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Construction Purchase Orders
Purchase Orders are a necessary progression from a small contractor to a larger one. As a contractor grows in size, he or she will see losses due to material logistics (hence money) and unnecessary conflict with Suppliers about past invoices. All this takes away from what a contractor needs to do, work in the present. Minimizing these interruptions is a benefit of simple but, thoughtful purchase order system.
Purchase orders set the conditions of sale. Price is primary in most negotiations but, terms and conditions of that sale are equally important. The "T & C's" answer the question posed by the six wisemen of Rudyard Kipling. Who? What? Where? When? How? Why? Conditions of sale determine payment. Merchants know that these guiding questions make for good business. The Cash-to-Cash Cycle is one of the important metrics in calculating return on investment. The big picture tells us that a poor project ROI makes the the contractor's ROI poor also.
Review your terms and conditions of sale. Standardizing these can keep all your projects on better footing. Homebuilders have seen the power of "pay by purchase order" and its affect on profitability. For Commercial, Industrial and other contractors, there are other terms that are effective. Again, good business practices dictate us being careful with money. Thoughtful purchase order language protects us against waste of that precious resource.
My Scottish heritage has helped me financially. The old joke is "how was the Grand Canyon Built? - a Scotsman lost a nickel and five of his friends helped him look for it."
Scots know terms and conditions are just as powerful a money saving tool as price negotiation. Below we have listed a small sampling of terms and conditions.
Some standard language might include:
1) Delivery upon our request
2) Billing term 2/10 net 30 (net 40, if you can get it)
3) Warranty by distributor against defect (not only manufacturer)
4) Order filling erFors are distributor's responsibility - we will charge 5% of cost of unfilled quantity pricing
5) Material to be protected when delivered by distributor
6) Credits to be issued within 72 hours of receipt of returned material
7) Material to be bagged and tagged at our direction.
These types of terms and conditions make sure that contractors get the material that they want when they want with the billing conditions they desire.
We cannot build without material and we cannot operate without working capital. These are not exclusive of each other. We can manage each at the same time. To be clear, no one has unlimited working capital. So, careful contractors adopt conditions of sale that keep material and equipment purchase from draining profitability. Contractors have seen the power of placing the responsibility of sale back to distributors. Such as requiring more timely material deliveries and invoice dating.
Average material content of a construciion project is over 40% of the total cost of the job. A construction firm simply can't ignore this huge financial risk.
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Matt Stevens is a management advisor who works only with construction contractors. He has performed training and business consultation for the contracting community since 1994. Matt can be reached at mstevens@stevensci.com.">mstevens@stevensci.com.
Posted by Matt Stevens at December 9, 2005 2:24 AM
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