Self-induced and supplier-generated paperwork can quickly chew up profits
It makes no difference if you bid and build in the new construction arena or run a fleet of service trucks. Electrical contractors of all shapes and sizes are choking on a glut of paperwork generated by their suppliers. Upon closer inspection, however, this problem may be somewhat self-inflicted, starting with the way you place material orders. Is all of this paperwork really necessary to run your business? That's exactly the question a recent survey conducted by Allen Ray Associates, an Arlington, Texas-based consulting research firm, set out to answer.
Behind the push for paper Taking a closer look at what's driving the paper problem, the survey revealed that 73.9% of responding contractors with annual sales of more than $6 million received between 101 to 500 paper invoices each month from suppliers, flowing in from as many as 10 or more sources.
When invoices are coupled with the number of other paper offerings, such as product submittals, acknowledgements, proof of delivery, miscellaneous changes to blanket orders, and monthly statements, the amount of paper handled by a contractor's back office can be downright staggering. In fact, it's not uncommon to see several stacks of paper in accounting that are being hand-matched back to purchase orders (POs), along with copies of faxes and other miscellaneous scraps of paper. The worst part is that a large percentage of these invoices do not match previously generated POs (Table 1).
“The problem is with shuffling so much paper, it causes us to make mistakes, adds additional phone calls, and delays payments that cause ‘summit’ meetings with our suppliers to resolve disputes,” says one contractor located in the greater Los Angeles area. “Manually handling paper adds up to time being used that we don't make money on.”
This results in inefficiencies on the business side of the house. To try and offset some of these challenges, more than 56% of the contractors surveyed said they've negotiated prices for their most commonly purchased items, an approach many thought would reduce certain administrative obstacles. Nevertheless, the paper continues to roll in.
“We honestly thought that by negotiating prices, we would alleviate a lot of our confrontations and that it somehow would increase our through-put or the amount of business we were capable of handling,” says one exasperated Chicago contractor. “Just the opposite has happened. My guess is we handle the same amount of paper or more. Obviously, we have a problem that has not been properly addressed.”
According to the survey, contractors receive approximately 18 to 100 paper invoices for every PO issued, depending on the size of the contract and what's included. This results in large quantities of paper being generated to which the contractor's accounting department must reconcile back to the original POs. Such manual reconciliation is so labor intensive for some companies that it sucks up anywhere from a few “man-hours” to several “man-days.” Several additional factors also complicate the process, such as the wrong product being shipped, the product showing up at the wrong location on the jobsite, the product showing up on the wrong jobsite altogether, or product shortages or overages (Table 2). What's behind this problem? Some contractors have voiced opinions about their third-party databases being the silent culprit for data errors in estimating and ordering. After all, third-party database companies take the liberty to fit data in their software offerings.
Where problems begin Of the bid-design and build contractors who responded to the survey and use estimating software (76%), virtually all recognized that they have a problem with the prices they use to prepare estimates. Depending on the supplier, most keep the actual “buy” price secret until they are ready to purchase. To be fair, commodity prices do fluctuate. But by the same token, most contractors readily admit that once the estimate is complete — and they've been awarded the job — the “bill of materials estimate” is then handed off to a project manager to buy out the job. The focus then shifts to reduction of price and scheduling of product delivery so that the contractor gets the best performance from their in-field labor. The problem is that the bill of material is then converted to a fax (64% of the time) and sent to the supplier. Some contractors e-mail or snail mail it to a supplier, but less than 19% of respondents indicated they were sending some sort of electronic purchase order to their suppliers.
Contractors who use software to determine a need for product say that they are frustrated that there is not a ready electronic software (off-the-shelf and out-of-the-box) solution to transfer their bill of materials seamlessly to their suppliers and then back into their accounting software.
“We have looked for a simple electronic solution to order and receive all other (shipment notices, delivery receipts, and invoices) supplier-generated documents so that we can import or merge these documents into our accounting packages,” says the same Chicago contractor mentioned earlier, who has five locations in the area. “The electronic disconnect that exists between our company and our distributors is costing both of us money.”
On the other hand, many electrical distributors feel they must generate invoices on a daily basis. Distributors surveyed indicated that in some circumstances they batch daily invoices and mail them for legal protection in their respective states. In addition, they may mail out a monthly statement and even include duplicate copies of invoices. Some contractors store the paper, while others try and run toward an electronic solution. One would think that with the falling prices of computer hard drives, they would at least convert the paper to electronic files for storage purposes. However, these duplicate invoice copies result in bales of paper storage for the contractor over the course of a year.
A new look at the back office When it comes to purchasing product, automation quickly stops (64% of respondents said) and reverts to a fax machine, telephoning the supplier, snail mail or the distributor's salesman picking up paper. Often contractors will issue a verbal or paper PO. Some will issue a blanket PO and other POs specific to the job(s) and/or to your customers. Some contractors even go so far as to set up specific accounts with various suppliers in order to segregate material purchases by customer or job. The net result for most contractors is that paper begins to flow back to their office.
Follow-up interviews with responding contractors revealed the majority of them, while aware of their overhead, really have not taken a serious look at how they could control the labor-intensive effects of handling so much paper. This mindset is one that has been conditioned over the years. In fact, many contractors say they are more interested in getting the job done in or under budget than improving back office and accounting efficiencies, which are typically not even on their radar screens.
The majority of contractors also reported that their estimating software systems didn't “talk” to or link to their purchasing accounting software packages seamlessly. This forces them to either manually enter line after line of data or record it as a single entry in their accounting package. This type of accounting entry does not give them visibility to quantities and prices, and a manual accounting entry system causes dependence on paper as the backup documentation.
“We want and need seamless integration with our estimating, purchasing, and accounting systems,” said one business owner in Silicon Valley, Calif. “As it stands right now, our current software systems don't link together, and we spend a large amount of time toggling between systems for prices, quantities, and invoices…not to mention trying to figure out what supplier needs to be paid and what amount.”
She went on to say that four of her suppliers offer invoices on their Web sites, but her company can only print PDF files of these documents. “What we really want is the ability to be able to import or load all of the distributor-generated documents, in particular invoices, into our accounting package,” she says, noting that this would offer up the real possibility for her company to manage material payables on a tolerance or exception basis. Her example was a ¼% to ½% plus or minus tolerance per line item and the extended total.
Many contracting firm owners surveyed said they were taught to contest all prices/invoices when there is a variance, regardless of the amount. They feel secure they are paying the “correct price” when the invoice and quote match exactly — no matter how much time or paper is involved. When a number of these owners were challenged as to the amount of time it took to reconcile invoices and POs, they consistently estimated on the low side (Table 3 on page C50), compared to actual numbers coming from their accounting departments (Table 4).
As one would expect, there are owners who say it is their accounting department's job to catch errors and take disputes back to the distributor. When asked about using disputes as a way of extending credit terms, some contractors replied that “they take all earned discounts.” So if your company is one that manipulates purchases to gain extra credit, then you may have additional problems that come from pricing projects too low — or you are extended beyond what your company realistically needs to conduct business.
The bottom line In today's construction market, contractors are under constant price pressure, whether it is in the form of bids, material, service contracts, or outright labor contracts. To alleviate the rising cost of handling paper, especially historical records, it will pay dividends for you to seek out suppliers that offer electronic order and payment capabilities that can link seamlessly with your accounting systems and software. Finding suppliers that offer an electronic way of doing business will help you streamline your back office functions and improve your bottom line.
Ray is president of Allen Ray Associates in Arlington, Texas.