April 2007

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Is Purchasing Costing You Plenty
The hidden overhead cost of the equipment ordering process

Al De Wachter, President,

Al De Wachter has been active in the Building Automation industry for over 38 years.  He has held senior positions with leading companies in the field and is currently the president of Independent Control Specialists Inc.  He has directed the development of advanced productivity tools for Building Automation Contractors since 1990.

In a typical building automation project, costs include labor, subcontract, expenses, materials and equipment. “Materials” denotes the installation materials like wire, conduit, etc while “Equipment” denotes the devices that make up the systems.

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Proven methods can be employed to manage the costs of a project. We won’t repeat them all here, but consider downloading “PLUG”, or Planning User Guide, an ICS publication that discusses global methods of job cost management. In essence: equipment is purchased from the as-designed bill of materials, reviewed by the project manager. Subcontractors are issued for a known amount. Installation materials are purchased under the watchful eye of the project manager, and expenses are carefully weighed.

The equipment purchase process and materials handling can be a complex activity. It can be simplified in an unwise manner: for instance, “just place everything on order NOW, and we’ll deal with it as it arrives”; that can be costly. Unloading and storing large amounts of boxes and pallets can be a daunting task. Whether delivery is made to the site or your own warehouse, do you have the manpower to take it off the truck? Is there space to store it? Who will separate the boxes, and organize the contents into project systems? How and when is the equipment being sent to the jobsite? Is the jobsite ready for it? Is there a secure storage space at the site? Is there a danger that equipment for job A will be ‘borrowed’ because it’s urgently needed on job B, and what problems will that cause? Will you get paid for the equipment if it arrives on site? Can you get paid if it’s stored in your own warehouse? Is there a tendency to miss equipment at the design stage, and “borrow” it from a service stock?

Ideally, a job life cycle progresses this way: the estimate was largely based on standard systems (libraries) that use known and pre-approved products. Count on 80+% of a job consisting of systems that were known before. The design was essentially a clean-up of the estimate, verifying it all meets the specific job specifications. Designers made sure that familiar, standard, proven equipment is ordered, and approval for exceptions has been obtained from the project manager. A job turnover meeting clarified any special arrangements and requirements. The project manager had a firm grasp of the general job progress schedule, and where his work fits into it. He knew when various job phases are scheduled to start, and when people are required on the site. He approved purchase orders that reflect all the cost considerations, and stored the equipment in a safe place that is approved to trigger delivery payment by the client.

Timing the arrival of shipments is important, and poor timing adds costs. The progress schedule must be taken into account: there is little advantage in shipping the material for the 12th-floor mechanical room, when that area won’t be ready for 6 months, and the client won’t pay for it. Another aspect is the recognition that panel mounted equipment can be shipped under a different schedule than field mounted equipment, if panels are pre-built in the shop.

[an error occurred while processing this directive] A lot of the success in dealing with the above issues depends on the who, when, and how of your order process that starts the material flow. Here are some of the issues that need to be considered in an Equipment Ordering Process:

Number of typing errors by an experienced data entry clerk: 1 per 300 keystrokes
The cost to process a manual purchase order: $100 to $110
The cost to process an automated purchase order: $50 to $55
The cost to process an automated purchase order with EDI: $20 to $25

We can see that a poor equipment ordering process has expensive consequences that may not be readily apparent to some people who do not see the whole picture. It is advantageous to make your ordering process an integral part of your procedures.

An ordering module is part of the ICS design/submittal software package. In addition to creating and managing your purchase orders, it also offers analysis tools for purchase order cost analysis on a per-job and whole-office basis. It uses the standard Concerto databases that you use to estimate and design projects.



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