How Much Is Your Purchase Order Process Really Costing You?

Managing your construction project’s purchasing process is one of the crucial aspects of making sure things are on or under budget, but depending on how you manage expenditure, finances can get out of control pretty quickly.

In this article, we’ll tell you the common ways your construction business may be losing money in the procurement and expenditure stages of a project, and how you can use PO software to prevent these common expense mistakes from hurting your bottom line.

Common Ways Expenses Get out of Hand

With 9 out of ten construction projects experiencing cost overruns on average of 28%, it's no wonder why expense management - in addition to a lot of other project management aspects - is so crucial for contractors.

Here are the common areas related to expense management where contractors can lose money that are directly related to spending and documenting money going out:

Improper Change Order Management

It’s common knowledge that unexpected changes happen in construction projects all of the time, and sometimes these changes – also called change orders – can lead to smaller profit margins if your team isn’t careful.

In fact, a study done by Dodge Data & Analytics showed that change orders account for an average of 10% of the total contract value, with some projects experiencing as much as 25% in change order costs.

This is why change order management can make or break your project finances. Just a few change orders can potentially lead to an increase in project expenses and/or a change to the initial budget, and when those budget changes don’t get accurately tracked, it can lead to cost creep and budget bleeding.

Poor Expense Management

Everything from what materials and labor are calculated for in the bidding phase to what items need to be modified with change orders has the ability to make or break your budget.

This is why it’s important to understand project expenses from the procurement phase to managing the billing and payment of different materials and labors throughout the project so that you can keep up with how money is being spent.

Unorganized Cash Flow Documentation

A crucial part of proper cash flow management, which includes tracking purchases and expenses, is having an organized way of documenting money going out and coming in.

Without proper documentation, including accurate financial reporting, change order documentation, purchase order management, and estimate reports, you risk going over budget, and leaving your business vulnerable to litigation, which leads to even more money lost.

Inaccurate Estimates in the Procurement Stage

It’s no secret that getting the estimate right from the beginning is the key to starting off any project on a good financial note, which means that starting with inaccurate estimates can lead to lost profit.

Without a solid estimate that has accurate costs and material quantities and labor hours, your expenses are much more likely to creep up, causing your project to go over budget.

Do you need a simple way of creating construction estimates so that you have all the data you need for creating purchase orders? Click the button below to access our free estimate templates for both residential and commercial projects:

The Solution: Use Construction PO Software

Purchase orders, bills, and receipt management is way too important of a process to leave up to paper documentation that can easily get lost or damaged.

With purchasing software like ConstructionOnline™’s purchase order and billing software, you can keep a close eye on every stage of the procurement and expenditure process at the click of a button.

Here’s a quick summary of what all your team can accomplish with our software:

1. Centralized Storage of POs

It’s one thing to have a bunch of financial data in separate places that can be hard to locate and track, but it’s another thing to have all of that data stored in a software that automatically organizes all purchasing data for you.

With our purchasing software, you’ll be able to keep all of your PO data, bills, and receipts in one place that’s easily accessible to all relevant parties, so that everyone can be in the know.

2. Interconnected Financial Data

What if you could automatically create POs directly from the relevant previously stored financial data instead of having to manually create POs?

With our purchasing software, you can create POs directly from construction estimates and change orders that you’ve created in your project. This takes the hassle out of construction job costing with our smart, streamlined approach to managing construction POs.

3. Clear Communication About Crucial Financial Data

When your construction team operates on poor communication internally with team members and externally with outside stakeholders, you risk project delays, litigation, and missed payments, all of which ultimately lead to smaller profit margins.

Having your PO data stored in a centralized place allows for a lowered risk of miscommunication about what’s been ordered, billed, and paid for, so that your projects run on time and under budget.

4. Automated Purchasing Workflow

Construction projects are full of essential workflows that keep the project on schedule and under budget, including purchase orders.

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.

5. 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.