5 Ways Purchase Orders Can Improve Construction Financial Management

Creating an accurate estimate and managing finances is one of the most essential parts of completing successful projects and running a profitable construction business, and having a system in place for managing construction purchase orders (POs), billing, and payments is a big part of managing project finances.

In this article, we’ll tell you why POs can make or break the success of your projects in 5 crucial ways, and we’ll explain the single best way you can use technology to streamline your construction PO management.

What is a Purchase Order?

A purchase order (PO) is a formal document that a buyer sends to a seller requesting a product or service. After the seller accepts the PO, it becomes a legally binding contract.

In terms of the construction industry, POs are typically used for managing the purchase of labor or a quantity of materials. For example, if a contractor or sub needs to order one fiberglass entry door and the removal of the existing exterior door on a residential property, they would need to create a PO so that the seller knows exactly what they need and how much they need to pay.

5 Ways POs Can Improve Financial Management

Construction POs not only help with the procurement process, but they also help with your overall ability to manage project finances in a variety of ways:

1. Clear Communication

As a contractor, you know the chaos that can happen when poor communication occurs in your business; you transfer disconnected information, you expose your business to legal trouble, and you leave lots of room for financial error.

By formally documenting purchase requests, there's a concrete record of vendors, quantities, dates, and costs - the team can see what's been ordered, when, from who, and for how much.

2. Budget Management

If you don’t have an accurate and simple way of job costing and managing the project budget, you leave your business vulnerable to overspending and ultimately hurting your bottom line.

With a streamlined way of handling cash flow which includes managing POs and bills, you make it so much easier to keep track of how money should be coming in and going out and estimated amounts vs. actuals, so that it’s easier to see where you might be going over budget.

For many estimating tools that can help you with your budget and cash flow management, check out our free estimate templates by clicking the button below:

3. Protection from Litigation

As a company who has worked with hundreds of thousands of construction professionals worldwide, we’ve seen just how lack of documentation in legal disputes can wreak havoc on your reputation and cost you a lot of money, including ill-documentation of construction POs and bills.

POs can protect your business from legal trouble because once a purchase order has been accepted and approved, it becomes a legally binding contract that is written proof of what costs were agreed on and what was expected to be received for that amount. Just like any contract, there may be terms based on delivery or completion date, standard of work, and more, that may cause payment to be withheld if work wasn't completed or wasn't completed to standard, if the right materials weren't delivered or were delivered damaged, etc. With written POs, you have evidence if a dispute should come up about a transaction.

4. Project Management Optimization

At the root of any construction project’s success is streamlined project management, including tracking daily progress, managing resources and team members, keeping everything organized, and making sure expenses stay on or under budget, and in fact, poor project management often leads to unsuccessful projects and lost time and money.

With an easy and accurate way of managing POs and bills, you can ensure the project runs smoothly by managing the procurement process, which facilitates the timely delivery of materials and services, and budget and cash flow management.

5. Approval Workflow Simplification

Construction projects are full of essential workflows that keep the project on schedule and under budget, including change orders, lead tracking, estimate creation, and POs.

With an efficient way of managing PO workflows, your company can implement clear approval processes – especially for high-value orders, and ensure purchases are necessary and within budget.

Using Technology for Optimized PO Management

Trying to manage purchase orders without technology in today’s digital age is bound to leave you unorganized, confused, and constantly wondering about crucial financial data.

In fact, an estimated 2.2% of annual revenue is spent on revenue in the construction industry, which is a major under-investment compared to more profitable industries.

With construction project management tools like ConstructionOnline, you can access state of the art project management and estimating tools including purchase order, billing, and payment software that will help you track construction job cost data with accuracy and efficiency.

ConstructionOnline PO and billing software includes many helpful features: