How You Buy Out the Job Affects Profits

The job is bid and won, mobilization has begun, and now it’s time to start writing purchase orders, which usually is a heckuva lot of fun. Then you’re done as far as pre-construction phasing, right? Wrong!

Do you routinely write purchase orders to the handful of lowest-priced suppliers who supplied quotes either on bid day or after you’ve beaten them down later and wrung the lowest possible price out of them? Do you repeat this pattern on job after job, thinking you’re maximizing your profit potential? Do you ever stop to think that doing business this way might not be in your company’s best interest?

One nice thing about living in the good old US of A is that this is still more or less a free country with more or less free enterprise (although with rules) and no government official tells you who to buy from — unless he’s a contracting officer, but that’s another story.

If you want to subsidize your buddies at the expense of your company, and your bosses and upper management are cool with it, I’m not one to tell you otherwise. Be thankful you have that much freedom to do so, from your bosses and the government and whoever else might have nominal control over your job purse strings.

But think about it: If you’re like most project managers, your bonus is directly tied into a quarter or calendar year’s net income, net profitability or both. If you’re paying too much when you buy a job out, it’s taking money out of your own pocket, not to mention your company. That also could negatively affect the combined futures of yourself and your enterprise. Not too smart, eh?

I’ve always been a firm believer in rewarding those who help you and not helping those who don’t, but when it comes to the application of a precious commodity for any contracting business, cash flow, there has to be balance.

Suppose a supplier always beats its competition by a couple percentage points on bid day, but then you routinely have problems getting materials from them to the job. Are you really saving or making any extra money? Which is cheaper, a point or two on bid day or having multiple work crews standing around a job for a day at hundreds of dollars per hour twiddling their collective thumbs?

What if a supplier is usually cheaper but then won’t take returns for anything or penalizes you out the ying-yang for mistakes that are usually his fault? What money have you saved?

What if your guys are more familiar and labor-efficient at installing Brand X of equipment? Brand X is also, by the way, the approved brand. Instead Brand Y always somehow monkeys in an apparent low bid on bid day. Then you’ll have to plead your case to the engineer to get Brand Y approved, and waste your time doing so. Which ends up costing more — running your crews inefficiently because they don’t know and don’t like Brand Y and taking hours eating dirt for the engineer to try to get Brand Y approved?

What if Supplier A is always cheaper but will only let you float purchases for 30 days without cutting you off? Supplier B, on the other hand, is three points or so higher but usually gives you 90 days of float. How much comfort level and how many net dollars will “spending” that extra three points give you?

I’ve always been a big proponent of creating and using metrics in all aspects of project management. The front-end part of buying out a job is no different from the back-end of actually PM’ing the job. Create a multiplier-metric for whatever negative or positive effects a supplier creates for you for whatever reason.

A baseline quote is always represented by a multiplier of 1. Every efficiency should be given a “positive” multiplier such as 0.8 or 0.9, which when applied will reflect the true cost of the quote. The same goes for any factor that will create inefficiency, which should receive a negative multiplier such as 1.1 or 1.25 or whatever you feel will accurately reflect its true cost by the end of the job.

If any factor can be represented by time, dollars or aggravation, all of which represent actual money spent by the end of the job, then it can be translated into a metric and applied to the quotes that are being looked at.

H. Kent Craig is a second-generation mechanical contractor and project manager with unlimited master’s licenses in boilers, air conditioning, heating and plumbing. He may be reached via e-mail at [email protected].