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 right away.

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 ways.

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 a project.

Fast Estimates With Internal Pricing

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 imagined.

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 company.

John Isaksen Jr.owns Finishing Touch Carpentry, a 15-year-old remodeling company in Bellevue, Wash.