Cost control: is a purchase order system right for you?

Custom Home, Sept-Oct, 2003 by Steve Maltzman

Field. Once a purchase order, work order, or VPO is issued, the field should only be responsible for verifying that the work was completed in accordance with the terms of the work order and trade contractor agreement and verify the quantity of material delivered.

When materials are delivered, the superintendent should go through the receiving ticket and verify he received exactly what was ordered. The receiving ticket must be signed off on and turned into the office regularly. By approving the quantity and quality of material delivery in the field, the superintendent should no longer need to be concerned with approving supplier's invoices that are matched to the receiving ticket and purchase order by accounting.

If trade contractors are being paid upon completion of specific tasks, and separate work orders are issued for each task, the superintendent should meet with the trade prior to the billing period cutoff. If the work was completed in accordance with the work order, the superintendent and wade partner should both approve the work order and send it to the office where it will be used as the wade partner's invoice. For trades that ale paid on a percentage-of-completion basis, this procedure could be modified: The superintendent and trade could authorize the percentage on the work order and have accounting calculate the pay amount based upon the total amount of the work order.

Accounting. With the work order being used as the trade contractor's invoice, accounting should not even have to worry about obtaining invoices from the trades. The approved work order should simply be processed for payment.

For material suppliers that issue invoices, accounting should match the invoice with the receiving ticket and the purchase order. Invoices should also be reviewed for clerical accuracy. Any invoices that do not agree with the purchase order (as to price) and receiving ticket (as to quantity) go back to the superintendent for approval. The superintendent only needs to see material invoices that do not match up, thus reducing the amount of time the super spends reviewing every invoice.

Implementing a purchase order system. Implementing a purchase order system can be a painstaking process since it may entail making major changes in the way you do business with your trades and suppliers. It is critical that you communicate any changes you make to your system to your trade partners and suppliers. A custom builder I worked with held several breakfast meetings with all of his trade partners to describe the new procedures and to show that when the work order became the trades' invoice it would help the trades in their own accounting process. As a result of the first set of meetings, he was able to get 80 percent of his trade partners on board with the program. The 20 percent unwilling to change were either granted a temporary exception or replaced with a new trade partner.

A purchase order system should be able to change the type of reporting you are currently reviewing on your jobs. Instead of just looking at estimates versus actual costs or actual costs incurred, you can locus at looking at variance reports. These reports are available in some integrated accounting systems. However, even if you do not have an integrated system that provides a variance report, it is easy to develop one in a spreadsheet. This report should be reviewed weekly with a discussion as to what went wrong (or right), why, and what can be done so that this variance does not recur.