5 Ways Not Using Purchase Orders Can Hurt Your Projects

Purchase orders (POs) are a common way for project-based businesses to track and manage their spending. There is a good reason why.

In this article we will present some of the key challenges of not using purchase orders in project-based businesses.

Key characteristics of project-based businesses

• Unique and specific objectives: Each project has its own unique set of objectives that must be met to be considered a success.
• Temporary: Projects are temporary and have a defined beginning and end.
• Cross-functional teams: Project-based businesses often require teams of people with different skills and expertise to work together to achieve the project objectives.
• Iterative development: Projects are often developed in a series of steps or phases, which allows for adjustments and refinements as new information becomes available.
• High risk and uncertainty: Project-based businesses are often characterized by high levels of risk and uncertainty. This is because the project objectives may not be fully known at the outset, and there may be unforeseen challenges that arise during the course of the project.
• Quality standards: Project-based businesses often need to comply with different quality standards.
• Continuous improvement: Project-based businesses are constantly looking for ways to improve their processes and practices. This is because they need to be able to deliver projects on time, within budget, and to the required quality standards.

With this is mind, there are many potential pitfalls that may arise during a project if not executes in a professional manner.

Using purchase orders is one way to increase quality and avoid potential issues.

What are Common Issues of Not Using Purchase Orders

1 – Supplier disputes

A purchase order is a legally binding document that is issued by a buyer to a seller to confirm the purchase of goods or services. If orders are placed in an informal way (by email, phone or similar), you increase the risk of leaving our important information related to the purchase and have no clear record of what has been agreed. Key aspects of this can be:

• Scope – Missing or unclear scope for the delivery
• Delivery date – No binding delivery date
• Delivery terms – not clear when the risk and associated cost is transferred between the parties.
• Payment terms – unclear payment terms
• Other important legal considerations

This can have both a cost impact, but also conflicts resulting in increased friction between your company and the supplier.

2 – Project delays.

Delays in delivery can cause delays in the overall project. This is especially true for projects that require long lead items (LLIs), which have a long time between order and delivery. If an important part is missing, the whole project can be delayed.

Read also: What are long lead items in construction

3 – Liquidated damages

For projects related to the delivery to a client, the project is often created based on a purchase order (PO) from the client which converts in to a sales order (SO) for the company.

Since late delivery is a key risk in any project, the PO often includes terms related to liquidated damages in the event of delays. These can be substantial and often up to 10-20% of the total PO value.

By not using purchase order, your company risk being stuck in the middle and bear the full risk of delays without having any way to mitigate.

See also: What are Liquidated Damages?

4 – Limited visibility

Another key factor is that by not being formal in purchasing, you will have limited visibility of what is outstanding which makes it hard to ensure that everything is received in time according to the project schedule.

With several people involved in the project, you do not only risk not ordering in time, but also duplicated purchases that increases the cost.’

5 – Increased administrative burden.

Without a purchase order, it can be more difficult to manage the procurement process, which can lead to increased administrative burden. Examples of this can be:

• the project leader who needs to know when important components are received to ensure important projects milestones are met.
• the accountant who needs to know if the supplier invoice is in line with the order and what has been received (often referred to as a 3-ways matching process).

See also: What is 3-Way Matching?

• The sales manager or project members cannot find record of previous purchases that might be important for estimating or other purposes.

So, if you look to solve some of these issues, we recommend one the following articles for further insight:

5 reasons to use purchase orders in your business

8 great benefits of using a purchase order system

10 important values you get from using CostTracker