Back office basics for construction – 10 Ways to Cut the Costs of your Construction Business Purchases

construction

How does your construction business purchasing measure up? Whether you’re buying tools, equipment, supplies, materials or even hiring subcontractors – are you planning those purchases as well as you could?  

When it comes to running a construction business efficiently, purchasing is often overlooked, particularly in businesses where purchasing tasks are handled by several employees. As a result, you may find that you are spending too much money on low-quality products or with suppliers who don’t exactly have the best customer service. Purchasing is a profession like any other – it is better handled by professionals. So if you’d never dreamed of letting someone unprofessional or inexperienced build a building or even weld, why should you treat purchasing differently?

So what measures can you take to reign in your spending and put some controls around the purchasing process? Here are 10 tips to consider.

1.     Separate your Personal and Business Banking

If you are purchasing anything for your business, first open a business bank account and apply for a business credit card. Here’s why:

1)     If you start intermingling personal and business credit, you negate any protection that being a Limited Liability Company (LLC) can afford. A business credit card, used solely for business purchases and expenses, can eliminate this risk as long as it isn’t backed by a personal guarantee.

2)     The IRS requires that income and tax deductions for business and personal transactions are kept separate. A business bank account can help with this, while a business credit card can make for easier record keeping because they break down expenses by category.

3)     Credit cards are also an effective tool for building business credit, which will help you to get better deals with banks and lenders.

2.     Establish a Formal Purchasing Policy

Now, you may not have a need or even the budget to staff up a purchasing team, but it’s a good idea to lay the foundations of a formal purchasing policy – one that defines your desired quality standards, delivery times, volumes, and price points.

Think about the following factors as you define your procurement policy:

  • Who has authority to purchase? What can they buy and are there any spending limitations?
  • How you select your suppliers? Do you factor quality, shipping times/costs, place of delivery, etc.?
  • How many quotes do you seek before selecting a supplier or subcontractor?
  • Do you enter into formal supplier contract arrangements? What are the acceptable terms?
  • Do you have a process for quality control? What happens when you get defective materials?
  • How often you evaluate supplier performance (if you don’t it’s a good idea to do so)?

3.     Appoint a Go-To Purchasing Function

As a business owner you can only wear so many hats, so consider passing the procurement reins to someone else on your team who can take on this function in addition to their other duties. In this role they will not only place orders, but ensure that your purchasing policies are adhered to, be responsible for supplier selection and management, inventory, quality control, and payment processing.

4.     Get a Grip on Inventory Management

Inventory tracking is a great tool to cut costs. It will help you avoiding buying materials you don’t need for your coming jobs, and ensuring you’re not losing time (and spending money) waiting for materials you forgot to order. There are many simple online ordering systems that can help you monitor and manage inventory, sales and shipping lines – automating as much as possible can give you visibility into your business, improve cash management, help with inventory control, and ultimately, enhance profitability.

5.     Keep Track of Orders

This is where the purchase order (PO) comes into play. Once you’ve agreed on a price with a supplier, filing up a PO (a formal request to a supplier to go ahead and deliver materials at an agreed price and terms) will help you stay on top of your purchases when they are delivered and invoiced. Cross check items that arrive with your PO, and again when the invoice arrives. This is the time to spot check quality and quantity.

6.     Negotiate Contracts for Quantity Discounts

If you are making repeat purchases from a supplier, use a contract instead of a PO. You may be able to negotiate quantity discounts or simply streamline the process of ordering recurring items. You’ll save time, money, and you’ll still be invoiced on a monthly basis.

7.     Keep an Eye on Market Fluctuations when Making Purchases

It’s likely that market prices for purchases are going to fluctuate. Take advantage of declining prices, liquidations and discounts on bulk purchases to lower your costs. If you don’t have the cash for this – try negotiating payment plans or even consider borrowing. Many times your borrowing costs will be much lower than the discounts you receive when buying in bulk.

8.     Going Beyond Price, Establish a Good Basis for Choosing a Supplier

Don’t just compare price among a short list of suppliers, be sure to dig deeper before you place an order. Look at their credit and payment terms. What about their reputation (do a little research or ask for customer references)? Likewise, don’t throw all your eggs in one basket, it’s very important to have at least one supplier “in reserve” who you can turn to if your preferred supplier lets you down. Having a few suppliers on your books will also put more pressure on your primary suppliers to add sweeteners such as discounts or better terms. Furthermore, working with several suppliers also gives you the opportunity to build good business credit. Finally, consider using marketplaces such as Specbid, Kinnek to get the best pricing you can get.

9.     How to Know When it’s Time to Hire Help

In the construction industry, purchases involve many time technical and industry-specific knowledge. Moreover, the quality of the goods you buy and sell determines the perceived quality of your company. So, if your company’s purchasing process has become too complex or it’s too much for you or team to handle, it may be time to hire a dedicated purchasing manager. Entrepreneur.com also recommends doing so if your business issues RFPs or RFQs (requests for proposals/quotations) when making purchases, negotiates contracts with each supplier, or needs a better grip of tracking supplier performance.

10.  Where to Find Specialist Help

If you can’t afford to hire a specialist, you can also call on the services of SCORE – a government-sponsored network of business mentors who specialize in helping businesses with business functions from sales and marketing to operations and finance. Alternatively, organizations such as the American Purchasing Society also offer consulting services to members in need of assistance with their purchasing processes.

What practices have you put in place to streamline your purchasing process? Share with the rest of us!

About Fundbox: Fundbox is a Technology company that is helps small businesses grow by managing their cash flow better and by overcoming short term cash flow gaps.

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