We Spent how much?!
It’s not an uncommon phrase to hear from upper management after a project has been completed and they are sitting down with their project managers or procurement team to review all the facets of the job.
There’s a multitude of money-in and money-out transactions when a project is underway and if the organization is not using detailed analytics and metrics, and following KPIs there will be details that slip through the books during the process.
This is not to insinuate that project managers or any member of the team is intentionally stealing from the company, or defrauding the company for their own personal gain. It’s simply to point out that without proper procedures in place the budget may fall apart due to maverick spending.
Let’s assume a company is taking a modern approach to their procurement processes. They’ve implemented a competitive bidding process with detailed tenders outlining all the goods and services required for the project. They have outsourced to the necessary suppliers and vendors, and have negotiated the best prices available.
Prior to beginning the project, they have established their budgets and timelines. Now they contact their team and vendors to begin the project.
But wait! There’s no mention of contracts. Even if there were some contracts drawn up for the major portions of the project, maybe they forgot about the small jobs.
Without contracts in place the company has less leverage in holding the supplier accountable for their responsibilities and services. This could very easily result in overspending.
In some cases, a project could have up to 80% of their invoices not tied to a solid contract. Without a contract a vendor has the opportunity to overcharge for their services and the company may not have any bargaining power to prevent it. A vendor could also use the lack of a contract to gain added work in additional services beyond the original verbal agreement.
Sometimes these extra costs could be due to last minute decisions or an emergency judgment by a manager trying to be efficient and solve a problem for the best interest of the project and company.
A couple of suggestions to improve upon maverick spending are to ensure that when a project is initiated each member of the team is assigned a role. Each role would have a detailed outline of their tasks, responsibilities and duties. Within these descriptions, it will state who has authority for purchasing decisions. By eliminating the number of team members that have the ability to spend it will reduce the risk of indirect spending.
All purchases during the project must complete the same process of generating a purchase order and be authorized by the appropriate team member before the transaction is completed. Implementing this process of purchase orders and invoicing will allow the company to monitor all expenses and trace the PO to evaluate the project at any time. By increasing the visibility for the team it will help reduce procurement waste.
Failure to implement these practices will most likely result in continued maverick spending and lost profits.
Utilizing a procurement broker, or a service managed platform are recommended for companies that are familiar with these situations.