What is a purchase order?
A purchase order (PO) is a legally binding agreement that a buyer uses to request goods or services from a seller. Purchase orders include a tracking number and specific product details like the price and quantity ordered.
In residential construction, purchase orders are used by builders + remodelers to request materials or services for a project from third party vendors, suppliers, or subcontractors. A detailed purchase order defines the scope, price, and terms of the expected materials or services.
Why are purchase orders important in residential construction?
Depending on the size of the company, builders and remodelers are often juggling a considerable number of construction projects at the same time. Builders use purchase orders to stay in touch with subcontractors and other partners throughout the building process. There are a few main reasons builders + remodelers should have a system for writing effective purchase orders.
1. Commit Trades to Work
As a contractual document, a signed purchase order commits a trade partner to a defined scope of work at a specific price. This written contract serves as valuable documentation to ensure trade partners perform the required work and understand expectations.
2. Eliminate Surprises
With a recorded document outlining what work or materials a particular trade partner commits to, builders + remodelers now have something concrete to double check the validity of incoming bills. If both parties understand and agree on the price for the expected project work, it eliminates uncomfortable conversations and sticker shock.
3. Protect the Project’s Bottom Line
A purchase order plays an important role in job costing. By understanding what bills and expenses will come in the door before they actually arrive, builders + remodelers can properly predict where their bottom line is headed. Builders document any changes throughout the build with a variance purchase order that provides further insight into how costs change on the project.
How do builders + remodelers write purchase orders?
There are many different types of building companies in residential construction. When it comes to writing purchase orders, a ton of different methods and strategies exist to maximize efficiency and automate the process.
1. Manual Methods
A simple word document listing out the necessary purchase order details, then printed for subcontractors to sign satisfies the basic needs of these documents. While simple and straightforward, this more manual method eliminates most barriers to starting a purchase order process. As paper documents, however, builders and remodelers face the risk of losing this important documentation or face not having them on hand in crucial moments. Digitizing these purchase orders solves many of the problems faced with handling paper, but building firms must still conduct in person meetings with subcontractors for signature.
2. Purchase Order Software
Virtually every small business that works with suppliers needs an automated purchase order system. While there are plenty of tools available for processing purchase orders, Xero is an incredible software tool that helps small businesses prepare and email customized digital purchase orders. Xero includes invoicing and billing features that function well for builders + remodelers. While many of these tools may pull other project financials, such estimates, invoices, and billing, together they fall short of a full integration into project details. A purchase order impacts and ties directly to subcontractor billing, client selections, the project timeline, scheduled tasks, and financial reporting.
3. Integrated Construction Management Tools
Integrated construction management tools offer an even more simplified approach to every aspect of a building project. Software suites like CoConstruct are designed specifically for builders + remodelers with features like estimating, scheduling, and client and trade partner communication all built into one platform. CoConstruct’s platform is a financial management powerhouse for building companies. In the same program, a builder can write estimates, invoice clients, and send purchase orders to subcontractors. When sending a purchase order through the software, a builder can send email notifications to subcontractors about the materials and services needed for a project. Having communication tied directly with documentation builds out the foundation of a successful project.