Controlling The Job With Purchase Orders - Continued
Some items are bound to be missed on the original takeoff, so
the leads have to order some material on their own. When they
first started ordering their own material, the leads tended not
to plan very far ahead and were always running out to various
suppliers. This was especially bad at the end of framing, when
it seemed like we'd get a PO every other day for a dozen studs.
The time wasted going to the lumberyard was killing us, as were
some of the mistakes that happened when the lead wasn't there
to supervise the job.
Variance POs. To address this
problem, we started using something called a variance PO (VPO),
which differs from a regular PO only in that the lead has to
note the reason for the extra order (Figure 2). We track all
nonchange-order VPOs and discuss them during the post-project
review, with the goal of having fewer next time around.
Figure 2.Before a lead carpenter can buy
materials, he has to call the office for a PO number, which
then goes on the lumberyard sales slip (top). Because this
purchase was for "extra" material, the office calls attention
to it by printing it as a variance purchase order — or
VPO — (bottom) and the company owner asks the carpenter
to explain the added expense.
The VPOs also show up in our leads' performance reviews, so
each lead makes a serious effort to avoid them. I've never
fired a carpenter for writing too many VPOs; I use them because
they are an effective way to make the point that every extra
item the lead buys cuts into profit and affects my ability to
pay him well.
Using Work Orders for Subs
When we reached the point where we were using POs for all
material purchases, we started using work orders for subs. A
work order (WO) is the same as a PO except for some contract
language that links the WO to the master trade contract we
require subs to sign. The trade contract contains legal
boilerplate that would be in any contract with a sub, such as
the requirement to carry insurance. Our WOs include a
comprehensive description of the work and a list of plan sheets
and specs where details can be found.
To request pricing, we send subs a "Bid Request" form that
contains a general overview of the work and a list of terms
they must agree to if they want to do the job. We also send a
WO with the header temporarily changed to read "Work Quote
Request" (Figure 3). Together, these documents ensure that we
get apples-to-apples bids. When the prices come back, we select
a sub and award the contract by sending him a copy of the WO
with his price written in.
Figure 3.The author gets quotes from subs by
sending out a bid request (1) and a work quote request (2),
which is the work order (WO) without prices. The sub on this
job submitted his price by letter (3) and the author accepted
it by putting the price in the WO (4) and sending it back.
There is no need to write a separate subcontract because the
completed WO serves as the contract.
What's in it for subs? When we
started this system, we had to convince subs to use our WOs
instead of their contracts. A few refused and no longer work
for us, but most agreed. In addition to reducing the subs'
paperwork burden, WOs allow them to get paid faster. Also, our
subs no longer have to write contracts, because the WO they
priced earlier is the contract.
Faster payment. Many of our subs work
in the field and do not have bookkeepers. Paperwork —
including the sub's invoice to us — has to be done after
hours. The bulk of our work is T&M, and in this state it's
legal to bill clients as soon as material or "work" is
received. So, once the sub finishes his work and our lead
carpenter inspects and approves it, we invoice the customer
Under the old system, we couldn't invoice customers until we
received bills from our subs. With WOs, we can bill our
customers sooner and pay our subs sooner.
Improved Cash Flow
Better cash flow is a big advantage of POs and WOs, since we
can now invoice customers as soon as material arrives on site
or a sub completes a job. We already know the invoice price, so
we don't have to wait for the vendor to bill us. And when the
bills do come in, we don't need to re-enter the cost data,
because we already entered it in the accounting system when we
wrote the PO, or when the sales slip came in.
Estimating More Accurately
There's no such thing as a perfect estimate, which is why
job-costing is so important. For good job-cost data, you need
to know which items you bought for which job, what each item
cost, and what it was used for. This information allows you to
increase the accuracy of future estimates and takeoffs. You can
do accurate job-costing with or without POs, but a PO system
enforces the discipline of coding expenses in a timely manner.
With good job-costing, framing costs don't get mixed in with
finish costs, and costs in the original scope-of-work won't get
mixed in with extras.
Good job-costing helps. Accurate
job-costing has proved to be helpful in some unpredictable
For example, I used to think I knew how many studs it took to
frame a wall. For some reason, though, my leads were always
running to the lumberyard for more. So I decided to figure out
just how many studs we needed per wall.
I knew how many studs were in our original lumber orders, and
by using the "items list" in QuickBooks, I could tag additional
purchases of studs. Then, at the end of each job, I could run a
report and find out exactly how many studs we used. After doing
this a number of times, I discovered that we use 1.8 studs per
foot of wall. The number may sound high, but that's what it
takes to tie new work into old.
I no longer underestimate studs. Now I know just how many studs
(or any other item) we need to carry from the very beginning of
Fast Estimates With Internal
Our next step, which we're presently in the middle of, is to
use POs and WOs to generate "internal pricing." This means that
our company's historical price data is good enough to get us
really close on the initial estimate — without having to
price every item with subs and vendors. The trades that do
roofing, gutters, insulation, drywall, tile, flooring, and
painting lend themselves to unit pricing, and we have convinced
those subs to quote us a rate for each item. Unit pricing makes
it faster and easier for me to do estimates and saves our subs
from having to visit every job we quote.
Scheduling With POs
We haven't done it yet, but someday I hope to use our PO system
to schedule jobs. In theory, you could put "delivery" dates on
POs and WOs and send them out before the job. We're a small
company, so we don't have the market power to hold people to
these dates. But the mere fact that our documents tell subs
what the schedule is and require them to tell us how much time
they need to do the work is a step in the right direction. At
minimum, we have a goal.
Making It Routine
Most carpenters hate paperwork and require some incentive to
get on board. I got our leads to sign on by telling them that
if anything is purchased on our accounts without a PO number,
I'm going to assume it's for their own personal use — and
that they'd need to settle up with the vendor. This is not a
policy I've ever had to enforce, but as with the VPOs, it's a
way to communicate how serious I am about our procedures.
However, getting the leads to do their part became less of an
issue once they realized that all they had to do was call for a
PO number, and the vendor and office would take care of the
rest. There was less paperwork involved than they had
Once the information is entered in the computer (name of job,
vendor, items purchased, cost code, and price) we never have to
enter it again. Each document we use (price quote request, PO,
WO, bill to customer) can be generated with a simple push of a
button. In the office, it was just a matter of developing a
procedure for collecting and recording the data. Once that
happened, using POs became a routine part of every job —
with a wide range of benefits for every part of the
John Isaksen Jr.owns Finishing Touch Carpentry, a
15-year-old remodeling company in Bellevue,