TECH TALK 8: MANAGING PURCHASE ORDERS
By Bill Allen
This is the eighth article in the Tech Talk
It's no secret that a builder doing any
significant volume benefits from using
purchase orders. The documents are great for
controlling materials costs, and you can use
them as checklists to make sure all materials
have been delivered and/or trade contractors
have completed work before you approve their
invoices for payment.
And if you use handheld devices to send
electronic purchase orders to and from the
field, you can speed up the payment approval
process and enhance its efficiency by putting
that responsibility in the hands of the
person (often the superintendent) who
approves the work or material deliveries.
There's no need to handle and re-handle
paperwork, and there's little chance of
purchase orders getting lost.
That scenario sounds good and it is. However
if you don't have good purchase order
management and payment approval procedures in
place, you have no control over the processes
or the quality that's tied to them. Chaos
will sustain chaos, guaranteed.
Purchase Order Process
Most builders work with some kind of trade
contractor agreement that spells out the
scope of work to be done and then have their
accounting departments issue payment after
the work is finished. Although both processes
originate in the office, there's often a
disconnect between them because the actual
work is done in the field. You can start
integrating those processes by putting
take-off information and bids into a database
that produces purchase orders with
information from accepted bids.
Similarly, you can produce a bill of
materials for each of your plans, and then
have suppliers bid on unit prices within
those line items. Once you've accepted a bid
that meets your budget, use the information
to spit out a purchase order.
You can produce purchase orders by creating a
Word or Excel template from QuickBooks or
another accounting program. Alternately, you
can use interactive software like that from
MasterBuilder, Timberline, or CDCI to build a
file of contracts and prices you can use for
Don't send purchase orders to vendors and
trade contractors until you know how to use
them internally. You need to determine who in
your company produces purchase orders, who
approves them before they leave the office,
who gets copies of them, when and how they
are sent to the field and the trade
contractor or supplier, who approves the work
done or materials delivered, and how invoices
will be reconciled with completed purchase
orders and then processed for payment.
You also need to figure out how frequently to
issue purchase orders; will you issue them in
advance for the entire project, or will you
issue them for each phase of construction?
Setting up your purchase order process
involves a lot of communication. Meet with
everyone who will be involved (employees in
sales, contract administration, estimating,
production, accounting, etc.) and find out
what they need from the process to make it
work and to do their jobs. It's a good idea
to get input from trade contractors and
suppliers, too. Since they work with other
contractors who use purchase order systems,
they can offer good insight on what works -
and what doesn't.
To get comfortable with using purchase
orders, try testing the process with dummy
documents (that are clearly labeled as such).
Instruct your employees to treat them as "hot
potatoes" - that is, to expedite them as soon
as possible so that they don't sit around on
anyones desk (and delay work to be done or
payment once you're using real purchase
orders). Write down working procedures and be
prepared to amend them.
Once you're comfortable with your purchase
order system, use the process on one project
at a time. Remember that there's a learning
curve with all new systems and procedures; no
one gets it right the first time.
Purchase Order Management
If you go the electronic route, it's best to
use a single database to account for regular
purchase orders, variance purchase orders
(used for unplanned items and work, these
typically originate from the field), and
change order requisitions (those issued if
the customer requests something that affects
the scope of work).
Make sure variance purchase orders don't
duplicate change orders. That problem occurs
if someone sits on a document and the
paperwork doesn't keep up with the chain of
events. There should be either a variance
purchase order or a change order for
something unplanned or added to the scope of
work; never two separate documents for the
same item. If you have a substantial number
of variance purchase orders, your estimating
process may need a tune-up.
Decide whether you will pay trades and
suppliers by the task (or delivery), by the
construction phase, or perhaps weekly or
monthly. If you pay by the task or phase,
make it clear to suppliers and trade
contractors that they won't get paid until
the job is finished or all materials are
delivered. Don't issue partial payments for
partial jobs or deliveries.
Make one or two people on each jobsite
responsible for approving work for payment.
Tell trades and suppliers who those people
are so they don't try to request payment
approval from field personnel who don't have
the authority to grant it. One benefit of
using purchase orders is they often include
take-off lists you can use as quality control
Reconcile invoices against purchase orders as
soon as you receive them, and put them
through to accounts payable pronto. Besides
eliminating phone calls from people looking
for their money, prompt payment provides a
tremendous amount of price negotiation with
trades and suppliers.
Integrated software systems like those from
NewStar, Phast, and ProStar offer the
advantage of document control between
purchase order and accounts payable systems.
Many integrated systems also offer handheld
capability, which lets users zip documents
back and forth from the office to the field
and cut down on paperwork. If you do purchase
orders and payment approval manually, you
must enter prices and payment amounts
separately in each system - and see to it
that they match.
No matter what system you use, purchase
orders can benefit your business by driving
accountability for working within a planned
budget to the source of the action and by
enhancing communication throughout your
Note: Various software products are mentioned
throughout the Tech Talk series. The intent
is not to recommend these products as being
right for you, but to identify some fairly
known players and to note a few new ones. My
apologies to vendors who aren't mentioned
the omission was not intentional.
Bill Allen is a longtime contributor to
NAHB's Business Management & Information
Technology Committee and is president of W.A.
(http://waallenconsulting.com). The Redmond,
Washington, company provides information
technology consulting services and process
management assistance to the home building
industry. Contact Bill at 425-885-4489 or via
e-mail at email@example.com.
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