All vendor expenses from the jobsite have to be incurred on a purchase order right? Isn’t that how it’s supposed to work? Aren’t all construction projects so well planned and organized that there is a pre-issued PO for everything?
Of course not. Even the most structured and planned projects have ad-hoc & unplanned purchases that happen at the jobsite almost daily. Some construction projects only issue purchase orders for a portion of the project; and the remaining vendor expenses just happen on the fly. Still other projects create no POs at all, and just give their field staff a stack of carbon paper Purchase Order Books they buy at Staples to record expenses as they occur.
None of these scenarios are wrong of course – but as I’m sure you already know, the less pre-planned control you have over jobsite expenses, the more challenges you face with getting a good handle on project status and vendor accruals, amongst other things.
In an ideal world, all vendor expenses should be controlled by issued purchase orders. These should be driven by the project budget – with committed costs recorded in the GL or procurement software, for every vendor cost: no exceptions. When expenses are recorded from a vendor, they should be recorded as an incurred cost against the original issued PO. This is the ultimate control because you know ahead of time all your budgeted and committed costs; and as your actuals are recorded, there is nothing that falls outside those committed amounts. There is full clarity around your accruals; and when the vendor invoices you, it’s an easy step to clear out that accrual. Even as change orders are approved, purchase orders are revised and committed amounts altered to reflect the change. So ya, that's in an ideal world. But it’s fantasy – things never really play out like that.
In reality, there can be a substantial number of non-PO vendor expenses that need to be recorded and accounted for on any project on any day. But just because it’s common, doesn’t mean that it doesn’t present a bunch of challenges. The biggest challenge is with reporting accruals.
Everyone has their own method for tracking construction project costs & activities from the jobsite. Some use a purpose-built system like 4castplus; many use a spreadsheet, some even still use pen & paper. No matter how you manage to capture hours & costs from the field, it all ultimately has to be routed back to the office to be used for cost tracking, reporting, billing (for contractors) and accrual management.
Managing Vendor Accruals without a Purchase Order
Let’s take an example of a site foreman who needs to order some gravel for the jobsite. It wasn’t planned, but he needs it quickly, so he calls up a trucking company at the nearest town and asks the guy to deliver 10 cubic yards of gravel. That afternoon, the gravel shows up and the truck driver drives off promising that they’ll invoice the company directly. Later that day, when the site foreman is entering all the hours and expenses for the day, he estimates that the gravel delivery cost $750. Three weeks later, the accounts payable group receives an invoice from Jason’s Trucking for $920.
Depending on the company, there may or may not be a $750 accrual somewhere for the AP clerk to match this $920 invoice against. Ideally there would be; but that would require a fairly rigorous process – and a software system – to manage the seamless routing and recording of this information as project cost and accrual. If not, the AP clerk has to hunt down where, when and who is responsible for this charge – and whether it’s actually legitimate. Getting the invoice approved and recorded takes up a lot of time and is prone to errors and oversights. This would be fine if there were only one – but there can be hundreds of invoices like this in a month. Companies will often hire multiple staff in the AP department just to deal with this situation.
The bigger problem is that, dealing with it is a reactionary approach, and provides zero insight into vendor accruals. I might be wrong, but I’m pretty sure this drives the finance department crazy. Closing out the month or quarter with no real clue as to the size of vendor accruals (liabilities) is a nail-biter for any controller or CFO.
If this is a scenario that is familiar to you and something you’d like to address, we’d be interested in talking to you about it.