Everyone knows that building material costs have been rising like crazy. According to information at a recent conference I attended, these costs went up 21% in the year 2021!
When we put our estimates together and then go to actually do the job, if our costs have increased like this, it makes for a big challenge that we frankly didn’t need.
The good news is, there’s a cost control tip that can help in these situations: Purchase order management
If you didn’t know, most of our construction accounting software programs have a section for purchase orders. What this allows you to do is to record the amount of the contract (purchase order) in the accounting software. Then whenever the invoice comes in, it forces you to match the two together, so you don’t have a mistaken over-the-contract amount that gets recorded.
Here’s an example with some numbers: Let’s say you have a subcontractor and you’ve provided them a subcontract (purchase order) for $50,000. That goes into your accounting software and stays there while it waits for the invoice to come in. Then, let’s say that the subcontractor bills you for $55,000. So what was the additional $5,000 for? Maybe it was a change order or even just a mistake. When that $55,000 invoice comes in and is entered into your software, it won’t match the original $50,000 purchase order. This means you’ll have to take a moment and figure out what to do — whether you need to go back to the subcontractor, or write a change order. It forces you to pay attention and make sure you didn’t accidentally put in $55,000 worth of costs without having a change order or an appropriate follow-up with the subcontractor.
That’s just one example of how you can use purchase orders within your accounting software. You can use POs on materials, consumables and incidentals. Just make sure you have a policy in place for using, tracking and matching POs — so you don’t end up with a bunch of open POs sitting in your system!
Purchase orders and the maintenance of them in your accounting system can be a great cost control method. If this is something you’re not currently doing and want to learn more about, the first step is to go to your in-house accountant bookkeeper and talk to them about what kind of PO management is available in your software. Each piece of software is a little bit different, and you want to make sure to customize your system/process to how your software works.