Purchase order control is extremely important and has major cost implications. On average, construction projects are made up of 40% materials. Given that materials are such a major component of cost it follows that controlling them can save quite a bit of money while not controlling them can be costly.
Most construction accounting packages come with a purchase order system. Used properly, the purchase order becomes the vehicle to control cost, prevent overpayments, and establish a regimented ordering process. Construction companies in particular need this level of control.
In reality, it is not practical nor is it necessarily desirable to require every kind of purchase within a construction company to have an associated purchase order. The manpower cost for such an exact system does not usually correspond to a potential benefit gained. There are, however, very good reasons to utilize a purchase order system.
First and foremost is the control of the “need it now” field mentality. Usually “need it now” means buy it at any cost to field personnel. There are of course times when a construction company must be prepared to pay a premium for materials that are unexpectedly needed, however, for the most part, material needs can be planned in advance. This is one of the inherent benefits of a purchase order system. When field personnel are subjected to a purchase order requirement, usually entailing a centralized purchase order manager, there comes a need to plan in advance for material needs. This is a good thing.
One of the biggest mistakes that a field foreman or superintendent can make is failing to plan out future material needs to coincide with the schedule. It is not uncommon for these key individuals to fall into a present day way of thinking, solving present day problems as they arise and just getting the job done. When this happens, present day problems often arise from a failure in future planning. Usually the schedule will then be negatively impacted.
A purchase order system that requires field foremen and superintendents to call into centralized purchasing accomplishes two goals. 1) The field foremen or superintendent are forced into a mindset that requires them to plan for the future and 2) central purchasing is afforded the opportunity to seek out the least cost materials.
Another benefit of having a purchase order system is to identify the unit cost of materials or items purchased so that when invoices arrive the payable department can verify the invoiced unit cost is correct. Often the volume of material changes and it is difficult for quantities to always match, but having a means to verify the agreed upon unit cost is important.
Finally, an inventory control benefit exists, particularly for those companies that have multiple use expendable materials that are often returned to the yard. Examples might include lumber, forming material or plastics with several uses. The purchase order process can drive a good inventory control system. Return materials can be added to inventory and materials required for another use can be subtracted from inventory. All of this can be performed within the context of a purchase order system.
It is clear that there are a number of considerations to be made when setting up a fully operation purchase order system. Druml Group can help define your needs. We have the necessary experience to set-up your purchase order system, to design the procedures, and to implement the strict usage within your firm. Call us today and we will begin helping you control your costs better then ever.