Reducing the pain of purchasing in construction

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Introduction

The Pain of Purchasing

Improve Your Procurement Administration

Shine a Light onto Your Project Spending

Conclusion

Share Project Information

Make Purchasing Easier for Everyone

About Procurify

Develop Clear Purchasing Policies

Milestone Reporting

See Inside and Out

Option 1: Email

Use Only Approved Vendors

Go Up the Chain

Eliminate the paper

Option 2: Pseudo-paperless system

Manage Your Vendors Better

Track all order

Managing Your Data Properly

Start generating reports

Option 3: Dedicated software platform

Spend Analysis: The Ultimate Goal of Visibility

Why use a dedicated platform?

Additional cost savings

Risk of Construction Procurement Fraud

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Handle Spending

Procurement

Additional cost savings

In today’s world, construction projects are often complex endeavors involving many different groups and entities. Construction companies require mature and efficient processes to keep everyone on target and get the work completed on time. From the smallest residential housing development to the largest office tower project, construction companies’ processes must scale at the same rate. Otherwise keeping everything on track is impossible.

The larger the construction project, the more sophisticated the processes needed to manage it. Everydepartment grows in complexity, and supporting functions like Accounting and Procurement take on larger roles. These departments face a perpetual challenge to manage the direct (core material acquisition) and indirect (office supplies, travel, printing, etc.) spend of the project.

Construction companies can reduce their risk of waste, fraud, and abuse in the procurement cycle by looking closely at any process inefficiencies, unnecessarily high administrative costs, and spending increases/decreases. Taken individually, issues in these areas are not considered high-risk, but simply a sign of poorly designed procurement processes. When issues exist in several of these areas however, procurement risk increases, and the entire procurement process should be more carefully evaluated.

Getting a handle on spend management is important, and the benefits of better spend management areimmediately measurable. Devising strong policies and using transparent, systematic controls to enforcethem – typically with purchasing software at the core – can reap substantial benefits. In fact, out of all thefraud cases analyzed by the ACFE in the 2012 Report to the Nations on Occupational Fraud and Abuse,36.3% of the ones in the construction industry were for billing fraud1 . Additionally, over 80% of thesefraud cases were discovered by external audits2, and not by internal controls (either software, training,or direct employee involvement.) Reducing the risk for these frauds could save the construction industryapproximately $300,000 in losses3.

In this paper we identify three practices you can start implementing – or improving on – today to reduce your organization’s risk of fraud, make procurement more effective at your construction company, and increase visibility into your projects. They are:

1. Developing policies and procedures to improve procurement administration2. Communicating project information through milestone reporting and software usage3. Gaining visibility into all aspects of a project’s spend, including reporting and analysis, using purchasing software

1 The Association of Certified Fraud Examiners. 2012 Global Fraud Study: Report to the Nations on Occupational Fraud and Abuse, p. 31. Accessed at http://www.acfe.com/uploadedFiles/ACFE_Website/Content/rttn/2012-report-to-nations.pdf2 ibid, p. 33.3 ibid, p. 29.

INTRODUCTION

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The PaIN Of PURChasINg

ImPROve YOUR PROCURemeNT aDmINIsTRaTION

While most construction companies work hard to win a project bid, and then finalize all the various contracts needed with their sub-contractors, one area they often neglect is purchasing. They continue to use outdated methods and processes that cause delays for everyone involved. Even so-called “advanced” construction companies that use the latest techniques in design invariably use outdated methods for purchasing. Everyone muddles through with non-existent or inconsistently-applied policies and wasteful paper-based systems that cost thousands of dollars and dozens of hours more than needed. Changing their processes and procedures is low on their list of priorities, mainly because of the time involved. In construction the cliche is true: time is money. When the right purchasing system comes along, the opportunities for improving efficiencies and saving money will be obvious. Whether you’re working on a large construction project with a budget to match, or a small one that has little room for error, there will be ample room to improve upon yourexisting practices and additionally reduce your fraud exposure.

Ask any athlete, and they’ll tell you that they just want to “get out there and play.” Waiting around for the start of the event is often the most difficult part of their journey. But these athletes also know that preparation and training is key to their performance. Sure, they want to just “get out there”, but if they don’t put in the hours beforehand, they know they won’t succeed. Similarly, putting purchasing processes and policies in place at your construction company before your next project can help you reap the same rewards.

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Develop Clear Purchasing Policies

Use Only Approved Vendors

Clear and consistent purchasing policies help the contractor, the purchaser, and the approver, as everyone knows what’s expected of them. It puts checks and balances in place, and through the policies, you delegate responsibility for spending across the company. This reduces the amount of time Purchasing takes to chase down approvals for the orders.

Additionally, introducing the concept of “spend under management” to your construction projects can also reduce the amount of administrative overhead for your Purchasing team. It refers to purchases that have been categorized for recurringuse, and allocated to specific vendors based on negotiated contracts. In other words, it is spending over which the Purchasing team maintains visibility and direct control (before you go and assume you can effectively funnel all purchasing through Purchasing, you should know that the average large enterprise typically has no more than 60.2% of total spend under management ). Compliance with your corporate purchasing policies will steadily increase because the policies are clear and understandable by all. Everyone is using the same policies, and will be complying accordingly.

When companies spend time and effort negotiating better pricing and/or delivery terms from certain suppliers, they should channel as much buying through them as possible. This means ensuring that the purchasing process funnels the requests to the right vendor at as much as possible. There will always be times when someone requests a specific brand or product with no real substitute, but for the vast majority of purchases, contractors and subcontractors will be happy to avoid sourcing a supplier for the item, as it saves them valuable time and energy. With that work already done for them, they can simply make the request and wait for the goods to arrive.

ImPROve YOUR PROCURemeNT aDmINIsTRaTION

Spend under management refers to spending that has come through a defined sourcing and procurement process.

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Manage Your Vendors Better

Risk of Construction Procurement Fraud

Track All Orders

Alongside consistent procurement policies, learning how to better manage your vendors will lead to better overall procurement compliance and budgetary savings. Vendor payment terms will be equal across the enterprise, employees will know who is responsible for managing the vendor relationships, and overall the process will work more smoothly. Procurement software will also help maintain your vendor data—everything from their contact information, to payment terms, and payment history.

Losing track of supplies and purchase orders is one way for rogue employees to perpetrate fraud. In 77% of these cases, the Purchasing department is one of the six departments involved in the fraud.4 Globally, construction fraud has decreased, however it is in the Top 3 of median losses, losing an average of $300,000 per case.5

Construction projects often have difficulty keeping track of all orders, especially large projects. That’sbecause they are dealing with a large volume of materials, and many different people and groups at thevarious phases of procurement. Add in a missing three-way match system/process for invoices, and therisk for fraud and project delays increases.

Procurement software can help your Project Administrators keep track of all incoming and outgoinginvoices, let them match invoices to purchase orders, and produce receiving reports. Your immediatelyreduce your risk of fraud and project delays, and ensure that your projects stay on budget.

Another concept important for the Purchasing team to understand is “Maverick Spend”. Maverick spend refers to purchases made within an organization that are either not budgeted or are not compliant with negotiated contract terms. For example, your Project Manager sources a new vendor for a particular supply because the order from your approved vendor was delayed at the production warehouse. There are times when such decisions need to be made quickly and must necessarily fall outside of negotiated contracts, so eliminating all maverick spend is simply not realistic — but reducing it is, through Spend under management.

4 The Association of Certified Fraud Examiners. 2012 Global Fraud Study: Report to the Nations on OccupationalFraud and Abuse, p. 4. Accessed at http://www.acfe.com/uploadedFiles/ACFE_Website/Content/rttn/2012-report-to-nations.pdf5 ibid, p. 29.6 Construction Fraud in Canada —Understand it, prevent it, detect it by Grant Thornton LLP, p. 7. Accessed athttp://www.grantthornton.ca/resources/insights/white_papers/Fraud_and_Construction-02-22-13-ELECTRONIC.pdf on October 1, 2013.

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COMMUNICATESHARE

Milestone Reporting

Construction projects generate and use a lot of paperwork. Unlike a lot of other industries, it is still a very paper-based industry, in particular for purchasing. It’s very dependent on paper forms, documents, faxes, and so on. Further complicating matters is the physical distance between project administrators and the construction workers at the site. We’re seeing more and more projects that are done hundreds, or even thousands of miles away from the project’s head office. Communication between the two becomes extremely difficult when that much distance is involved, especially given the paper-based nature of the administration.

So developing a good communication strategy to share project information efficiently and in a timely manner is critical. You want to make sure all stakeholders are kept abreast of any project updates. To foster this, construction companies should consider moving their administration to a web- or electronic- based purchasing system that includes milestone reporting, approval administration, and easy project communication.

Administrators rely on project milestones in order to keep tabs on the status of the project. However because so much information is tied up in papers on the job site, it’s difficult for them to know the exact status of the work. They have to rely on their project leads to relay the information, and much like the childhood game of Telephone, information is distorted by the time it reaches them. A webor electronic- based purchasing system allows for these types of milestones and metrics to be defined and reported on in real-time, so everyone knows the exact status at all times.

What can you do to stop fraud?6 You can: Gain senior management support for zero-tolerance of fraud; Implement a compliance and ethics program; Screen your suppliers and subcontractors; Ensureyou have strong internal controls; and Set up an anonymous whistleblower hotline.

shaRe PROjeCT INfORmaTION

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Less T

ime Go Up the Chain

Managing Your Data Properly

Real-time interaction on an electronic-based system also alleviates the bottleneck for purchasing that a paper-based system creates. Requests are input more quickly, and Approvers are able to review and sign-off on the requests quickly, and Purchasers can order the items immediately. This frees up everyone’s time, moves the project along by removing the delay between request and need, and also keeps the budget updated as purchases are completed and paid for more quickly.

As mentioned earlier in this paper, managing your vendor data is an important activity in the procurement process. This includes developing a structured approach to consolidate, scrub, and enhance your procurement data at all times. Departments and groups involved in the procurement process should be in charge of maintaining the data on a day-to-day basis, and alerting management whenever issues arise, like:

One construction company head said that while he often doesn’t know the status of his projects, they always seem to get done on time. That’s a telling comment coming from the head of a construction company that deals with multi-million dollar projects. It shows that maintaining visibility into all phases of your projects is vital on a number of levels, especially when it comes to purchasing.

Duplicate vendor information

Duplicate payments

Inefficient invoice processing, either in creation, processing, or payment

Lack of reports on historical spending, invoicing, payments, etc.

Outdated reporting on historical spending and invoicing

shINe a LIghT ONTO YOUR PROjeCT sPeNDINg

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See Inside and Out

Within the purchasing function at your company, the more visibility you have into who is buying or approving what, the more you will be able to identify areas for efficiencies. For example, you’ll be able to pinpoint purchasing bottlenecks, and then devise tactics for easing them. You’ll also be able to see who is skirting the edges of company policy, and ispotentially exposing you to construction fraud.

Knowing what’s going on with your project’s purchasing empowers your employees to contribute strategically to the company. By generating data and metrics, your purchasing system helps your staff rationalize vendors, negotiate better contracts, and accelerate the buying cycle. It should automate processes wherever possible, and enable macro-levelperformance analysis for continuous improvement. Like any process or piece of software,your purchasing system should be an enabler of better business, helping to reduce costs, andincrease productivity.

Better visibility means you’ll be better equipped to answer questions from your Accountingdepartment, or even the company owner. When they ask why Accounting has had to redo theproject budget three times this quarter, or why spend is under budget, you’ll be able toexplain why.

Identify areas for efficiencies

Contribute strategically to the company

You’ll be better equipped to answer questions

Three reasons why you want visibility

Having visibility into the purchasing process is a two-way street: your Purchasing team can see what’s going on, as well as senior management. And of course there’s also the visibility the requesters gain by using purchasing software. Think of all the emails and phone calls you can eliminate if you could enable your colleagues to search for their own answers on orders and delivery status. With the mobile accessibility provided by smartphones, you’re almost obligated to delegate visibility outward in this way. It’s more efficient for everyone, making the entire purchase process smoother and more credible.

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Eliminate the paper

You’ll quickly gain credibility for your Purchasing team and the budget when you eliminate paper-based processes. That’s because paper isn’t easily searchable, and isn’t accessible on-demand. When you migrate to a paperless process, you’re opting for a data-driven, and therefore highly accessible, system that immediately is more visible than paper-based processes. Purchase requests become data points, and data points are fully reportable.

Assuming you’re already using a dedicated software platform for your purchasing, then you’re probably ready to use all the data that it stores and generates. Most third party solutions have basic reports built into them, however if yours does not, you’ll have to export the data and use a separate reporting tool to discover the perspective you’re looking for.

At a basic level, you should be looking at the following types of reports:

Purchases by Item/Type/Category

Spend per Employee or Department

Budget by Vendor

Purchases by Vendor

Start generating reports

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Spend visibility is a critical source of Purchasing’s success within an organization. Every Manager knows that achieving best-in-class performance requires controlling and leveraging an organization’s existing spend. This means optimizing purchases from trusted vendors (ones that balance price with availability and service), and it also means being able to drill into your purchasing data in both directions: where it’s coming from, and where it’s going.

Accurate, detailed reporting gives you the insight you need to make more informed decisions about spend management. This is one of Purchasing’s strategic values to any construction organization. If you’re not using a platform specifically built for procurement and purchasing, there is little chance you have the right tools to do this effectively.

Visibility should also give you the power to respond to the results. Many other parts of your business– production, distribution, sales and marketing – are assigned annual, quarterly, and even monthly yardsticks often referred to as Key Performance Indicators (KPIs). These KPIs are put in place to measure performance against targets, and to identify areas of the business where results are underdeveloped. In your Purchasing area, common KPIs include Purchase cycle time, Cost per invoice, First time match rate (PO, invoice, and packing slip), and of course, Spend under management. Continuous measurement against an agreed set of KPIs encourages continuous improvement in these areas.

Spend Analysis: The Ultimate Goal of Visibility

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Going paperless? Give these methods a try:

EmailPseudo-paperlessDedicated software platform

make PURChasINg easIeR fOR eveRYONe

What options are available to construction companies who want to make purchasing easier for their employees, and improves the way your employees work?

Email is often the first option chosen by companies, as it’s traceable, accessible, and is already a part of your company’s daily routine and culture. But email doesn’t integrate easily with centralized control systems so data sharing is limited. If someone wants to follow up on are quest, they’ll have to send another email which may or may not be attached to the original thread.

And data from emails cannot be manually or automatically embedded into a purchase order. The benefits of email to purchasing begin to unravel quite quickly. Contractors and subcontractors shouldn’t have to call or email the Purchasing team for an update on their request. Especially because they’re often not working in an environment that’s conducive to email, even with the proliferation of smartphones. Having access to a system where they can look up the information themselves is ideal.

Option 1: Email

Option 2: Pseudo-paperless system

If you aren’t at the point where you can go paperless, and email just isn’t working for you, the increasing communication (and ultimately, visibility) will require some duplication of effort. You will be limited in just how much you can consolidate your purchase information, and much of your effort around gaining visibility will be just that: effort. As an example, you could:

This process is almost as time-consuming and laborious as the old completely paper-based system, so if you’re ready to move away from that system, it might be time to consider Option 3.

Scan paper requests and save them on a central server for remote access

Email updates to requesters to keep them apprised of their order status

Maintain a hardcopy spreadsheet of all pending and open orders that people can come byand check out on their own, or save it on a central server

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Option 3: Dedicated software platform

GO PAPERLESS

What you should be looking for is a dedicated software platform that allows your employees, and contractors to generate requests on their own. This same platform should be able to automatically enforce an approval workflow based on your authorization thresholds, while also allowing you to maintain oversight of the entire process.

When it comes to your software solution choice, there are two: a local, client-/server- based system installed on your company’s network, or a SaaS-based (Software-as-a-Service) system that is accessed through a web browser.

A specialized platform from a third party vendor will have been designed with a wide range of customer needs in mind, and will likely offer features, performance, and value beyond what you could expect from something custom-built just for you. It will offer long-term support to help you as your Purchasing team grows and develops. And it will be forward-thinking, offering new features and capabilities that you could invest in when the time is right.

The key is to ensure that anyone who needs to make any kind of purchase has access to the system. Each person will have his/her own login to maintain security and enforce approvals. The simpler the system is, the easier it will be to train users and obtain their buy-in.

Another thing to consider with a dedicated platform instead of a local, client-/server- based system installed on your own system is the employee cost savings you’ll enjoy. Having IT staff on hand to handle the installation and maintenance of your purchasing system installed locally on your computer network could be significant. There is the staff cost (salary, benefits, etc.), as well as the time involved to source, hire, and train the staff. Add in any software/system maintenance costs and potential downtime for upgrades and troubleshooting, and you can see that having your purchasing system on your local system could add up to significant costs rather quickly.

An SaaS solution for your purchasing system will save on all these costs for you, as they’reshouldered by the third party provider.

Why use a dedicated platform?

Additional cost savings

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We're here to clear the path to better spending

CONCLUsION

abOUT PROCURIfY

The path to easing purchasing pain is a challenging one, but the rewards are easy to see and measure.By establishing and enforcing clear purchasing policies, developing better communications strategies, and making the entire purchasing process more visible, purchasing teams can make a powerful contribution to the company’s culture and bottom line. There are many tools available to make this a reality, and they’re easier to adopt than you might think.

A dedicated purchasing platform offers you the workflow streamlining and visibility that you crave for your construction projects, while being easier to implement and maintain. When choosing a third party vendor for the dedicated platform, choose one that is able to customize the solution for you, implements it in a timely fashion, and provides training for you and your employees. This way the disruption to your work is minimal, yet you start to reap the benefits of the purchasing solution right away.

Procurify is an online spend management solution that gives you control and visibility into your company spending. Procurify helps streamline the entire purchasing process to drive higher compliance with contracts, maintain control, assign accountability, and increase visibility into your organization.

For more information, visit us at www.procurify.com.