The Purchase Order is one of the most important systems to help make sure you make money. Purchase orders provide the foundation to effective job costing and insures you get the facts on your production performance and profits. Here are the simple steps to implementing the Purchase Order System
- Begin by taking credit cards out of the hands of all field staff and managers.
While some owners entrust a credit card to a small number of individuals my recommendation is that you give credit cards to NO ONE in your company except a couple of trusted office administrators.
- The purchase order system should be controlled from the main office.
Assign both a primary and secondary purchase order administrator. The Construction Coordinator is an appropriate person to give primary purchasing responsibility, but it could be any office staff you choose. Use a spreadsheet numbered 1000 – 1999 for the primary and 2000 – 2999 for the secondary purchase order administrator. Once those numbers are used begin with 3000 – 3999 and so on. This allows you to know which administrator handled the purchase order. The purchase order register should record the date of the transaction, the name of the purchaser, the vendor name, the job name (customer), a brief description of what is being purchased, and a check box to indicate the original receipt has been received by the office.
Since managers and field staff no longer have credit cards the purchaser must call the office while at the vendor to get a PO number before they may purchase. For example, while at the check-out register have the check-out clerk call the office for the PO number and credit card authorization. Most retailers and vendors have no problem doing this. Once the purchase is authorized the clerk should be asked to fax or email the receipt directly to the office. Many vendors can automate this, so the receipt is sent automatically. If the primary purchase order administrator is unavailable, the secondary can be asked for the PO number authorizing the purchase.
Some vendors have the means to flag your account so that purchases can only be made with a PO authorization. If the vendor is unable to fax or email the receipt the purchaser MUST turn in the receipt to the PO administrator at the end of the day. Remember, the PO register has a place to check that the receipt has been received by the administrator. If it doesn’t come in, they can chase it down without much effort The PO administrator has the responsibility to not only record the purchase on the PO Register, but also to job cost the purchase to the appropriate job using your project management program such as System 100, Job Docs, DASH or others. These programs typically keep a running total of purchases, and adjust the overall profit percentage per job each time you make an entry.
Lastly the receipt should be uploaded as a PDF to the electronic job file to which it corresponds. In my company we had a unique fax to email phone number that receipts were sent to, and the first 30 minutes of each day a designated office worker was tasked with the “daily data dump” uploading information such as receipts to each job in our electronic job file. The hard copy can be placed in a hard folder either by job name or vendor whichever is preferred by the business owner.
- Reconcile credit card statements at the end of the billing period with the PO Registers.
This is how you insure that every single receipt for equipment, material and labor are job costed. Since the POs and the statement purchases are in calendar order doing so is not difficult or time consuming. If the charge is not found on the primary register look for it on the secondary register. If it is not recorded on either register, you have found an expense item that has not been job costed. The statement provides information for where the purchase was made enabling a PO administrator to track down the actual receipt from the vendor and get it properly recorded and job costed.
This same process should be completed for vendor statements. For example, if you have an account with Home Depot or Sherwin Williams and receive a statement of activity each month a review of all purchases against the PO register can easily be completed. You are simply looking for any purchase that was not recorded with a PO. If you find an omission, contact the retailer and find out who made the purchase. Coach, train and redirect the purchaser to eliminate the problem in the future. Record the purchase on your PO register, and job cost the purchase to the appropriate job. The same procedure is followed using company checks or direct deposits for labor or subcontractor payments. No check is delivered without a PO assigned to it. These procedures accomplish several important benefits regarding job spending and production management:
- Oftentimes construction workers overspend and oftentimes simply discard excess materials in the onsite dumpster or take them home for personal use.
For example, if the Xactimate materials list estimates 12 sheets of drywall are needed for a repair a worker might purchase 10 sheets of drywall at the start of the job. Several days later 5 more sheets are purchased, and the next day another 3 sheets are purchased. That is 18 sheets of drywall for a job that should require only 12 or 13. And remember you only get paid for what is reflected in your Xactimate estimate. All excess spending comes out of the owner’s pocket. Oftentimes this excess spending is never discovered, and therefore goes on and on and on with each new job. If the pattern was discovered it could be stopped. How do you prevent such overspending?
Using the purchase order system there is a record of who made the purchase(s). Management can coach, train and redirect the worker to monitor purchases according to the Materials List provided within the Xactimate scope of repair, and you can track down the final resting place of excess purchases and take appropriate action. Was the excess material returned to the vendor for credit, did it end up in someone’s garage, or did it get discarded into the job site dumpster? In any event corrective action can be taken to ensure that excess material purchasing ends. If the project manager in charge of the job is using the Xactimate master material list for the scope of repair, they can monitor materials purchased against the total quantity required to complete the job.
- Accurate job costing enables construction supervisors to assess the production management for each job.
The per job profit is a strong indicator of efficiency and effectiveness of operational systems. If the construction job profit is 40+% the conclusion is that material and labor costs are under control. If the per job profit falls below 40% someone needs to look deeper into the job management, and determine why and what to do next time to insure a higher job profit margin. Job costing gives you the means to determine if there is a problem and how you are doing. Purchase orders insure you have all the data available for thorough assessment. It also prevents overspending by controlling purchase transaction through the main office. As you can see the two systems (Job Costing and Purchase Orders) are complimentary and necessary to growing your business.
Reference: 6-Month Coaching Plan - The Profit Maker: Make More Money than Ever Before Managing Your Business Like A Pro! Subscribe and receive our weekly blogs in your email inbox at http://growmyrestorationbusiness.com/blog/