As a financial consultant to small construction companies,
I've seen lots of cases where a builder finished a job and the
bookkeeper closed the books on it — only to have a late
subcontractor bill for that job show up months later. I've also
seen cases where material costs on a job ran as much as $20,000
over budget, but the project manager didn't tell the boss until
the project was complete. The owner thought he was making a
decent profit and then got a nasty surprise.
The source of these problems isn't necessarily the bookkeeper
or project manager; it's the process itself — which is,
of course, determined by the company owner. The reason
bookkeepers in construction offices often seem to be
inefficient is that their bosses don't give them the
information they need. In many companies, a bookkeeper handed a
stack of bills properly coded to a job would go into shock and
faint; more typically, he or she has to figure out which bill
goes with which job. Inevitably, such guessing leads to costly
mistakes. But again, don't blame the bookkeeper. It's her job
to do the bookkeeping; it's the responsibility of the person
buying the materials to allocate them to the proper job.
A purchase-order system allows you to keep track of a
job's expenses. All "committed" costs — essentially
subcontractor payments and material purchases — receive a
PO number, which gets plugged into a basic spreadsheet like the
one shown here. As the job progresses, you can compare invoices
received with what has been budgeted.
Speaking in Code
For that to happen, the purchaser needs to have a code to give
the supplier — and the company needs to have a good
purchase-order (PO) system. A lot of contractors don't use POs
because that would require planning jobs more carefully, and
they don't see much value in time spent planning. But in the
examples cited above, the reason the contractors lost track of
bills or didn't know jobs were going over budget was that they
lacked a PO system.
With a good PO system, you calculate at the start how much
you're going to spend on each part of the job (or, for very
small projects, on the entire job), and you create a budget for
that amount. Most small contractors already do that, based on
the job estimate.
The next step is to assign costs to suppliers and subs. Then,
whenever a crew member working on the project buys materials,
or a subcontractor submits a bill, he provides a PO number that
links the bill to that job and to the proper phase. The payoff
is that you and your bookkeeper will always be able to see how
much you have left in the budget, and therefore whether the job
is on track.
The biggest advantage of a simple purchase-order system is that
it helps you keep track of "committed" costs. These are costs
you have very little control over once the job is under
contract — material and subcontractor costs are the best
examples. By contrast, your "internal" costs — primarily
your own labor costs — are under your control.
To use the PO system, go through your job budget and determine
which line items are committed costs and which are internal.
Then issue a PO number for each committed cost and set up a
spreadsheet — like the one shown on the previous page
— so you can tell as the job progresses where you stand
against budget and where you have money left to work
Say you exceed your labor budget for demolition. Since it's
early in the job, you can still make up for this on one of the
other phases — as long as you use internal money. You
know, for instance, that there's unspent money set aside for
the cabinets and you don't have to pay the balance for them
until near the end of the job. But the spreadsheet makes it
clear that those dollars are spoken for and you'll have to find
the savings elsewhere.
A simple kitchen remodel like the one in the sample spreadsheet
uses several suppliers and subs. Each cost is assigned a PO
number — based on the job number and phase — that
should be given to each sub or vendor and to any carpenters who
might be purchasing materials.
It's smart to have a rule: No PO, no payment. Once your subs
and vendors get used to it, they'll make sure they include POs
on their invoices. Having to provide POs will also reduce those
impulse purchases at the lumberyard counter; everyone is
accountable for what he buys.
No More Overpayments
The PO system also eliminates another common problem:
overpayments. Let's say a sub has a contract for $8,000 and
bills for $4,000 at the beginning of the job, but doesn't get
paid. Later, at the end of the job, he sends a second bill for
the full $8,000. The bookkeeper — who in this scenario
doesn't have a PO number to compare the bills against —
pays the sub $12,000. By the time the contractor figures out
what happened, he may not be able to get the money back. An
updated PO spreadsheet would have made it clear how much the
sub was owed and how much he had billed for.
Even if you decide not to use a purchase-order system, you
should at least have what I call a "purchased order" system.
All you need are line-item numbers and job numbers.
Say item number 6000 is framing lumber; when you buy lumber for
job 63, you give the supplier 63-6000 for the PO number. This
won't let you compare actual numbers with budgeted numbers or
know what has already been committed, but costs will get
credited to the right job and the right line item, and the
bookkeeper will know the job number and line item without
having to ask.
When creating a budget, resist the impulse to use too many
codes. That may mean not listening to your project managers,
who often want to job-cost at the same level of detail they
I had one client who ignored this advice and, rather than use
one line item for countertops and tile, created a list that
included separate codes for master-bath tile, master-bath
granite, master-bath Corian, first-floor bath granite,
first-floor bath tile, and so forth. Don't make this mistake.
Not only will the bookkeeper balk at entering costs with that
level of detail, but the sheer number of categories will make
it too hard to get an accurate picture when you're comparing
budgeted costs and actuals. The ultimate outcome could be that
everyone gives up and decides that working from a budget is too
hard. So keep it simple.
Leslie Shiner is a financial and management consultant
for builders and remodelers. Her office is in Mill Valley,