Purchase Orders: How to Use Them in Residential Construction
Running a residential construction business means spending a significant amount of time coordinating with and managing trade partners. And a lot of that work happens upfront in the estimating and pre-construction phases of a project.
One of the most important things you can do to ensure your projects are set up to run smoothly is to implement a formalized process with your trade partners when hiring them, and vendors when purchasing from them. This helps keep everyone on the same page and clear about a construction project's details.
The Bid Management Process
Let's start at the beginning of the journey in the bid process for any builder in the residential construction industry. The bid management process is a complicated dance played out by you and your trade partners every time a new project comes up. It involves a lot of back-and-forth work to create and finalize a clear and comprehensive scope of work and the associated project costs.
It's often the most challenging part because, like you, your trade partners are small business owners who are busy running their construction companies and often fall behind on administrative tasks, like pricing out work.
The process looks like this:
Receive design plans and begin the estimate
Contact trade partners you work with to check their interest and availability
Create Requests for Proposal (RFPs) that include drawings, cut sheets, measurements, and other important information related to the bid
Receive Requests for Information (RFIs) back from trade partners either in the form of a document or, more than likely, a call or text
Receive and verify their bid to ensure it is accurate and encompasses the full project scope, specifications, and equipment
Return it if it is incomplete
Determine if you're satisfied with the bid and make plans to hire them either now or closer to when the project begins
Hiring a subcontractor usually happens via text, email, or phone call. But using any of these forms of communication for this transaction doesn't give you the opportunity to provide the detailed information the trade needs to know, including the terms and conditions for working with you.
That's where using a PO process comes in.
What is a Purchase Order
In any business transaction, there is a buyer and a seller. This might be the vendor you purchase tiles from or the trade partner you hire to supply goods and services.
With vendors, you are clarifying the order details, including the items, the unit price, the total cost, and the delivery date. This is a critical step in the purchasing process to ensure that the correct tiles show up on the job site at the right time.
In the context of subcontractors, construction Purchase Orders act as a legally binding contract between your and your trade partners' construction businesses.
① The first part of the purchase order outlines the goods and services they will provide at a certain residence and the total cost.
② The second part clarifies what should be included and what is excluded from their work. For example, if I'm hiring a plumber to rough in a house, one of the inclusions might read "To test and set the hot water at each shower to 120 degrees at the hottest setting."
③ Lastly, it lists the terms and conditions that your trade partner needs to adhere to for the project's duration. This includes specific items like jobsite codes of conduct, communication procedures, start and delivery dates for their work, payment schedule, and other contract terms.
Scope of Work
First and foremost, a purchase order outlines what services you are contracting your trade partner to perform. It also includes the specific construction materials, finishes, fixtures, and equipment that are required and the price you are being charged.
This is your opportunity to include all the detailed information for the work so that your trade partner knows precisely what is expected. Getting the scope of work correct here helps avoid any confusion, friction, or additional costs downstream because everything was described upfront and can be referred to during the construction phase.
Inclusions and Exclusions
We often assume that when we hire a trade to perform a task, they will naturally do it the way we expect or would do it ourselves. But equally as often, we're disappointed when they miss something we think was obvious.
That's why it's critical to have a section in your purchase order to outline things that are inclusions, meaning things that are part of the scope of work but not listed in the SOW document, such as the example above regarding setting the hot water temperature.
It's also important to let a trade know what you don't need them to do as part of their scope of work. For example, if you're hiring an exterior carpentry team to install T&G cedar soffits, but you have a masonry contractor installing brick veneer before them, they will have scaffold set up that they might agree to leave for you to use. In this case, you would list that "scaffold is excluded from the carpentry team's purchase order."
Terms and Conditions in a Purchase Order
Trade partners often work for multiple general contractors and remodelers, each with their own way of conducting job sites, managing processes, and executing work. What might be acceptable to one remodeler may not be to you.
In some cases, the other remodelers and general contractors they work for might not have any documented processes and procedures, which means trade partners might unintentionally disregard yours simply because they aren't used to having any.
This is where purchase order terms can clarify what you expect from your trade partners and how you expect them to conduct themselves on your construction site.
Here are some common terms and conditions to incorporate into your purchase order system:
Jobsite Code of Conduct: This outlines your expectations of everyone on the job site so they know what the rules are and the consequences for not adhering to them.
Communication: Communication terms define the primary contact point(s) and who the trade partner should communicate with regarding the job site, scope of work, and pricing items.
Scope of Work: Define the scope of work they are agreeing to and include any required cut sheets for products, etc. The details matter here!
Pricing: The total cost connected to the scope of work.
Payments: Define the draw schedule, your payment terms, and your process for managing trade partner items landing on punch lists.
Change Orders: Clearly explain what your process for change orders is for trade partners before they complete any additional work and that any additional work completed but not approved is not paid.
Supervision of Employees: Make it clear that the trade partner is responsible for overseeing their employees and that their employees adhere to your jobsite code of conduct.
Project Schedule: Clarify the trade partner's project timelines and be specific about "time is of the essence" in completing the work.
Insurance and Worker's Comp: Outline any state or municipal requirements regarding liability insurance and workers' compensation that your trade partner must provide before working with you.
Warranty Information: Make sure to input transferable warranty information from the trade partner.
Documentation: List any and all documentation that the trade partner is required to provide, from mechanical manuals to the labeling of the electrical panel, etc.
Inspections: Identify who is responsible for inspections, from scheduling to attending.
Health & Safety Policy: Provide your policy to your trade partners and ensure they understand they are responsible for upholding it.
Violence and Harassment Policy: Provide trade partners with your violence and harassment policy and ensure they understand their roles and responsibilities.
Using a purchase order to convey this information is a relatively simple process to implement into your residential construction business since you can create a master template and adjust each section as needed.
Most of the time, any changes in trade partner terms or conditions occur in the "Scope of Work" and the "Inclusions/Exclusions" sections. But even if your general terms change, using a template means you aren't constantly reinventing the wheel and missing critical information.
Purchase Orders Avoid Issues Downstream
It's hard to see how a new process - like using a purchase order with trade partners, can be beneficial in preventing those firefighting issues you're currently experiencing. But this is exactly why we use them.
It's called "upstream vs. downstream," and the premise is that if we put in the planning work early, we avoid an issue before it starts. This saves time and money later on in the project because we don't have to go back and correct something that wasn't done properly. Not to mention the frustration of managing multiple daily fires across multiple jobs.
As a small business owner, you're inundated with tasks, and the thought of adding even more work to your load can be offputting. People in every company I've ever worked with or coached, from owners to project managers to site supers, have balked at the idea of using purchase orders because they "barely have time to write change orders, let alone start the job with purchase orders."
Just like a change order, though, a purchase order is a way to mitigate financial loss - only it's done at the beginning in the hopes of alleviating issues with the trade's performance and completeness downstream. And that's possibly the single greatest reason for implementing a purchase order process:
Being proactive about protecting the outcome of each project instead of being reactive when something goes wrong.
How Using Purchase Orders Benefits You
To anyone thinking that they don't have time to write construction purchase orders and they aren't necessary, let me share this story:
Years ago, I stepped into a project mid-way after the original project manager abruptly left. By the time I joined this project, it was in the finishing stage. A few weeks in, the Stelrads were delivered, and the client noticed that they weren't the correct ones they had chosen.
This could have easily been a situation that cost us money. However, because our company had a purchase order system in place, I was quickly able to determine that the HVAC tech was sent (or ordered) the wrong rads. This was listed on the original purchase order with a cut sheet of the Stelrad, and sign-off from our HVAC trade partner.
Using purchase orders helps you because:
They provide clarity into the scope of work
They provide a formal sign-off on the exact products supplied
They give everyone a place to re-visit for the "truth" when our memory fails us
In the end, the client accepted a small discount from the HVAC trade partner for keeping the current rads instead of waiting another 4-6 weeks for the right ones. But that potential disaster was only narrowly averted because of the purchase order.
Purchase Orders vs. Trade Agreements
Similar to a purchase order, a Trade Agreement helps ensure that everyone understands the scope and ground rules for a project. It outlines all the details of the project they are being hired for, the inclusions and exclusions, and the terms and conditions of working for you. It also captures all the legal conditions of working with your company, like what happens if the trade is in default of the agreement and other legal situations.
A trade agreement is a much larger and bulkier legally binding document that takes longer to write, as it is like a formal legal contract you would sign with a client. It's generally a best practice to have a lawyer review a trade agreement that you've drafted before giving it to trade partners.
However, don't rely on a lawyer to write it, or you'll end up with a novel that no one will ever read or use. And while that might protect you, it won't do you much good if they refuse to sign it.
Where to Start
As with any new process, the most important thing is to start small and scale over time. This is why it makes more sense to start with a purchase order and eventually work your way up to a trade agreement.
Here's why:
Purchase orders are easier to implement and are often built into whichever project management software you're already using so you can start immediately.
They're flexible documents that you can easily update or modify as you go.
They clarify all the project details in one place, like the scope of work, associated costs, and the project schedule.
A trade agreement is a more formal document that often requires legal guidance and review and won't be as easy to modify. Plus, it can be harder, especially in the beginning, to get your team and your trade partners on board with using it.
How to Get Started Using Purchase Orders
Making the leap to implementing a PO process with your trade partners doesn't have to rely on purchase order software. In fact, it's as easy as downloading this purchase order form I've created to help you ensure you're able to systematize the PO process.
The Bottom Line on Purchase Orders
Navigating trade partner relationships can be tricky because you want to foster collaborative environments and be able to hire them for multiple current or future projects, but you also need to maintain a sense of control because they are an extension of you and your company.
That's why having a written contract in place to communicate all the detailed information of a project to them is so important. It helps secure better relationships with your partners, better work environments for them - and for your team, and leads to better outcomes for your clients.
Using purchase orders allows you to keep a formal paper trail of all policies and procedures trade partners need to know when working on your job sites and clarifies the scope of work, costs, and required materials and equipment to ensure that everyone is on the same page.
I created this template to help you get started using purchase orders in your residential construction business easily and efficiently. Simply click the button below to download your copy.
Interested in implementing more systems into your remodeling or custom home-building business? Join the BUILD AND PROFIT SYSTEM program to learn how to apply systems thinking to all aspects of your business so that you can run it more profitably and efficiently.
