Do I Need Purchase Orders as a Small Civil Contractor?

Effective cost management can make or break a civil construction project. With economic uncertainty rising, it’s more important than ever to ensure you’re following good cost management practices.

One area that can be particularly challenging for contractors, especially if you have a small management team, is managing suppliers and subcontractors. If you’re not careful, you can be liable for much more expense than you’ve budgeted for.

These costs can be managed formally or informally – both have their advantages and disadvantages. In this article we’ll share our experience, industry best practices and pros and cons for managing construction accounts payable with and without purchase orders.

Managing Suppliers without Purchase Orders

Many contractors start their construction accounts payable management without purchase orders, and to a certain size this can make sense. While you’re at a size that the business owners can keep on top of all costs, the additional admin required might not make sense.

Like the proverbial frog in boiling water though, it’s not easy to recognise the point where you need to implement more process. As the business grows and you’re not able to keep on top of everything, the risk grows exponentially. At some point most contractors realise they need a proper review and approval process and tracking of costs – typically well after the change should have happened.

Pros and Cons of Implementing a Purchase Order Process

Whether to use purchase orders or not is a decision based on your business dynamic, and depending on the purchase there may be some items that make more sense than others to run through a construction PO process. Consider the following pros and cons while making the decision for your business:

Pros

• Improved Financial Control: Purchase orders with appropriate approvals can greatly increase your financial control, reducing overspends, ensuring best value for money vendors are selected and identifying bad behaviour from both vendors and your own staff.
• Enhanced Record-Keeping: A purchase order process leaves a paper trail, allowing you to catch issues early and conduct post-mortem investigations if things go wrong
• Reduced Errors and Disputes: Many disputes are due to misunderstandings or genuine errors. A well designed purchase order process can provide clarity to all parties and enable errors to be resolved quickly without damaging important relationships.

Cons

• Increased Administrative Work: Implementing a purchase order process can create additional work, especially if it is done without the appropriate technologies.
• Potential Delays: An approval process can result in delays with critical purchases, especially if approvers are not motivated to keep things moving forwards.
• Initial Setup Costs: There may be some expense involved in procuring, setting up and training personnel for a purchase order process.

Debunking Common Misconceptions about Purchase Orders

1. Complexity and Time Consumption: This is perhaps the most common myth. An effective purchase order process does not need to be complex and time consuming – to the contrary, it should be as simple as possible, while providing the right amount of management control. On the other side, not having a purchase order process can create unnecessary additional work with reconciling disorganised records.
2. Delegation and Streamlined Approvals: It’s hard to let go of control as a business owner, but at a point it’s the only way to continue growing. The paradox here is that as an owner, you (hopefully) have employees in your team with less responsibilities who are better placed to approve the day-to-day decisions of your business. A good purchase order process allows you to delegate some of this authority, while giving you the ability to periodically audit how good a job they’re doing.
3. Value in Post-Delivery POs: Sometimes you’re going to need to make purchases before you can raise a purchase order. It may seem like raising purchase orders is a waste of time, but even in this situation there is value in purchase orders. While the purchase is still fresh in mind, it enables you to review the purchase, ensure everything is in order and keep the transaction organised and tracked for future review.

How Varicon Enhances Purchase Order Functionality for Small Civil Construction Businesses

Varicon’s Purchase Order functionality is designed to help small civil construction businesses improve purchasing governance while simplifying cost management. Our system allows you to:

• Quickly Generate POs: Create and send purchase orders directly from the platform, speeding up the procurement process.
• Streamline Approvals: Set up custom approval workflows that match your business’s needs, enabling efficient management of purchase processes.
• Integrate with Accounting: Varicon integrates seamlessly with accounting systems like Xero and MYOB, ensuring that all financial data is synchronized and up-to-date.

For a growing civil construction business, an effective purchase order system is much more than a “nice to have”, and you’re going to need it earlier than you think. With the right tools, it really doesn’t need to be difficult. Varicon is here to simplify this transition, providing you with a robust solution tailored to the unique needs of small civil contractors.

If you want your business to reach its full potential, start with solid foundations. Whether you’re already in need of a structured purchase order system or you want to keep things less formal for now, Varicon can help you out. Reach out to us for a no obligation assessment of your specific needs.