What are long lead items in construction

Long lead items (LLI) are items that have a delivery time of several months from order to delivery. For project-based companies these are important. They might impact the delivery schedule for the project and is vital for delivering the project on time.

Therefore, determination of what are long lead items is often done in the planning stage to ensure that components that have long lead times are assessed. Often long lead items also involve processes ahead of ordering that impacts the timeline, such as creation of technical drawing and approving these with clients.

In this article we will describe what long lead items are and how you can mitigate the risk of cost overruns due to delay in deliveries.

What are typical long lead items?

Examples of long lead items can be

• Custom fabricated items
• Materials with specific certifications
• High demand speciality equipment

How long lead items can result in cost overruns

Project agreements are often structured to ensure delivery according to an agreed delivery date. To impose an incentive to the contractor, commercial clauses are often structured to ensure that progress meets the delivery schedule.

Delays will then result in cost impacts if the project is not delivered in time. These might include:

Liquidated damages – where the company will be penalized by losing a percentage of the contract value depending on the length of the delay.

Delayed payment milestones – most often payments are scheduled around delivery milestones. If the delivery milestones are not met in time, these impacts when the company can invoice the client. Although the amount might be the same, delayed payment milestones might have a severe impact on the cash flow for the project.

Prioritized orders – some time suppliers can deliver long lead items faster if you are willing to pay your way earlier in the queue or by using alternative freight methods (e.g., air vs boat). This will again impact the cost in the project.

How to avoid cost overruns from long lead items?

• Plan accordingly – Poor project planning is the number 1 reason for cost overruns in projects. Having a solid plan ensures that also long lead items are identified early. This can help to ensure that your project is delivered on time. Having good control on components that are long lead items and the associated lead times will help you track when you need to order each component.
• Assess risk – Assess risks that can impact the schedule or cost estimates. Maybe there are components that require certifications that can be hard to get hold of,or other client specific requirements that needs to be clarified early in the project. Also, you should assess if it makes sense to build inventory on certain items or purchase spare items so that you avoid the risk of having to initiate purchasing of long lead items far out in the project.
• Use standard components where possible – Standard components can often be sourced of the shelf and make lead time much lower.
• Use pre-approved suppliers – Having system of approving and assessing supplier performance for critical suppliers mitigates the risk of random selection and thereby reduces the risk of delays.
• Make binding orders with your supplier – using purchase orders to ensure clear agreements with your suppliers will help you avoid miscommunication.
• Quality check prior to ordering – it is human to make mistakes. Ensure important orders are checked by a colleague to ensure all it correct and nothing is forgotten prior to ordering.
• Include liquididated damages – To enforce delivery in time you should include liquidated damages where this makes sense (typically for larger orders). This will to some extent mitigate the financial risk and also ensure that the supplier knows it will have a consequence of not delivering in time.
• Change mode of shipment – Shipment by sea involves a lower cost than air shipment, however if the time is of essence using air shipment will reduce the time and might impact the total project positively.
• Confirm orders – make sure you receive order confirmations so that nothing falls in between
• Track deliveries – track purchase orders until goods are delivered so that we know that you receive all items in time.

How you can avoid cost overruns using a Purchase Order System?

There are several ways a purchase order system can help increase the quality and thereby reduce the risk of cost overruns to delay in the project.

1. Purchase planning – some purchase order systems include a purchase planning module where you can have control on all your planned purchases and associated order times considering the lead times for the various purchases.
2. Clear supplier agreement – with a purchase order system you can impose proper quality in the ordering process by ensuring that all relevant fields are filled out properly. Using a purchase order system will also help you include all relevant terms and conditions to ensure proper quality in the ordering process.
3. Visibility – Have a software allows you to easily have control on the latest status for all planned and outstanding orders.
4. Order confirmations – Capture important information such as supplier confirmations and any potential change to the delivery times.
5. Delivery tracking – Track outstanding deliveries so that you know what will be arriving when to ensure control on your project delivery schedule.
6. Real-time cost tracking – an automated benefit of using the purchase order system is that you also know at any given time how your project is performing financially. This can help you see potential deviations and take necessary actions.

Case Study: Saudi Aramco

A paper from the Project Management Institute (PMI) highlights how Saudi Aramco, one of the world’s largest oil producers, reduced program schedules by 4-5 months through innovative procurement strategies. The study emphasizes the importance of optimizing the procurement cycle for long lead items, referred to as long lead engineered equipment. Read more here

In summary, long lead items are particularly important to keep track of for project-based businesses to ensure successful delivery and cost control in the projects. There are many ways you can mitigate risks of cost overruns and a purchase order software can also assist you in this process.

See also:
5 reasons to use purchase orders in your business

CostTracker is an easy-to-use purchase order (PO) system helping small businesses with purchasing and cost control. It offers several unique features designed for project-based companies. CostTracker helps hundreds of companies in more than 35 countries worldwide.