Assessing ROI of Building Materials Software

The overhead cost of purchasing building materials

Material prices are often top of mind for contractors when they think of the costs associated with materials purchasing. However, contractors often overlook overhead costs tied to the procurement process itself. If you are a contractor that buys at scale, then how you handle buying materials will impact your bottom line. Turning field requisitions or supplier quotes into POs, keeping track of delivery slips, verifying supplier invoices, controlling rogue spending – it all adds up to high overhead costs and reduced margins.

For many contractors, material procurement starts from the field. Foremen call or email the office a field requisition form to tell the purchasing team or the Project Manager what materials they need on the job site. This will easily take the foreman 15 min. If you have 2 people on the phone, it’s double the time.

If you have a purchasing team in the office, they will manually create a PO in your ERP and then email it to the supplier. That is another 15 min for lump sum POs or as much as 1 hour for large itemized POs.

Next, materials get delivered to the job site. Foremen need to verify the received items on the delivery slip or trucking ticket and handwrite any issues (e.g., damaged items, wrong quantities). This will take another 15 min or more if foremen bring the paper slips to the office.

The purchasing team often needs to follow up with suppliers to clarify lead times, confirm deliveries, coordinate returns in case of issues, request credits, etc. When we blend this across many orders, this adds up to another 15 min per order.

Finally, the Accounts Payable team needs to process the supplier invoice. They have to download and print it, enter and cost code it in the ERP, and check it against the PO and the delivery slip. In case of questions, the AP team needs to reach out to the PM on the job to get the answers. It takes the AP team 15-25 min per invoice to enter it and verify it with the PMs.

In the end, to create a PO and process an invoice takes about 80 minutes in cumulative time across everyone involved in this process. If we apply a fully loaded hourly rate of $50 per employee, then it costs your company about $67 to process a PO and the associated invoice. If your average PO is $1,000, you end up adding an extra 6% to your material cost. To put this into perspective, if you process 10,000 invoices annually, it costs your company a staggering $670,000 per year.

The costs of rogue spending

The other hidden cost of purchasing building materials that many contractors overlook is the cost of rogue spending (also known as maverick spending). Rogue spending happens when foremen go to a supply house or Home Depot to buy materials at retail prices instead of buying from preferred vendors with whom you pre-negotiated prices for the job.

Suppose 20% of your material spend is in the form of quick will-call errands. Assuming that these will-call orders have a 10% higher cost than your pre-negotiated prices, you are losing 2% in overall margin on your company's total spend on materials. And that's on top of the 6% that you already lose on the overhead costs of handling procurement.

The costs of missed errors

Errors in the supplier invoices is another common cost that results from the messy material procurement process.

Suppose that 10% of supplier invoices have errors due to wrong unit prices (retail prices applied by the supplier instead of the pre-negotiated prices), backordered items being double charged, etc. If errors on average represent 10% of each invoice's total, this eats an additional 1% off your margins. Now add 6% for overhead costs, 2% for rogue spending, and 1% for invoice errors and you lose 9% off your margins.

Slashing procurement overhead costs

With the advent of Large Language Models (LLMs), AI-native building materials software is rapidly transforming how contractors handle material procurement.

Field Requisitions

When submitting field requests, foremen now use mobile apps to simply take a photo of a hand written requisition form. The AI scans its content and instantly creates an itemized PO. If the job has an associated Bill of Materials, foremen use the mobile app to quickly select the needed materials and instantly forward the request to the purchasing team. No more rogue spending! A field requisition now takes 2 min or less for the field staff.

Purchase Orders

The purchasing team no longer needs to be on the call with the foreman or review their incoming emails to enter the data in the ERP as POs. Instead, the AI generated PO is already cost coded and waiting to be approved by the purchaser before the procurement software posts the PO to the ERP.

When the purchasing team needs to create an itemized PO from a supplier quote, they simply upload the quote into the procurement software and the AI instantly creates an itemized PO. Once approved, the PO is posted to the ERP. Creating a PO now takes the purchasing team 2 min or less.

Delivery Slips

When receiving orders on site, foremen use the mobile app to take photos of delivery slips. If there are no issues with the order, the process is as fast as snapping a photo with your phone. There are no PO numbers or jobs to specify - the AI will do the hard work.

In case of delivery issues, the mobile app lets foremen quickly flag problem items by choosing from a list of common delivery issues. Capturing a delivery slip now takes 2 min or less and eliminates the need for foremen to bring paper stacks to the office.

AP Invoices

The AP team no longer needs to download and print invoices. The building materials software will automatically download the invoice, and the AI will scan its content to match it to the correct PO and delivery slip. Now the 3-way match is automated and the AI pre-selects the PO items that are being invoiced and verifies the accuracy of invoiced quantities and prices to match received quantities (from the delivery slip) and prices (from the supplier quote).

No more duplicate charges for backordered items or wrong prices that are hard to catch - the AI highlights any discrepancies. If there is an issue, the AP team now kickbacks the invoice to the supplier to be corrected. If there are no issues with the invoice, the AP team approves the invoice and it is automatically posted to the ERP against the corresponding PO. Processing and verifying an invoice with the help of AI now takes 2-4 min.

In summary, contractors that use AI native building materials software spend on average 10 min to create a PO and process a corresponding delivery slip and invoice. At a fully loaded hourly rate of $50 per employee, it costs your company about $8 to process a PO and the associated invoice instead of $67 with the manual methods - a savings of 88%! If you process 10,000 POs annually, it costs your company $80,000 instead of $670,000.

Cutting rogue spending

Building materials software is also a major lever for cutting rogue spending. When your field teams have access to all active purchase orders and buyouts via the mobile app, they are less likely to go on a whim and buy material at retail prices. They'll see the material buyouts set up for the job and they will buy from the right supplier at the right prices. The number of will-call orders will go down because field staff will see via the mobile app when materials are slated to arrive to the jobsite and see materials already delivered to the warehouse. If materials are already present in the warehouse, they'll just request the materials from the warehouse rather than buying new ones which would normally generate material waste.

ROI of building materials software

When you look at the total impact of AI-native building materials software, there are 3 major sources of savings:

• Savings from slashing procurement overhead costs: 88% x 6% = 5% of your material spend
• Savings from cutting rogue spending: 2% of your material spend (assuming 20% rogue purchases at 10% price premium)
• Savings from catching errors in supplier invoices: 1% of your material spend (assuming 10% of invoices contain 10% margin of error)

AI-native building materials software will cost you less than 1% of your annual material spend yet provide you with 8% of savings for your margins. This is more than 8x return on investment and it provides you with competitive advantage by helping you scale your operations to handle a higher volume of contracts with the same number of people.

Field Materials is the leading AI building materials software in construction. Built from the ground up as an AI native platform, it empowers contractors across 30+ US states in 11 construction trades to automate the processing of quotes, delivery slips, and invoices across more than 13,000 suppliers. Contact us to learn more!