There are two predominant schools of thought on purchasing practices. Centralized purchasing is managed by an in-house purchasing agent. Project-level purchasing is managed by a project manager and/or job-site superintendent. They both have their place in the world of electrical contracting, but knowing when and where to use each one is worth exploring.
Project-level purchasing
This approach is typically used by small- to medium-sized contractors and is a natural stepping stone in the evolution of an electrical contractor. Let’s begin by examining the development of a company’s purchasing methods.
A typical electrical contractor starts out as a one- or two-man show. They decide to go into business for themselves, get a license, and go to work. They set up an account at a local electrical distributor and buy materials as needed for each project. They go to the supply house every few days, order the material they want at the counter, and, when asked for a purchase order number, they give their name or the name of the project.
They probably have two to three projects going at any given time. These projects aren’t very large and don’t take very long to complete. They can easily track costs per project and manage cash flow because they aren’t buying anything in sufficient quantities to qualify for bulk discounts. Their purchasing life is pretty simple and easy.
But as the company grows, their projects get larger. The owner becomes more of a project manager, and now he or she is buying materials for several projects at one time, often placing multiple orders every week. Eventually, keeping up with all of the requests coming in from the different projects via the field superintendents and foremen becomes hard to manage. Orders get misplaced or forgotten, materials get delivered to the wrong job site, or they get billed to the wrong project. At this point, the owner realizes he needs a better way to manage purchasing practices, so the firm evolves into a project-level purchasing stage. This is where the project manager or superintendent buys the material for the project on an as-needed basis. This fixes the problem, because now there is one person assigned to buy the materials for each project — and life goes back to a more manageable situation.
At this point, project-level purchasing is in place and working perfectly. Project managers have autonomy and direct control over material and equipment costs for specific projects. They are also free to negotiate their own deals and discounts. Perhaps corporate has limited the number of “authorized” vendors they can use to help expedite accounting, but project managers have the freedom to operate within this framework.
As the company continues to grow, they develop standardized purchase order forms and language, numbering systems, phase codes, etc. They are typically working closely with the superintendents to ensure that every line item is necessary in an attempt to control costs and maximize profit at the project level. However, each project manager comes with his own relationships and preferences for vendors and manufacturers. But as more project managers are hired on and the company grows, project-level purchasing is no longer the most efficient method of operation. It’s now time for the owner to think about moving to a more centralized purchasing operation, where the firm take advantage of discounts for bulk orders and capitalize on economies of scale.
Centralized purchasing
This purchasing approach is often employed by larger electrical contractors for several reasons. First, it facilitates large bulk purchases for copper and aluminum. If a company can predict the amount of copper or aluminum it will use in a year, it can lock in pricing per pound with a manufacturer or distributor and fix its costs for these materials over a set amount of time — typically 12 months. Purchasing agents can also negotiate long-term fixed costs for commodity items such as conduit, fittings, straps, strut, and wiring devices. All of this helps to improve estimating accuracy and avoid material cost escalation between bid time and project award, which often lags several months on larger projects. General contractors love it when they get a no-escalation guarantee with a bid proposal — this typically carries weight when they are evaluating bids.
Centralized purchasing also helps contractors get better multipliers (discounts) from distributors on large equipment purchases, such as switchgear, generators, and lighting packages. If an electrical contractor can group similar purchases from multiple projects together and commit to buying them all from the same distributor, then they can typically save 3% to 5% off the combined price. For example, if an electrical contractor has three projects with switchgear packages worth $75,000 each, and it can get a 4% discount by purchasing them all from the same vendor/manufacturer, this would result in a total savings of $9,000, or $3,000 per project. On a larger commercial building, the switchgear package typically costs $500,000 to $1 million. If an electrical contractor has two buildings starting within a few months of each other, it could group these purchases with one vendor and save approximately $50,000 to $100,000. (Note: These discounts can also be negotiated with project-level purchasing, but it’s more challenging to organize when there are multiple parties involved. A centralized purchasing agent will typically know the manufacturers and vendors better and have more negotiating power for these types of deals.)
Centralized purchasing is also used by larger contractors to facilitate implementation of financial controls and minimize risk. A centralized purchasing agent will use a company’s standard purchase order numbering format and coding system to help ensure that all purchases are assigned to the proper project and phase/cost code. This greatly increases the accuracy of project level financial reporting, budgeting, and forecasting. (Remember that your reports are only as accurate as the information on which they’re based.) The centralized purchasing agent will also use the same purchase order forms, language, and terms across the company. There may be specific terms and conditions language for distinct purchases (e.g., switchgear and lighting purchase orders usually have specific language to protect the electrical contractor), and the agent will ensure that all projects get the same levels of buyer protection.
One more benefit of centralized purchasing is the reduced workload on the project manager. Considering all of the responsibilities the project manager has to juggle at one time, removing the purchasing component from the mix can provide him with additional time to focus on other critical activities, delve deeper into coordination issues, or even take on an additional project. Centralized purchasing is always more efficient at sending and receiving requests for quotes from vendors, entering purchase orders, and processing paperwork.
What are you waiting for?
You may be wondering why all companies don’t eventually shift to centralized purchasing. Well, there are always a few hurdles to surpass when making a shift of this size and impact.
The first challenge will be the hiring and training of a centralized purchasing agent. Aside from the salary requirements of the position, candidates must possess a certain skill set. They will need to have existing relationships with vendors and the ability to generate and sustain new relationships as well. They must be an excellent communicator and negotiator. They must be organized and have a strong attention to detail. They must also have industry and field knowledge of materials in order to understand what a superintendent is requesting in “field language.” As you know, superintendents don’t always know the manufacturer’s catalog name for something (e.g., CJ6 = Colorado Clip). Seasoned project managers can make excellent purchasing agents, if they don’t mind being in the office all day.
The next challenge is employee morale, especially with project managers. Project managers are a proud group — independent, full of confidence, and ready for any challenge. They are likely to see this move as an insult to their ego. You may hear comments like, “Why are you taking away my control over buying materials for my project?” or “Don’t you trust me?”
There’s no sure way to remedy this, but one method I’ve seen work well is to keep large purchases (e.g., switchgear, lighting, generators, etc.) in the project manager’s control at first. Let them ease into the idea of centralized purchasing by having the agent just buy commodities and wire to start. Let the project manager keep control of the “important” purchases, and you can also let them have final approval on any purchase orders over a certain value — say $10,000. This will also help new centralized purchasing agents get to know the purchasing habits of each project manager, and allow them to get comfortable working together. After a few months of not having to write miscellaneous purchase orders every week, the project manager will start to appreciate the shift in responsibility and the reduced number of phone calls from superintendents looking for their materials.
Cooper has more than 20 years of electrical construction and contracting experience. He has worked for several of the largest electrical contractors in the United States, and holds a Class II Unrestricted Electrical Contractors license in the state of Georgia. He currently is president of Ascent Consulting and can be reached at acooper@ascentconsults.com.
