How to Use Purchase Orders to Combat the Rising Cost of Construction Materials
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A construction purchase order is a detailed agreement between a project owner or builder and a third-party supplier, regarding the amount and cost of materials for a project.
Material supply, and material cost: These are critical parts of the construction accounting staff's day-to-day duties, made easier with purchase orders. Purchase orders are a great way to ensure that construction projects have the right materials at the right time during a project, and avoid costly delays. But the volatility of construction supply costs over the past two years has wreaked havoc on even the best-planned construction projects.
A construction purchase order is a detailed agreement between a project owner or builder and a third-party supplier, regarding the amount and cost of materials for a project. At minimum, a purchase order includes a description of materials or equipment, the quantity or amount, agreed-upon cost, terms of payment, and delivery dates. When it has been signed by the buyer and seller, a purchase order is legally binding.
For those who are able to track costs and billing closely, purchase orders offer many benefits: construction accounting can see existing costs, upcoming expenses and committed costs.
Why are purchase orders in the spotlight in 2022?
First look
Purchase Orders: A Risk and a Safety Net
In times of extreme volatility of construction material costs, a purchase order can be a safety net … or a massive risk.
A purchase order solidifies an agreement to buy a certain amount of construction materials at a certain cost. When the cost of materials rises, locking in a purchase order can secure a great deal for a project owner.
When the cost of construction materials falls off a cliff—or projects are postponed, reduced in scope, and even canceled—project owners may be stuck holding the tab, with little hope of making a profit. With razor-thin margins, few contractors can afford to absorb rising material costs.
The price of construction materials jumped nearly 20% in 2021, according to recent analysis from the Associated General Contractors of America. Why are purchase orders in the spotlight in 2022? Because of the rising cost of raw materials in 2021. Prices seem to be leveling out currently; for example, the price index for steel mill products rose 0.2% in December, the smallest rise in over a year. But a project owner who signed a purchase order in December of 2020 is still paying at least 127% more, according to the same AGCA report.
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Why Purchase Orders Fail
Purchase orders are nothing new, but they can be cumbersome. It’s also difficult to know the exact amount of materials needed in advance, and what price-point the project can bear, without construction accounting and project management software.
Project owners must be confident in their estimates and bids, to commit to a purchase order agreement. Off-base estimate? Unanticipated leap in lumber prices? Lots of things can affect construction materials costs.
Companies that still use spreadsheets and disconnected construction accounting can struggle to use purchase orders to their advantage, because information becomes outdated so quickly, and it’s just so much trouble. It takes a lot of time to track current and committed costs, to say nothing of actually being strategic about it ... like bundling material orders from multiple projects for a bulk discount.
How to Use Purchase Orders to Stay Profitable
Construction contractors can’t simply count on a steady supply and consistent prices of materials, even in the best of times. It’s a different world today. It’s more important than ever to have accurate estimates and up-to-date pricing information—so you can take advantage of purchase orders to lock in profit and control costs.
To tie it all together (and keep it tied), contractors need a way to connect accounting and PM workflows with up-to-date prices. Purchase orders can do that, but only with good data. Construction technology has come a long way since the days of spreadsheets and notes, and successful companies must adapt to the pace of change.
Today’s connected, cloud-based construction management suites leverage real-time data and workflows to tie together all phases of construction, so that project and financial planners have the accurate, timely information they need at their fingertips, as well as a deeper understanding of their true project costs and resource allocation.
ProjectSight, for example, is part of the Trimble Construction One connected platform, gives contractors the ability to create a PO from the information entered in an estimate, with connected workflows between field purchase orders and PO receiving. Trimble Construction One also includes Supplier Xchange, a real-time pricing and inventory market.
Purchase orders are a vital part of the process, but in 2022, they can be an opportunity instead of a headache—if you're using a modern process with solid, connected data!
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