What Is a VPO in Construction and Why It Matters

June 12, 2024

The concept of harnessing the "Voice of the Process" in Lean Operations emphasizes understanding what your processes are communicating, which can lead to significant cost savings and efficiency improvements. To gain insights from your processes, relying solely on traditional metrics may not be sufficient. It requires deeper and more specific metrics.

Understanding VPO and PO

The terms VPO (Variance Purchase Order) and PO (Purchase Order) are critical in project work:

  • PO (Purchase Order): Represents planned and budgeted work.
  • VPO (Variance Purchase Order): Represents ad hoc, unplanned, or exception-based work that arises during the project.

Key Metrics to Track

To effectively harness the Voice of the Process, tracking the ratio of work done under VPO compared to PO is recommended. Two specific metrics should be considered:

VPO/PO Ratio

There are two key aspects to consider under the VPO/PO ratio:

  • Number of Orders: Tracking the number of POs vs. VPOs issued per house.
  • Dollar Value: Comparing the dollar value of VPOs against POs.

Examples and Analysis

Consider a hypothetical comparison of two builders:

Builder A has a VPO/PO ratio of 20%, while Builder B has a VPO/PO ratio of 5%. Through this comparison, it’s evident that Builder B would have a more organized schedule, better employee work conditions, satisfied suppliers and trades, and higher profitability.

Benefits of Tracking These Metrics

Organizational Insights

By consistently tracking VPO/PO ratios, organizations can gain actionable insights about their operations, allowing for identification of inefficiencies and opportunities for improvement.

Profitability

Well-planned and executed work (more POs) equates to higher profitability, while work falling under VPOs typically reduces profit margins.

Early Warning System

These metrics can act as an early warning system, highlighting potential issues before they exacerbate and affect schedules, quality, and profitability.

Challenges and Solutions

Consistency in Measurement

Consistently applying rules when issuing POs and VPOs ensures reliable ratios and insights.

Implementation

Despite the apparent benefits, not all organizations track these metrics. The lack of adoption is puzzling given the clear advantages, suggesting that more education and advocacy are needed to promote these practices.

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