The American Journal of Management and Economics Innovations
96
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TYPE
Original Research
PAGE NO.
96-103
10.37547/tajmei/Volume07Issue07-11
OPEN ACCESS
SUBMITTED
07 June 2025
ACCEPTED
24 June 2025
PUBLISHED
21 July 2025
VOLUME
Vol.07 Issue 07 2025
CITATION
Elmurat Erkin uulu. (2025). Pricing in the Direct Supply of Construction
Components. The American Journal of Management and Economics
Innovations, 7(07), 96
–
103.
https://doi.org/10.37547/tajmei/Volume07Issue07-11
COPYRIGHT
© 2025 Original content from this work may be used under the terms
of the creative commons attributes 4.0 License.
Pricing in the Direct Supply
of Construction
Components
Elmurat Erkin uulu
Business Manager , Commercial Director at Opes Trade LLC
Bishkek, Kyrgyzstan
.
Abstract:
This article aims to conduct a comprehensive
study of the economic and logistical factors that
determine the formation of the final price when
abandoning multi-stage intermediary chains in favor of
the factory-to-site model. The relevance of the work is
due to the high level of cumulative markups in the
classical supply scheme, especially for developing
landlocked markets, where transport and warehousing
costs multiply the price of building materials and hinder
the introduction of innovative solutions in infrastructure
projects. The novelty of the research lies in combining
quantitative analysis of marginal markups (using the
Lerner index and PPI data), logistical assessment of
hidden costs (according to UNCTAD and SCFI data),
modeling of currency effects based on historical
exchange rates, and practical case analysis of pilot
projects in Kyrgyzstan, during which empirical
confirmation of the claimed savings was obtained. As a
result of a comparative analysis of the traditional and
direct supply models, it was found that eliminating
national distributors, wholesale warehouses, and
retailers ensures a reduction in the final cost of supplies
by 30
–
40 % through the removal of the accumulated
markups at each link. Additional savings are achieved
through factory cutting of materials to order size, just-
in-time delivery, optimization of warehousing and
installation operations within a lean approach, as well as
the use of currency risk hedging instruments. The
factory-to-site model demonstrates high transparency
of cost structure and scalability of the methodology to
neighboring markets, which is confirmed by an increase
in annual turnover from $0.5 million to over $6 million
with supply volumes increasing up to 100,000 m². The
article will be useful for procurement managers,
logisticians, investment analysts, and government
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specialists in the regulation of the construction market.
Keywords:
direct supply, pricing, supply chain,
construction
components,
marginalization,
lean
production, logistical costs, currency risks
Introduction
Modern construction projects demand an engineering
mindset in every aspect of their execution, starting with
the procurement of materials. Just as the design of a
skyscraper hinges on precise calculations for beams and
bolts, the organization of supply chains must rely on
systematic, data-driven approaches to ensure cost
efficiency and reliability.
Securing partnerships with manufacturers across
borders involves more than inspiration
—
it requires clear
objectives, concise market insights, and targeted
communication. By employing structured outreach
strategies
—
such as iterative A/B testing of messages,
automating dispatch, and segmenting by industry and
role
—
organizations can streamline negotiations with
factories and scale their direct-supply operations
effectively [1].
The challenge is most pronounced in developing
markets, where project sizes are smaller and logistical
hurdles greater. With cold email conversion rates often
below 0.2%, hundreds of contacts may be required to
finalize a single agreement [2]. Under these conditions,
even marginal gains in outreach effectiveness can free
up substantial resources
—
tens of thousands of dollars
—
that might otherwise be spent on intermediaries,
ultimately enabling investment in critical infrastructure
such as schools, hospitals, and technology initiatives.
Materials and Methodology
The study of pricing in the direct supply of construction
components is based on the analysis of 12 key sources,
including academic articles, industry reports, global
databases, and materials from pilot projects in
Kyrgyzstan. The theoretical foundation comprises works
on markup structures and inter-stage marginalization:
Allen et al. described the role of double marginalization
in supply chains [4], and Alvarez et al. analyzed the
distribution of markups across supply-chain stages using
the Lerner index [5]. Bureau of Labor Statistics data on
PPI for contractors’ overhead enabled evaluation of cost
dynamics in the USA [6]. To study hidden logistical costs
and the impact of global freight shocks, new UNCTAD
data on transport effort and the SCFI index were used [7,
11], and historical dollar
–
som exchange rates from
Investing were employed to model currency effects [10].
Practical metrics and industry benchmarks were taken
from Belkin's reports on cold email campaigns [1] and
Focus Digital on meeting conversion [2]. At the same
time, Solomon illustrates the impact of floor coverings
on operational risks in the healthcare context [3].
Additional context on modular construction and lean
approaches in cost calculation was provided by
McKinsey [8] and Dargham et al. [9], and global freight
rates by Drewry [12].
Methodologically, the research integrated several
techniques. First, a comparative analysis of supply-chain
models: the traditional multi-stage model versus direct
factory-to-site, where intermediaries are excluded,
which enabled quantitative estimation of the effect of
eliminating each link’s margin. Second, a quantitative
analysis of marginal markups and overheads using the
Lerner index [5] and PPI [6] revealed the average share
of markups and the growth of contractors’ overhead
costs [6]. Third, the logistical analysis was based on
UNCTAD data on hidden transport and insurance costs
[7] and the dynamics of the SCFI [11] and World
Container Index [12], allowing modeling of freight cost
reduction by reducing the number of transshipments.
Fourth, an empirical case analysis of pilot projects in
Kyrgyzstan: registration of supply volumes, delivery
times, and calculation of 30
–
40% savings compared to
the classical scheme, as well as assessment of the
factory-cutting effect and JIT delivery on waste and
warehousing cost reduction [9]. Finally, the analysis of
currency-
risk management relied on Investing’s
historical data [10] and simulation of a currency corridor
with forward contracts, which made it possible to offset
fluctuations in the som/dollar exchange rate.
Results and Discussion
The share of problems begins with materials. In public
hospitals and schools in Kyrgyzstan, wooden floors are
still often installed: wood requires annual repainting,
absorbs moisture, and creates ideal conditions for
bacterial proliferation. An American study found that
72% of surface swabs from ward floors were
contaminated with C. difficile, and 57% of objects that
merely touched the floor transferred pathogens to staff
hands [3]. For facilities where sanitation is critical, this
translates into direct costs for infectious complications
and increased operational budgets.
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The typical route from factory to importer to national
distributor to wholesale warehouse to retailer to builder
creates so-called sequential intermediation: each link
applies its markup, thereby doubling or tripling the
overall margin
—
a systemic inefficiency described by the
theory of double marginalization [4]. For developing
markets, where project volumes are smaller and
logistical legs are longer, the chain often extends by one
or two additional levels, widening the price gap between
factory and end user.
Empirical data confirm the scale of this divergence. A
Harvard Business School study recorded that the
cumulative difference between factory costs and retail
price across a global sample of goods from 2018 to 2023
averaged 0.65 on the Lerner index, meaning nearly 65%
of the final price arose from markups at various chain
stages [5]. Even in the USA, the index of contractors’
overhead and profit markups, according to the Bureau
of Labor Statistics, rose from a base of 100 in 2004 to
164.37 by the end of 2022 [6], as shown in Figure 1. In
developing countries, where transport and customs are
more expensive, the resulting price ballast can
constitute the majority of the price paid by the client.
Fig. 1. PPI for nonresidential building construction overhead and profit markups [6]
Thus, the technological lag of institutions is fuelled by
financial structures: old materials appear cheaper not
because of lower production costs, but because a stable
yet socially expensive chain of intermediaries has been
built around them. This vicious cycle can only be broken
by replacing the multi-stage model with a direct factory-
to-site scheme.
To disrupt the chain of accumulated markups described
above, the direct factory-to-site model was adopted. In
this configuration, only three participants remain
—
the
manufacturing plant, the engineering team, and the
construction site. The plant produces components
tailored to the specific project; the engineering team
handles customs clearance, container consolidation,
and local delivery; and installation begins on-site
immediately.
National
distributors,
wholesale
warehouses, and retailers are removed from the chain,
automatically eliminating their margins and double-
handling costs.
Actual cost accounting shows that the factory price
constitutes the majority of the total sum, to which are
added international logistics and insurance, customs
duties, domestic delivery, while project services and
warranty reserves occupy the remaining percentages.
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The following formula summarizes the combined impact
of the first two items:
𝑅
𝑙𝑜𝑔
=
𝐶
𝑓𝑟𝑒𝑖𝑔ℎ𝑡
+𝐶
𝑖𝑛𝑠𝑢𝑎𝑟𝑎𝑛𝑐𝑒
𝐶
𝑓𝑎𝑐𝑡𝑜𝑟𝑦
,
where
𝐶
𝑓𝑎𝑐𝑡𝑜𝑟𝑦
represents the ex-works (EXW) price
paid to the manufacturer, essentially the factory gate
cost with no transport added;
𝐶
𝑓𝑟𝑒𝑖𝑔ℎ𝑡
is the
international freight charge (whether by sea, rail, or air)
from the plant to the destination port or inland terminal;
𝐶
𝑖𝑛𝑠𝑢𝑎𝑟𝑎𝑛𝑐𝑒
is the cargo insurance premium, typically
quoted as a fraction of a percent of the shipment’s value
or its CIF equivalent. The ratio
𝑅
𝑙𝑜𝑔
therefore tells us
how much of every factory dollar is consumed by freight
and insurance before the goods even cross the border.
Let us consider an example. Suppose a company buys
eight containers of façade panels at a factory price of
USD 42,000. Ocean freight on the Shanghai-to-
Rotterdam route costs USD 9,800, while the insurance
premium
—
calculated at 0.25 percent of the CIF value
—
adds another USD 220. Adding freight and insurance and
dividing by the factory price yields
𝑅
𝑙𝑜𝑔
=
9800 + 220
42000
≈ 0.239,
or roughly 23.9 percent. In practical terms, almost one-
quarter of the panels’ initial value is absorbed by
logistics and insurance costs before arrival. If route
optimization reduces freight costs to USD 6,500, the
ratio drops to about 0.16 (16 percent), instantly freeing
nearly eight percent of the total procurement budget.
For landlocked countries, the transport + insurance
block is critical: according to a new UNCTAD global
dataset, developing economies expend twice as much
transport effort per dollar of maritime imports as
developed ones, because their shipments are heavier
and routes to markets are longer [7]. The fewer
intermediate warehouses and transshipments, the
lower this component.
The primary source of savings is the elimination of
cumulative markups. In the classical scheme, each link
added approximately 10
–
15% to the price; therefore,
excluding three to four intermediaries yields a 30
–
40%
reduction in the client’s final invoice. Global practice
confirms our calculation: a McKinsey study showed that
using direct procurement and centralizing supplies in a
factory format reduces costs by about 20% even without
scale effects or logistics optimization [8]. Under Kyrgyz
market conditions
—
with small batch volumes and high
delivery costs to Central Asia
—
the cumulative gain
approached the upper bound.
Savings are further amplified by precise project
engineering. Materials are specified at the working
documentation stage, so the plant cuts panels and floor
slabs to final dimensions, eliminating on-site waste and
unplanned repurchases. Delivery follows the just-in-
time principle: the container arrives exactly when the
site is ready to receive it, removing storage costs and
redundant handling. Studies show that materials and
equipment account for 60
–70% of a project’s direct
costs, so any reduction in on-site movement
immediately impacts the budget [9]. In our case,
transitioning to factory cutting and JIT delivery
eliminated the small portion of costs previously eaten by
warehouse space, pallet leftovers, and rework.
Thus, the factory-to-site model not only lowers the price
to competitive levels but also makes it more
transparent: the client sees each cost item, and savings
derive from processes rather than quality compromise.
This approach has become the foundation for scaling
and will be a key element of the next phase
—
exporting
the methodology to neighboring markets.
Currency fluctuations remain the main external shock to
budgets, even when the supply chain is reduced to three
links. According to [10], in 2024 the Kyrgyz som
appreciated by 2.4% against the dollar and by 6% in real
effective terms, producing an equally sharp but positive
price recalculation, as shown in Figure 2.
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Fig. 2. US Dollar/Kyrgyzstan Som Rate [10]
To smooth out the amplitude, a currency corridor is
established
—
it fixes the price in euros upon contract
signing and simultaneously open a forward position on
the freight component.
In its first year, the company handled volumes of
approximately 1,000
–
5,000 m²; by its third or fourth
year, it had scaled up to 70,000
–
100,000 m² and beyond.
The company invested in advanced installation
equipment for flooring, ceiling systems, and façade
materials, significantly reducing installation time and
labor costs.
During peak season, it managed 5
–
10 projects
simultaneously, employing up to 180 professionals. All
workers received project-specific training and were
contracted on a per-project basis, enabling the company
to avoid maintaining a large permanent staff, thereby
greatly reducing overhead and improving operational
flexibility. Financially, the results were substantial: the
initial annual turnover ranged from $250,000 to
$500,000, but within a few years, the company
surpassed $6,000,000 to $7,000,000 annually.
Freight remains the most unstable budget element: in
the first half of 2024, rerouting of vessels around the Red
Sea caused the SCFI index to more than double
compared to end-2023 levels; even after correction it
remained 115 % above the pre-COVID average and
nearly twice the 2023 level [11], as shown in Figure 3.
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Fig. 3. China Containerized Freight Index: Impact of Panama Canal and Red Sea Disruptions [11]
For a container of façade panels on the Shanghai to
Rotterdam route, rates reached $2,837 for a 40-ft box
[12]. When shipping inland, freight-and-insurance costs
for developing economies double per dollar of goods
shipped
—
this is the hidden transport effort identified by
UNCTAD across more than 170 countries [7].
On-site savings continue through dedicated installation
assets. By investing in vacuum lifters and precision panel
saws, the company accelerated the installation of HPL
façades and large-format slabs and reduced labor
inputs. Moreover, transitioning to a lean workflow
decreased the share of non-value-adding operations.
Before commencing price formation, it is crucial to
adopt an engineering mindset: every cost item must be
calculated with utmost precision, as though one were
sizing a skyscraper’s load
-bearing columns. One should
begin by analyzing factory production costs,
understanding that only international logistics and
insurance, customs duties, domestic delivery, and
project services with warranty reserve will be added
thereafter. Such calculation prevents hidden markups
and excessive expenses inherent to the classical factory,
importer, distributor, wholesale warehouse, retailer,
and builder chain.
The direct factory-to-site model reduces the number of
links to three: the plant, the engineering team, and the
construction site. Eliminating national distributors,
wholesale warehouses, and retailers yields savings by
removing the cumulative marginal markups of each
intermediary. This effect is particularly pronounced in
developing markets, where longer logistical legs and
smaller project volumes traditionally extend the supply
chain by one or two additional links and increase the
price ballast.
To further enhance savings, it is recommended to
specify materials at the working-documentation stage:
the factory cuts panels and floor slabs to final
dimensions, eliminating waste, unplanned repurchases,
and storage costs. Just-
in‐time delivery—
when the
container arrives precisely as the site is ready to receive
the shipment
—
eliminates redundant handling and
storage fees. Since materials and equipment account for
the majority of a project’s direct costs, any optimization
of on-site movement is immediately reflected in the final
price.
When determining the ultimate cost, currency risks
cannot be ignored. Fixing the price in euros at contract
signing and opening forward positions on the freight
component smooths out exchange-rate fluctuations.
The volume effect is achieved through demand
aggregation: combining multiple projects into a single
container batch reduces freight cost per unit.
Nevertheless, freight remains the most volatile line
item. For developing economies, hidden transport costs
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double the freight and insurance per dollar of goods,
making the minimization of intermediate transshipment
critical.
Equally important is investment in installation
equipment and personnel training. Vacuum lifters,
precision panel saws, and lean-flow optimization reduce
labor costs and accelerate the installation of façades and
flooring systems. The final touch is budget transparency:
the client must see every cost item. This approach builds
trust and enables scaling of the model to neighboring
markets.
a market modernization effort in Kyrgyzstan began with
an assessment revealing that many hospitals and
schools still relied on painted wooden boards and
gypsum panels for floors and walls
—
materials prone to
annual maintenance, moisture retention, and bacterial
growth. To address this gap in quality and hygiene, a
direct partnership was established with twenty
European manufacturers specializing in antibacterial
PVC coverings, acoustic ceiling systems, and high-
pressure laminate façades. By adopting a factory-to-site
supply model
—
where components are cut and packed
at the plant to match each project’s specifications,
customs clearance and transport are managed by a
dedicated logistics team, and on-site installation begins
immediately upon delivery
—
intermediary markups
were eliminated. This streamlined approach yielded 30
–
40 % cost savings over the traditional multi-tier
distribution chain, making advanced finishing materials
affordable even for regional educational and healthcare
facilities.
Initial batches amounted to only one thousand to five
thousand square meters, yielding a turnover of up to
half a million dollars, but after the publication of test
results and the demonstration of two pilot hospitals,
market doubts disappeared. Order volumes grew to one
hundred thousand square meters, and annual revenue
reached six to seven million dollars. Key to this success
were investments in in-house installation crews and
equipment: vacuum lifters and precision cutting
machines reduced installation time by almost one third
and enabled the simultaneous servicing of up to ten
large projects without maintaining a permanent staff. As
a result, over four years, more than fifteen clinics
received bactericidal floors and ceilings, dozens of
schools were fitted with acoustic classrooms and anti-
vandal doors, and business centers in downtown
Bishkek adopted façades whose lifecycle costs are half
those of traditional aluminum composite.
State technical review reduced the number of project
rejections, and new regulations included composite
façades and acoustic ceilings in the mandatory
specifications for public buildings. Thus, it demonstrated
that an engineering-precise yet open approach can
simultaneously reduce costs and raise quality standards.
Conclusion
The results of the present study confirm that the direct
factory-to-site supply model constitutes an effective
instrument for optimizing pricing in the construction
sector, especially in developing markets. Eliminating
sequential intermediation
—
by excluding national
distributors, wholesale warehouses, and retailers
—
achieved a 30
–
40% reduction in the final cost of supplies
through the removal of cumulative markups at each link
of the chain. This approach not only enhances the
competitiveness of materials but also renders the cost
structure fully transparent to the client, thereby
strengthening trust and facilitating the scaling of the
model to adjacent markets.
Analysis of logistical expenditures indicates that
landlocked countries are particularly incentivized to
reduce transport effort, since an excessive number of
transshipments and warehousing operations doubles or
triples freight and insurance costs. The adoption of just-
in-time delivery and factory cutting of materials to
specific orders eliminates on-site losses and reduces
expenses
for
storage
and
waste
processing.
Consequently, savings in logistics and installation are
immediately reflected in the project budget, while
investments in installation equipment and a lean
approach decrease labor requirements and accelerate
project commissioning.
An additional factor in the model’s resilience is currency
risk management: fixing the contract price in euros at
signing and employing forward instruments to create a
currency corridor mitigates exchange-rate fluctuations
and supports long-term financial planning. The volume
effect is achieved by aggregating demand from multiple
sites into a single container batch, which further lowers
per-unit freight rates and amplifies savings for the small
order volumes typical of Central Asia.
Empirical data from Kyrgyzstan demonstrate that, at
initial volumes of 1,000
–
5,000 m², direct supplies
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generated turnover of up to $0.5 million, whereas upon
reaching 70,000
–
100,000 m², annual revenue exceeded
$6
–
7 million. The widespread introduction of innovative
materials into healthcare and educational institutions
enabled improvements in sanitation and the durability
of finishing systems, accompanied by significant
reductions in operating and maintenance costs.
Thus, the combination of an engineering-precise
approach to cost calculation, the reduction of
intermediary links, and the application of proactive
currency and logistical risk management measures
establishes a universal methodology capable not only of
lowering the price of construction components but also
of enhancing quality and cost transparency. These
principles underlie the prospects for the development of
direct supply in construction and are poised to drive
sector modernization in the context of global
competition.
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