Contractors and distributors operate under different cost models — but when they align, it can result in lower project risk and improved profitability. Direct through stock (DTS) is a material handling approach where materials are purchased, stored at a distributor’s location, and delivered to the jobsite just in time.
It ultimately helps minimize skilled labor waste, streamline project logistics, and clarify shared responsibilities — from ordering and inspection to labeling and delivery.
For construction financial professionals, understanding the true cost of storage, delivery, and labor allocation can unlock savings and reduce unnecessary jobsite risk. This article explores how the DTS model works, its impact on financial planning, and how better communication across the supply chain can drive better outcomes.
A Look Back: Effort Expended
In the latest Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606),1 three methods of revenue recognition are outlined: cost to cost, units installed, and effort expended.
Non-installation and value-transferring activities — such as prefabrication, material kitting, or assembly — that contribute to installation can be quantified as effort expended;2 this is an opportunity that has long been recognized by MCA, Inc. and Dr. Perry Daneshgari.
It also introduces the potential for the Japanese keiretsu model to the construction industry — a concept that rose to prominence after World War II for horizontal and vertical integration to reduce structural costs.3
Vertical supply chain integration was tested in the mid- to late-1990s with partners from ELECTRI International; the research foundation of the National Electrical Contractors Association, with progressive contractors such as Universal Systems in Flint, MI and Cleveland Electric in Atlanta, GA; and potential distributor partners. For material procurement and management, this allows contractors and subcontractors to bill when tasks related to procurement and storage were visibly completed.
In this case, DTS served as a way to have material procurement and storage validated as complete by ordering, procuring, and paying for material stored at the distributor’s warehouse.
In addition to saving money, storing material offsite helps reduce risk. DTS provides an opportunity to warehouse customer-owned materials to manage inventory or provide storage when project site conditions may not allow it.
Material can be shipped directly to a distributor warehouse to be received, inspected, stored, and staged until the contractor team schedules delivery to the site. In other words, the distributor location is an added buffer to alleviate the risk of material exposed to the chaos of a project site. However, the buffer needs to be managed actively between contractor and distributor rather than treating it as “out of sight, out of mind.”
Early examples from the late 1990s and 2000s showed measurable benefits for both contractors (cost reduction) and distributors (increased revenue).4 Still, the model pushes the boundaries of both parties’ ability to measure and focus on mutual cost reduction.
There are realities — and often hidden costs — to explore when a project team decides, sometimes unbeknownst to you, to have a distributor store and release materials that would otherwise come directly from the manufacturer.
DTS Benefits
DTS can benefit all members of the supply chain: GCs, trade contractors, owners, and distributors.
In the DTS model, large material purchases (such as switchgear and lighting) are approved by the owner and GC, and the trade contractor places an order with the distributor. The distributor orders, receives, and sometimes inspects, sorts, rebundles, and labels the material. These materials are stored with the distributor until the trade contractor requests delivery to the specified location.
Doing this allows for:
- Pre-installation inspection, heading off additional delays caused by unexpected issues at the jobsite
- Limited rehandling of materials onsite as the material can be delivered how it’s wanted, when it’s wanted, and where it’s wanted
- Increased cash flow to start the job by upfront billing for stored materials through the Financial Accounting Standards Boards’ effort expended
revenue recognition allowance - Secure location (insured/bonded) with photos/insurance as needed
- Ability to prefabricate, stage, kit, repackage, and eliminate waste offsite
During the COVID-19 pandemic, DTS was also used purely to protect for material availability.5 DTS can also be used to lock in quoted costs. It’s important for construction financial professionals to recognize what costs they are protecting for the project and what costs they are driving or absorbing.
Lessons Learned: Case Study
Someone is paying for DTS — and any change in material, timing, or delivery location adds money.
This makes supply chain planning an essential component among the contractors building the job and distributors supplying the materials.
Because of the fluidity between the members of the supply chain, getting and staying ahead of material and logistics planning is critical.
Quantifying the Costs
As an example, Exhibit 3 uses a DTS calculator to show the planned cost for a distributor providing DTS services for an electrical contractor supporting the data center project.
At the beginning of the project, the distributor and contractor expected and planned:
- Frequent deliveries to the jobsite within a 10-mile range of the distributor
- Storage of material for roughly three months
- Approximately two inbound deliveries to be received and held throughout the project
However, no formal documentation was created, and potential costs were not reviewed at the outset.