How are purchase orders used?

Q:

How are purchase orders used?

A:

A purchase order (PO) is basically a price agreement between a remodeling contractor and a subcontractor or supplier. With a PO system, subs and suppliers who find they need to do something on the job that will incur extra cost have to clear it with the remodeling contractor first.

An example would be an electrician discovering, after the existing drywall has been removed, that old wiring needs to be brought up to code. This extra work was not in the electrician’s original quote and will cost the electrician labour and supplies to complete above their approved quote.

Although POs take time to create, they are a valuable management tool, and most professional remodelers insist on them.

In a renovation that is large in scale and also takes a significant amount of time there could literally be dozens of PO’s that could and should be created. This could add up to a large amount of money that neither the homeowner or sub-contractor or the remodeling contractor could have foreseen. If no PO’s are created and the homeowner is just billed for the extra work after it happens than the remodeling contractor and the sub contractor run the risk of the homeowner forgetting about the earliest ones and coming to the conclusion that the job has become well over budget or the remodeling contractor is overcharging the homeowner for the work created. This is the opportunity (if you have taken the time to do PO’s ) where you are able to bring out all of the PO’s from the entire job and go through each one with the homeowner.

This process works very well to dispel any thoughts from your clients of wrong doing and it also keeps everything when it comes to billing above board. This should help the remodeling contractor to leave their client with the feeling that they have been treated fairly and professionally. With the PO’s in hand everyone can come to an agreement that the homeowner was billed the appropriate amount of money for the work completed and the contractors received the appropriate compensation.

Remember get it in writing and everything will go a little smoother.

Rob Abbott
Village Builders Inc.