Purchasing procedures key to profitability - Review and Forecast, Section III

At the heart of the profitability formula for a property is the effectiveness of its manager's purchasing procedures. Buying products and professional and technical services for a portfolio of properties represents an important part of the service that any manager, fee or owner/manager provides to its buildings, regardless of whether these properties be rental, cooperative or condominium or commercial.

A management company's purchasing procedures directly affects a property's "bottomline" and, in today's cooperative environment, may also identify the possibility of improper or inefficient performance on the part of the manager responsible for all purchasing activities.

The problem of controlling purchases made by a manager for multiple properties is a daunting task that requires an understanding of the types of purchases being made, the frequency and timeliness of those purchases, the quality of product or technical service secured and the marketplace dollar value of that product or service.

A property manager is responsible for making hundreds of purchases for your property, many of which he or she will actively supervise and others of which will be made by subordinate staff. A manager may use a variety of suppliers or professionals that comprise his or her data base of reliable vendors, contractors and consultants. In other cases, products or technical services may be solicited from new and untried sources that claim to provide better products at lower costs. As a result, the reliability of a contractor or vendor further compounds the complexity of the purchasing process.

Controlling A Complex Process

You cannot overregulate the purchasing process that occurs on a daily basis within a manager's portfolio. To do so would impede the natural flow of activity that will occur in providing necessary products and services to a building. However there are several basic principals of purchasing and competitive bidding that can be applied in most situations.

1. Qualify All Vendors. As a first step in the purchasing process, all vendors should be qualified for several factors and placed on an approved vendors' bid list. Qualification factors may include: business history, financial strength, reliability of service or products delivered, service history with the building, as well as other relevant factors that will overall contribute to the quality of product or service delivered and the way in which it is priced.

2. Competitive Price Bidding for Small Purchases. On a periodic basis bi-annually or annually -- prices for select items should be requested from a qualified list of vendors. Generally, the lowest price vendor should be selected for use throughout the firm's portfolio. The selection of a vendor who will assure that prices do not increase provides great cost savings to the entire portfolio managed by the agent. However, it is important to make sure that quality of product or service is not comprised during the contract period. Frequent spot checks should be conducted to ensure quality of product or service.

3. Price Controls Set Within a Property Manager's Portfolio. Regardless of the number of qualified vendors who may supply services or products, it is also important to make sure that vendors supplying like services or products meet certain pre-set price parameters. Complete price controls can never be assured without constant monitoring. And, in certain situations, price monitoring can become a costly task to administer. As long as prices are checked within pre-established margins, control is generally assured. It is usually the agent's responsibility to set those price parameters and to check invoices within his or her portfolio. It is the responsibility of the management company to provide oversight throughout its entire portfolio.

4. Volume Purchasing Within a Portfolio for Large Purchases, i.e., Fuel, etc. With respect to the purchase of large volume items such as fuel, special service contracts, insurance or other products for the building, volume purchasing procedures throughout a management company's portfolio should be put in place. These volume purchasing techniques can result in extensive cost savings for the individual building as a result of its participation in the purchasing group.

5. Emergency Pricing Established within a Company's Portfolio. Emergencies will always occur in a building. To guard against extraordinary costly repair situations, it is helpful to establish emergency pricing conditions in the case of an emergency. One good technique is to establish reasonable emergency pricing in advance of those emergencies.

6. Sealed Competitive Bids for Large Capital Construction Projects. Sealed competitive bids for large capital construction projects is an important component of the overall purchasing procedures employed in a management company. Sealed bids should be opened in front of a consultant such as an architect, attorney or accountant and the board members responsible for the project. Every effort should be made to reduce the possibility of fraud from occurring prior to the submission of the bids. While this is not always controllable, sealed bid procedures that adhere to strict rules help to ensure honest submissions.

7. Extensive Planning Time for Specification Development for Large Capital Expenditure Projects. To ensure that bids for large capital construction projects are accurate, extensive planning time should be allocated to make sure that specifications for the project are correct and resulting extensive change orders do not prevail throughout the project. Obviously this would disqualify the approved bid and compromise the underlying goals of a sealed bid process.

Today, the way in which a company will make purchases for its properties is an important predictor in determining the profitability of a building as well as the level of supervision that a management company exerts over its employees. In the wake of allegations of improper behavior on the part of numerous residential managers, a close examination of a company's purchasing procedures will yield important information about the potential success of any management program for a property.

COPYRIGHT 1995 Hagedorn Publication
COPYRIGHT 2004 Gale Group