It’s not “news” that one key to profitability for plumbing and mechanical contractors is accurate, timely tracking of materials costs.

But how do you do that? How do you ensure that planned materials purchases conform to the job’s budget? Just as important: How do you obtain current access to materials-related information?

The answer is to use construction accounting software that integrates purchasing and job cost in the same package. An integrated package enables the project manager to immediately see the purchases planned for a specific job, including an on-line review of the actual purchase order detail for every job. That enables him to compare costs to the job’s budget, ensure that planned purchases conform to the budget — and if necessary, make corrections immediately.

The same package also can address other materials-related areas that directly affect your profitability, including building a database of materials that you regularly purchase.

Typical Problem

Construction accounting software that integrates purchasing and job cost in the same package can eliminate one of the nagging headaches of this business — materials invoices that arrive in the office near or after the job’s completion. This can reduce — if not eliminate — the job’s projected profit.

Perhaps this sounds familiar:

Your project manager estimates a job with a projected cost of $100,000 is 98 percent complete. In other words, if the job is on track, you’ve spent $98,000 with $2,000 remaining. But invoices keep trickling in — $1,500 here, $2,000 there, another $2,500. Suddenly the job is not so profitable. In fact, the project manager really can’t say for certain where it’s all going to end — except that, by now, you’re seriously overbudget, and there’s not much you can do about it.

Here’s how you can avoid all that — and in the process make your jobs and your company more profitable: Use construction accounting software that allows you to use the purchase-order function to create “committed costs.” Once those committed costs are created, you can compare them to the actual invoices for materials as you receive them. That gives you a cost comparison on individual materials, plus an overall look at the profitability of the job. Most importantly, it enables you to make decisions immediately using current information.

Perhaps the best way to explain how this works is by example. Let’s say the XYZ Construction Co. has a new job. XYZ’s office staff enters the materials list for the job as a “proposed purchase order” (PPO) into the purchase order module of the construction accounting software. The PPO is akin to a shopping list, in which prices and vendors for individual items have not been finalized. Indeed, XYZ faxes the PPO directly to vendors so they can respond with prices in the space provided.

After receiving responses from the vendors, XYZ chooses the specific price and vendor for each item on the PPO. Then the PPO “explodes” into multiple POs — one for each vendor — that immediately create committed cost entries in job cost, without additional entry of the same information.

As materials invoices come in from vendors, the system matches them to the purchase order, giving the project manager current information about the total for the job. Just as important, it gives a summary of the materials outstanding for each job, and their cost. That, of course, enables the project manager to make adjustments now — rather than waiting until the job is complete, and trying to bill the “extra” costs as change orders. Building A Database

XYZ Construction also uses its integrated software package to build a database of materials it regularly purchases in which it records special prices from specific vendors. After that information is loaded, the software can search the database to provide the least-cost solution for a job’s PPO. It also can show the total price for the items on the PPO for the three lowest cost vendors, if XYZ decides to buy all its materials from one vendor.

Any of the automatic choices of price and vendor can be easily changed in the software so that purchase orders are written exactly as XYZ desires — an important function for high-volume buyers like XYZ.

The software enables XYZ to create an unlimited number of PPOs, which can be re-used just like standard shopping lists. XYZ also can change them at will, by adding or deleting items, changing vendors, altering prices, etc. before confirmation. That’s critical for XYZ, which constantly buys lists of items.

Another major bugaboo, of course, is invoicing. If you’re not using purchase orders, then the invoices must be routed to project managers for approval. In many cases, however, the approval process seriously slows the processing of invoices and payments to vendors making timely job-cost information impossible.

But XYZ Construction has a better way to do things. If a PO has been written, the invoice can be entered against the PO immediately. That, in turn, updates job cost files to provide accurate information. If discrepancies exist between the invoices and the PO, it shows up when the office staff enters the invoice. Invoices also can easily — even automatically — be placed on hold so that payment is held up until problems are ironed out. And because the items were entered for the PO (perhaps first with a PPO), they don’t need to be re-entered when invoiced.

Change Orders

Another issue where the proper accounting software should be able to assist is billing for materials on time-and-materials jobs or change orders. It’s typically a laborious process: Costs need to be pulled together, marked up, a bill produced, and back-up provided to show detail. But with the proper accounting software, entire jobs — or portions of jobs or even individual change orders — can be billed easily and efficiently.

Here’s how XYZ Construction does it: The company uses the time and materials module in its construction accounting software to build a list of materials to be billed through a specific date. The bill is created in Accounts Receivable, and back-up reporting is provided to demonstrate the details on what’s being billed. All of that is done with no double-entry of data; the purchase order information “flows” to the A/P invoice, which, in turn, flows to job cost and to time and materials. (Indeed, a bill can even be based on POs written prior to receiving the actual invoices.)

And it can be much worse. When Mother wreaks havoc with a snowstorm, tornado, flood, etc., the last thing a customer thinks is, “Will the work be covered under my service contract?” Instead, it’s “Fix it now!”

So being customer-oriented, you fix it now, figuring that all this extra work (thank you, Mother Nature) surely will lead to extra profits. Perhaps it will — if you have an efficient system of tracking materials cost (as well as labor).

Unfortunately, materials costs on service work often are priced manually using price catalogs. At the very least, that’s a laborious process; at worst, it’s an inaccurate one that results in delay and inconsistent pricing.

But once again XYZ Construction has a better way. Materials used (and labor performed) on a service call are entered into its accounting software against a work order. The pricing for materials and labor is automatic, based upon pre-determined prices. When the job is completed, the work creates a bill in accounts receivable, and an invoice is produced to send to the customer.

The software saves time for XYZ, improves cash flow and collections, and provides consistent pricing and profit margins. Perhaps best of all, the construction accounting software’s profit report shows revenue, cost and profit “sliced and diced,” according to technician, type of work order, customer, date range and many other variables.