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An Effective Purchase Order System Enhances Efficiency

The eighth in a series of tech talks for builders

It is no secret that a builder doing any significant volume benefits from using purchase orders. They are great for controlling materials costs. They also can be used as checklists to make sure all materials have been delivered and that trade contractors have completed work before you approve their invoices.

You can speed up the payment approval process and enhance efficiency by using electronic purchase orders and handheld devises. It’s even more efficient when that responsibility is put in the hands of the person in the field, often the superintendent, who approves the work or material deliveries. That way, paperwork doesn’t have to be re-handled and there’s little chance of purchase orders getting lost.

However, if you don’t have effective purchase order management and payment approval procedures in place, you will have no control over the processes or the quality that’s tied to them. Chaos is guaranteed.

Steps to Improve Your Purchase Order Process

For most builders, the purchase order process is some form of a trade contractor agreement that spells out the scope of work to be done. Once the work is completed, the builder’s accounting department issues payment and the process is complete. As simple as this process appears to be, there is a disconnect. Both processes originate in the office, but the contractor’s work that triggers the payment is done in the field. To better integrate the work and payment processes, simply broaden the database that produces your purchase orders to include take-off information and bids along with your information from the 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 generate a purchase order.

QuickBooks and other accounting software programs allow you to produce purchase order templates in Word or Excel. Alternatively, you can use interactive software like MasterBuilder, Timberline or CDCI to build a file of contracts and prices you can use for each job.

Whatever software you use, do not send your purchase orders to vendors and trade contractors until you’ve established your internal procedures and routing. This includes determining:

• Who approves your purchase orders before they leave the office
• Who receives copies of your purchase orders
• When and how your purchase orders are sent to the field and the trade contractor or supplier
• Who approves the work done or materials delivered
• 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?

As you can see, your purchase order process involves coordinating 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. 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.

Test Your New Purchase Order Process Before You Implement It

To get comfortable with using purchase orders, try testing the process with dummy documents (that should be 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 gather dust on anyone’s desk. Write down working procedures and be prepared to amend them.

Once you’re comfortable with your purchase order system, begin by using the process on one project at a time before you implement it across the board. There’s a learning curve with all new systems and procedures; no one gets it right the first time.

Better Purchase Order Management — Electronically

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 that variance purchase orders do not duplicate change orders. You do not want two separate documents for the same item or scope of work. Duplication often can occur when someone sits on a document and the paperwork doesn’t keep up with the chain of events. Issue either a variance purchase order or a change order for something unplanned or for an addition to the scope of work.

Note: If you have a substantial number of variance purchase orders, your estimating process may need a tune-up.

Fine Tune Your Payment Approval Process

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 will not be 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 job site responsible for approving work for payment. Tell your trades and suppliers who those people are so they don’t try to request payment approval from field personnel who do not have the authority to grant it. One benefit of using purchase orders is that they often include take-off lists you can use as quality control checklists.

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 gives you a tremendous amount of price negotiation room 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 have a manual system for purchase orders and payment approval, you must enter prices and payment amounts separately in each system. Be sure to double check to make sure the entries match.

An effective purchase order system will benefit your business. It will drive accountability for working within a planned budget to the source of the action and enhance communication throughout your company.

Earlier Articles in This Series

• To read, “Know Your Technology Needs Before You Invest,” Part 1 of this series, published April 14, click here.
• To read, “Strategic Planning Software Can Help Focus Your Business Model,” Part 2 of this series, published April 21, click here. 
• To read, “Does Your Planning Software Match Your Project's Sophistication?” Part 3 of this series, published May 5, click here.
• To read, “Don't Put the CAD Before Your Product,” Part 4 of this series, published May 26, click here.
• To read, “Manage Prospects and Buyers More Efficiently With Technology,” Part 5 of this series, published June 9, click here.
• To read, "Automate Your Selection and Change Order Processes,” Part 6 of this series, published on June 23, click here.
• To read, “Scheduling Software Can Improve Your Cycle Time,” Part 7 of this series, published on July 7, click here.

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 well-known players and to note a few new ones. My apologies to vendors who are not mentioned — the omission was not intentional.

Bill Allen is president of W.A. Allen Consulting and a member of NAHB’s Business Management & Information Technology Committee. His company, headquartered in Redmond, WA, provides information technology consulting services and process management assistance to the home building industry. Allen can be reached at 425-885-4489 or via e-mail. Or visit the W.A. Allen Consulting Web site.

Want more information about using technology in your business?

NAHB’s Business Management Department offers a variety of online resources to help you run your business better and more profitably. Click Business Management Tools for articles about human resources, financial management, sales, production, technology, customer service and other business-related topics. In addition, visit the NAHB Software Users Network Discussion Forum (SUN) to ask technology consultants and other builders what they think of various software packages and applications.

BuilderBooks.com also offers a variety of publications about computer technology. To view or purchase these publications online, click here.

Subscribe to NAHB’s Business of Building e/Source

NAHB’s Business of Building e/Source is your monthly electronic guide to the hot issues and emerging trends in home building business management. You’ll find practical advice, tricks of the trade and sound business guidance — all delivered monthly, straight to your desktop, in a quick and easy-to-read format. Business of Building e/Source is available free to NAHB members and their employees. To subscribe, click here on the members only side of www.nahb.org.

University of Housing Offers Courses on Customer Service and Business Management

The NAHB University of Housing offers a course on business management designed to help builders improve their business and profitability. For a list of current offerings, click here.

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