Purchase Order systems: the key to make profit

This entry is part 7 of 7 in the series Business Coaching

The last few weeks we’ve been discussing financial record keeping, mostly for the purpose of documenting and eliminating waste, as well as building up a practical and functional labor rate, so you can recover the cost of operating expenses while your crews work.


In the Chart of Accounts article you read why separating out the Project Costs is important. Going a step further, keeping your project separate while you allocate labor and material to the appropriate project is vital for setting up a solid Project Management reporting system. This is key to creating a systematic and scalable business. 


Often contractors mush all of their project costs together, this is a mistake. Each project is like a mini-business that needs to be profitable if the company is to be profitable. You can’t know this if those costs aren’t separate. We’ll dive into how to get this done in a few weeks, for now it’s important to understand the why.


You need to be able to see where you are losing money. Is it typically on the materials or labor? Was it only on one project or is there a trend? 


This is the beginning of setting up a solid project management system that will drive production on your projects so you can optimize the labor dollars you spend. It will also help separate the material costs, so you can be more systematic about where, how and when materials arrive on your projects. 


The point here is to become less reactive and more proactive. Project management can do this if it’s done correctly. Project management is less about documenting what’s happened and more about communicating and setting things up to happen. Don’t get me wrong, you do need to document what’s happening, but too many PMs become reactive instead of driving the project forward and coordinating with other trades.


Because Labor tends to be more complicated, we’ll start with materials. The next few weeks we’ll discuss creating systems for tracking labor hours and creating labor productivity rate that suits your crews and your contracts. For now, we’ll touch on creating a system for material tracking. 


Creating a Purchase Order system that supports your projects is key to creating more profit within the project itself. 


Few small and medium-sized contractors use Purchase Orders, which is a shame since very few small and medium contractors have funds to waste with extra material costs. Purchase order process boils down to three key steps:

1. Completing a purchase order: This involves setting out the items or services to be purchased, as well as the price. A purchase order also lists any terms and conditions for the transaction, and the timelines for delivery. These are often created by the Project Manager, signed by the Owner and should be sent to the supply house as soon as the contract is signed, assuming it’s materials you are ordering. The deliveries should correspond with the Project Schedule. 


Of course things change, I’ve yet to be on a project where things “went to schedule”, but you can make these adjustments as you go along.


Locking in the pricing that’s closest to the estimating cost is also important. Many supply houses will be more lenient to contractors who have an ongoing relationship with that. It’s likely you can keep and hold pricing if you have a relationship with them that’s positive. 


2. Processing a receiving report: Here, the team in the field records the goods or services provided in each delivery. This is passed to the Project Manager, who then lists the payment owed to the supplier based on what was delivered. This information goes to the Bookkeeper. Receiving reports list a lot of crucial details, so it’s important to take the time to comb through them:

    • Does the delivery slip reflect exactly what was ordered?
    • Were the goods actually received on the jobsite?
    • Are the unit costs and calculations correct? 
    • What about tax?


3. Receiving and processing the supplier invoice: Once the office/bookkeeper receives the PO + Receiving Report. The Owner signs the release for payment. The bookkeeper then processes it for payment. As above, this involves checking through each of the details to ensure it matches the goods or services actually received. This should happen monthly in a batched system. 

    • Does the invoice reflect exactly what was ordered and delivered to the site?


When processing supplier invoices, it’s crucial to centralize payments. If all company payments come from a single account, it’s a lot easier to get a clear overview of the money heading out the door. 


One thing you really want to avoid is paying invoices on an ad hoc basis, or with multiple accounts or credit cards. Splitting your payments not only makes it harder to get a handle on how much your company is paying each month, but also opens you to the risk of fraud.


A qualified project manager can help break the PO down based on the schedule, so you can see when the material expenses will be hitting you, depending on what’s actually delivered of course. Once again, record keeping will be your ally here. If you are documenting what’s happening with Project Management reporting systems you’ll be able to see what’s coming down the pipeline. This glimpse into the future should help clarify your cash flow, so you can begin making more strategic plans. 


As I said above, the next few weeks I’ll begin breaking down payroll and labor productivity so you can begin building out Project Management systems that are less reactive and more proactive. 


Until then, if you have any questions, comments or statements about how we can help you build a company that’s ready to scale, schedule a meeting with us!


  • Vivian Mandala is the founder of CMC Network and has worked in NY Construction for over 20 years, most of which was as a Contractor. She is now a Construction Business Coach. In 2017 Vivian, along with a group of dedicated Contractors, CM’s, GCs and Developers, started CMC Workforce, a long term in depth construction training program. Vivian enjoys the personal connections she makes through her coaching and seeing the lasting changes that she sees her clients benefit from year after year.

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