A few weeks ago I was scrolling through email and decided to open an invoice. It was a typical supply house invoice for materials on a recent roofing job. I read it through and noticed something fishy. We had an agreed price of $72 per square on Tamko shingles, but the invoice listed a charge of $28 per bundle. Since there are three bundles in a square, the actual per square cost totaled $84. Meaning that on that job, which used 25 squares, the supply house pocketed an extra $300.
I asked someone in the office: Don’t we have an agreed price with this manufacturer and this supply house?
Indeed we did. So I called the rep.
He apologized and promised to get it corrected at once.
Doing the Math
So far so good, but as my head hits the pillow that night I’m thinking: I caught that one mistake only because I happened to stumble aross it. What if there are others? How could there not be? And what if it’s a systematic effort to bilk our company and other contractors as well?
The seed of doubt has been planted. It’s like catching a cheating spouse. You confront him or her and they say: “Honey, that was the only time.”
You think: Really?
Now, I’m not accusing anybody of anything. Putting a number that’s knowingly wrong on an invoice and putting a stamp on it is, I believe, mail fraud. Would a supply house risk that?
But whether intentional or accidental, what matters is that such mistakes seriously mess with a company’s gross margin and net profit.
Supply houses know that most contractors are too busy, lazy, or trusting to check their invoices. (We didn’t.) And we do about 300 jobs a year, with maybe 10 or 12 invoices per job. So let’s say we were mis-billed $300 on every one of those 300 jobs. The damage would be $90,000.
Front- and Back-End Controls
What you can do about it is put controls in place. I would:
- Go into every supplier negotiation wide-eyed and get the best possible price you can on every item. Often suppliers will offer you an unbelievable price on, say, such-and-such a manufacturer’s shingles. Great, you think, imagining you’re going to pick up some margin points. Well, the low price on one item could be the Trojan Horse that gets that supplier past the gate where he can stick it to you on nails, starter strip, capping, ice and water shield, and everything else. They’re putting money in your left pocket and taking it out of your right. A magic act. So negotiate on every item, not just the biggie.
- Check every invoice. Let suppliers know that you do that. I estimate the manhours for checking those invoices to be about 10 to 20 hours per month. That’s a chunk of change, and you can pay for it by also informing suppliers that if you find a mistake, your company will expect to be credited $50, which you’ll deduct from payment. Sound arrogant? Consider: If we fail to pay our bill on time, we get charged a late fee plus interest on unpaid balances. Charging $50 for invoice mistakes follows the same principle. You’re exacting a dollar cost for the supplier’s failure to take the time to prepare an accurate invoice.
- Ask for extras. If a supplier can bill at Net 30 and charge a late fee plus interest on balances paid after that, why not the other way around? Say we pay in Net 10. That’s great for their cash flow, but there has to be something in it for us. Namely, 3 percent of the total invoice amount.
- Skip the trip. Some suppliers offer a free trip or vacation when your purchases hit a certain threshold. That shouldn’t be a reason for not paying attention to what they’re charging you, and, in addition, let me point out that that vacation isn’t exactly free. You’re paying for it many times in higher prices. Frankly, I want my money in my bank, and I’ll book my own vacation, thank you.
Cost of Consolidation
We used to do business with a lot of Mom & Pop supply houses. Many either went out of business or were bought by national or regional chains. Mistakes didn’t happen with the Mom & Pops. I don’t know what it is with big supply houses, but I know now that you have to keep an eye on what they’re charging. It’s useful to remind yourself every now and then who the customer actually is. That way, when I sit down with a new rep from a supply house, I can truthfully say to him, "You’re not going to get rich off our account, but if you’re a good supplier, you may have and keep our business."