Unlock construction purchase orders to control project costing
In its 2024 survey of the construction industry, Rabbet reported a serious decline in the financial stability of construction contractors. The survey revealed that most general contractors (95%) and subcontractors (75%) reported floating payments while waiting for a developer to issue payment. Contractors noted that three out of four projects needed to float payments using personal savings, retirement accounts, or credit cards.
Faced with such instability, contractors are unanimous about one thing — 100% said they consider a company’s payment history before doing business with them. To succeed in this environment, your construction company needs exceptional control over costs and the ability to pay vendors on time, which means optimizing your procure-to-pay (P2P) workflows.
And that’s where construction purchase orders (POs) come in. They’re not just paperwork; they’re a powerful tool for tracking spending, managing inventory, and ensuring trades and materials arrive on time. Plus, they enable accurate job costing by providing up-to-date expense information.
Whether you’re a general contractor (GC) overseeing a big project, a subcontractor managing multiple jobs, or a supplier providing materials and trades, understanding and managing purchase orders in construction is the key to project success. Use this guide to learn what they are, how they work, why they’re important, and best practices for using them in your construction business.
Let’s get started.
What are purchase orders in construction?
Construction purchase orders are legally binding documents that outline the terms and conditions between a buyer and seller for buying materials, equipment, or services. They keep the two parties on the same page about what’s being ordered, when it’s needed, and how much it costs.
Why construction purchase orders are important
According to Rabbet’s Construction Payments Report, the top three causes of payment delays are bank issues, lack of organized processes, and cash flow problems.
Construction POs are the foundation of efficient and accurate P2P processing. Having a written record of your purchases makes tracking spending and managing costs easy. Greater accuracy also facilitates faster invoice processing and reduces payment delays.
Here are some of the key benefits to your business:
Accurate job costing
POs give you the true, real-time costs of materials, labor, handling charges, and other expenses. This lets you estimate project costs accurately and protect your bottom line.
For example, BTB Construction is building a fence for $12,000. They issue a purchase order for 1,000 feet of lumber at $7,000 from Murphy’s Forest Products. To calculate the project cost and profit, they subtract the material and labor costs from the price. Assuming labor costs of $2,000, BTB’s total cost for the project is:
- Total cost = material + labour = $7,000 + $2,000 = $9,000
and total profit:
- Profit = price – total cost = $12,000 – $9,000 = $3,000.
Capture project variances
Purchase orders let you identify and document variances due to unexpected changes during projects and protect against cost overruns.
Using our example, say Murphy’s Forest Products only delivers 900 feet of lumber but still charges $7,000. BTB detects the difference when they compare the purchase order to the shipping receipt and informs Murphy’s of the variance. Murphy’s confirms the shipping error and reduces the price to $5,000 for 900 feet of lumber, and BTB issues a variance purchase order with the amended quantity and pricing. Then BTB adjusts their project costing and profit analysis to reflect the lower cost. The variance PO helps BTB maintain accurate records and ensures they only pay for the received materials.
- Adjusted cost = $5,000 + $2,000 = $7,000
- Adjusted profit = $12,000 – $7,000 = $5,000
Learn how Wolf Construction eliminated inefficient paper processes and improved cost control with Stampli.
Improve budget and cash flow management
POs help you track committed costs against actual spending so you can ensure that expenditures stay within budget and predict cost overruns. Greater visibility into future expenses also makes it easier to manage cash flow. Discover how Cork Howard Construction got real-time visibility into their expenses with Stampli.
Strengthen vendor relationships
Construction POs keep everyone on the same page. They help you build trust with vendors by improving communications, minimizing misunderstandings, and ensuring timely payments. Modigent used Stampli Advanced Vendor Management to provide 24-hour vendor support and engage and empower thousands of vendors.
Now that you understand why construction POs are important, let’s look at how they work in a typical construction workflow.
The construction purchase order process
The construction PO workflow can be broken down into 4 steps:
- Create a purchase order
- Ship products and services
- Receive and verify goods and services
- Process and pay invoice
Let’s illustrate the steps using the fictional company BTB Construction.
Step 1: Create a purchase order
To start their new building contract, BTB Construction needs to acquire materials, equipment, and services. Their project management department identifies these needs, including:
- Materials: Concrete, lumber, and other building materials
- Equipment: Scaffolding, crane, and power tools
- Services: Engineering consultants, trades, and business services
After identifying and listing these needs, BTB’s project manager contacts their suppliers and negotiates the prices and terms. Then, they create the purchase orders for the project.
Each purchase order contains the details needed for the supplier to deliver the goods and services. To illustrate, let’s look at the elements of the purchase order for Murphy’s Forest Products.
Header items
The header items are located at the top of the purchase order and include information needed to track and manage the transaction.
Vendor name and details
The vendor’s name, address, and contact information are listed at the top of the purchase order.
Project name and number
The project name and number are listed under the vendor information. This information lets both parties keep track of the purchase order in their accounting and operations systems.
PO number
The purchase order is also assigned a unique PO, making it easier for both parties to track and manage the purchase.
Line items
The line items are located under the header and include the description, quantity, unit price, and total price of the goods and services being purchased. For example, BTB’s PO to Murphy’s Forest Products includes two line items:
- 100 sheets of ¾ inch 4-foot by 8-foot plywood at $25/sheet for $2,500
- 100 pieces of 2-inch by 4-inch by 8-foot lumber at $1.10/each for $110
Due dates
The due date specifies when the good or service will be delivered. The PO may contain due dates for each line item or the entire order.
Payment terms
The payment terms specify when and how BTB will pay Murphy’s for the order. Payment terms are usually based on credit. For example, the payment terms for BTB’s order are Net 30, meaning payment is due 30 days after Murphy’s sends its invoice.
Retainage
In some cases, a PO may also include retainage terms. These specify the percentage of the total amount due that the buyer will withhold pending the project’s completion or at the end of a defect period. For example, BTB includes a standard 10% retainage clause on all POs.
Delivery terms
The delivery terms specify the method for each delivery. Construction delivery terms are usually Free On Board (FOB) Origin (or FOB Shipping Point) or FOB Destination. FOB Origin means the buyer is responsible for any damage to the delivery once it leaves the seller’s warehouse. FOB Destination means the seller is responsible for damage until the delivery reaches the job site.
Once they complete the PO, BTB’s project manager forwards it to the construction manager for review and approval. After the PO is approved, the PM issues it to Murphy’s Forest Products.
Step 2: Ship products and services
Once they receive BTB’s PO, Murphy’s Forest Products reviews the order, prepares the shipment, and delivers it to the job site. The delivery driver drops off the shipment and gives the BTB project manager a shipping receipt with the shipment details. After shipping the order, Murphy’s sends an invoice to BTB’s accounts payable (AP) department.
Step 3: Receive and verify goods and services
When Murphy’s Forest Products delivers the lumber to the job site, BTB’s project manager inspects the shipment for quality and confirms the shipment contains the correct quantities. If the shipment isn’t up to quality standards or is incomplete, the PM contacts Murphy’s to resolve the issue.
Step 4: Process and pay invoice
Once the shipment is verified, BTB’s AP department processes the invoice. They enter the details into their accounting system, assign cost codes, and perform three-way matching to verify the invoice. They compare the invoice details to the PO and shipping receipt to confirm they match. If the AP team identifies any discrepancies between the documents, they investigate them and address them with the supplier.
Three-way matching helps control project variances and ensure invoice accuracy to reduce costs. Discover how Superior Masonry leveraged Stampli Cognitive AI PO Matching to save $10,000 per month by improving oversight of vendor charges.
Once they verify and approve the invoice, BTB’s AP department issues payment to Murphy’s Forest Products.
How construction companies manage purchase orders
Construction companies use a variety of methods to prepare and manage purchase orders.
Manual PO processing
Paper-based manual PO processes are the simplest and lowest-cost way to create, track, and manage purchase orders. In most manual processes, the project manager creates a paper purchase order and issues it to the supplier. For faster delivery, they may scan the PO and send it via email. Paper purchase orders are stored and organized in a physical document management system such as a filing cabinet.
While they’re cost-effective, manual processes are slow and can be error-prone, especially at higher PO volumes.
Purchase order or AP automation
Construction companies can use automated systems to automate some or all of their PO or AP processes. Automation streamlines complex manual processes such as PO creation or invoice processing, and improves accuracy and efficiency. Automated systems can also reduce errors, improve data visibility, and increase productivity. For example, learn how Becker Studios Construction eliminated paper processes and improved labor efficiency by 4X using Stampli.
Integrated construction management tools
Integrated construction management tools are specifically designed to streamline financial processes in construction. Platforms like Sage Intacct for Construction combine powerful ERP accounting features with construction-specific capabilities like estimating and scheduling. Learn how Stampli helped Beyer Mechanical leverage their Sage Intacct solution to reduce their invoice processing cycle by 60%.
Whether you’re relying on tried-and-true manual processes or considering automation, there’s always room to improve your PO processing when it comes to job costing or handling variances. Optimize your construction PO process and overcome common challenges by taking these next steps.
Next steps to improve your construction PO process
Here are some next steps you can take to streamline your construction PO processes:
Standardize PO templates
Create standardized PO templates to maintain consistency across your organization and ensure POs contain all essential details. This helps reduce errors and delays. For example, if you frequently order lumber, create a pre-filled PO template with your most-purchased lumber sizes and grades.
Centralize vendor information
Keep vendor details, contact information, and purchase histories in a centralized location. That way, you can easily find vendor information when preparing POs or tracking past orders.
Build strong vendor relationships
Strong vendor relationships make all the difference in construction. Invest in these relationships by improving communications, paying vendors on time, and providing clear and accurate POs. Building trust with vendors pays off in better pricing, fewer delays, and even preferred service.
Analyze data to improve decision-making
Track and analyze spending patterns, variances, and vendor performance to identify bottlenecks and cost-saving opportunities. For example, if your data shows frequent late deliveries from a specific vendor, you can investigate the root cause and take corrective action.
Invest in PO automation
Finance operations software can significantly improve your procure-to-pay workflow. By automating your end-to-end processes from requisition to payment, you can streamline manual tasks, reduce errors, and get visibility into spending, project costs, and vendor performance. Automation can help with complex tasks like purchase order creation, order tracking, three-way matching, and approval routing. For example, automation can flag potential variances, preventing cost overruns and fraud.
If you’re not ready for a complete overhaul or want to retain your existing business systems, consider a targeted point solution. For example, AP automation can eliminate manual invoice processing and automate three-way matching to reduce the invoice lifecycle and minimize payment errors and fraud. Look for solutions that integrate with your existing ERP or construction software to avoid data silos and ensure data integrity across your business.
Stampli for construction: built for the way you work
Stampli is the leading finance operations platform centered on accounts payable. It’s built to help construction companies like yours control project costs, pay vendors faster, and streamline financial processes. Here’s how:
Work from anywhere
Process, verify, and approve invoices and pay vendors anytime, on any device.
Control variances and fraud
Use Stampli Cognitive AI PO Matching to match invoices to POs with near 100% accuracy and eliminate expensive mistakes and fraud.
Reduce paperwork
Automatically capture, enter, and code invoices to expedite processing and eliminate messy paperwork.
Strengthen vendor relationships
Keep vendors happy with timely payments, centralized communications, and improved collaboration via Stampli Advanced Vendor Management.
Seamlessly integrate with construction systems
Leverage pre-built integrations that support full functionality for FOUNDATION, Viewpoint, Sage Intacct Construction, Sage 300, and over 70 other ERPs and business systems.
But don’t just take our word for it…
“Great AP automation for construction!”
Construction companies rave about how Stampli has transformed their business. “The AI technology (Billy the Bot) is a huge timesaver. How quickly he can learn invoices and provide suggestive coding has reduced our invoice entry time to a fraction of what it was,” says one reviewer.
“We process over 1,000 invoices a month where each had to be manually added to our ERP system which would take our staff days. Stampli has been able to reduce this entry time to a fraction of what it was – hours. This has freed up our staff’s time to work on other areas of our business. Having software that also issues payments on our behalf saves time not having to manually print, sign, and stuff checks.
“By and large if there was one essential area of Stampli benefitting our business is TIME. Stampli being cloud based has assisted our company with document storage of having all invoices accessible at the touch of the button compared to storing on our own network which can be cumbersome to sort through. Approval process is a breeze for users where all information is located on one screen for review, with a detailed audit trail showing what steps the invoice has gone through.”
Ready to see how Stampli can revolutionize your construction business? Contact us for a free demo today!
