What is three-way matching of invoices?
The concept of three-way matching refers to the accounting procedure for processing vendor invoices whereby the (1) invoice is matched to a (2) purchase order and (3) shipping/receiving documentation. While the process initially gained traction as an internal control over the “procure-to-pay” process to mitigate the risk of fraud in publicly traded companies, it has been widely adopted for its practical use in preventing duplicate payments and improving the accuracy of financial statements.
In construction, three-way matching is indispensable to accurately tracking job costs. Let’s explore the three documents that are critical to the process and how they work together.
Purchase Order (PO) – Purchase orders provide official confirmation of an order. Purchase orders generally include the name of the company purchasing the goods or services, date, the description and quantity of the goods or services, price, a mailing address, payment information, invoice address, and a purchase order number.
In larger companies with defined Purchasing departments there are several layers of approval required to approve a PO which often include a Buyer, the Controller, and the Manager from the department requesting the materials. In a small company, this role may be handled by a single person. In either case, it is valuable to follow a consistent process.
Shipping/Receiving Documentation – often called by many names this can be the order receipt, packing slip or other documentation that serves as proof of delivery. When construction materials arrive on the jobsite, the delivery driver will require signature approval from the superintendent or foreman to confirm delivery of materials. Shipping documentation should include an itemized list of all materials included in the delivery including dimensions and other descriptive detail. It should also include the dollar amount of the order, method of payment and delivery date.
Invoices – Invoices are critical to the financial management of construction companies. Profitability boils down to ensuring that individual projects show a profit. This means ensuring that the revenue for each job exceeds the cost of labor and materials. The Accounts Payable process, where invoices are approved and paid, verifies the accuracy of information, and allocates material costs to individual projects.
Why three-way matching is important to capturing accurate cost data?
Accurately allocating material costs to individual projects is best done with 3-way matching of invoices against purchase orders and shipping documentation. The following are three examples where this helps construction companies improve financial reporting:
Accounting for discrepancies in material deliveries. Matching invoices against shipping documentation provides an opportunity to account for discrepancies in material deliveries on the jobsite where they are most accurate. For example, when the lumber package arrives at the jobsite, the framing crew will unpack, inspect, and stack it on the jobsite. Traditionally, the foreman would note damaged lumber on the shipping documentation and then sign off for receipt of the delivery. In a digital world, apps like StructShare allow field teams to document damaged material and share real time material delivery data with the home office. Accounts Payable teams can then take deductions before releasing payment on an invoice.
Verifying project cost codes. Invoice matching also gives accounting teams an opportunity to review job cost codes and ensure that building materials are allocated to the correct project. Using automated digital platforms like the StructShare app helps facilitate real time communication between field teams and the back office and integrate directly with accounting software packages. In small businesses, Bookkeepers, Office Managers, and Controllers need to work with Foremen to help establish a consistent process for using project codes to track time and material costs.
The benefits of automating three-way matching.
Three-way matching is a proven best practice in managing the accounts payable process, however it can be labor-intensive and time consuming. Getting shipping documentation from the jobsite to the accounting office is difficult, fraught with incomplete and inaccurate information.
Thankfully, the three-way matching process can be automated with the use of simple, easy-to-implement apps like StructShare. With a built-in Foreman App and integrations with popular accounting packages like QuickBooks, Sage and Viewpoint small contractors can get up and running in minutes.
Construction Technology is not limited to large companies. Affordable, easy-to-use apps like StructShare are helping local, specialty trade contractors track project costs like the big boys. Automating the three-way matching process is a great place to start towards making project accounting more efficient and ensuring project profitability.