Do you know how much profit you made on each of your jobs? How about on jobs-in-progress, are you on track with your estimate or not? How did you determine what to bid the job at – a gut feel or do you have historical job information so you know how much the various inputs costs, especially your labor burden and overhead costs? In this article, We’ve organized some thoughts on how a contractor can profit from proper accounting and job costing.
Job costing (or also know as job cost accounting) is the key to being able to answer all the above questions with a “yes” and not having to rely on your gut – then having sleepless nights wondering if you were right or not. Proper job costing will allow you to bid at the optimal price and complete the job at the right cost.
Components of Job Costing
Incomplete or lack of job costing is one of the most significant causes of construction contractor failure. A contractor that has not properly accounted for job costs, has no historical information to rely on to know how much overhead and burden. To give your team room to make a profit, you need to know how many work hours they should be applying to the job for accurate bidding. Let’s address these parts separately:
- Overhead and Burden
How should overhead and burden be applied to these work hours? The hourly rate of labor may be easy enough to calculate, but you may have union costs, workers comp, payroll taxes, other employee benefits that you need to consider in your labor burden. Also in your overhead would be costs such as your general liability insurance, depreciation on your tools and equipment, vehicle expenses, supervisor salaries, small tools that are often lost, stolen or broke on each job, etc. Your expenses should be looked at continually to determine all relevant direct and indirect costs are being included in the burden and overhead rates, and the rate should be adjusted as needed, for example when your workers comp insurance rates are adjusted or union costs are renegotiated.
- Time Studies
Time studies will allow you to figure out what your true work hours are for a particular item. The direct material costs are reasonably easy to determine as you can contact your suppliers, but again historical job costing can help you determine the proper quantities to order so you don’t have excess material but are not short due to normal waste.
A Contractor’s Perspective on Job Costing
We sat down with Matt Krig, co-owner of Northland Woodworks, Inc., a woodworking and custom cabinet maker in Blaine, MN and a fellow Minnesota Associated Builders and Contractors member. Like many companies out there, Matt stated that before they started using job costing, they would review their quarterly financials and hope for a positive outcome. When it was positive, they were happy but they weren’t able to really tell why it was positive and recreate it. Worse, when it wasn’t a positive bottom line, they could only scratch their heads and hope for a better quarter next time.
For Northland Woodworks, Inc., one of the biggest benefits of job costing is that they have been able to determine which of their areas between box cabinets, custom work, closet systems and hardware were the most profitable. Matt has seen a shift in the business model to instead of taking on a high volume job, they actually turn away some work because they now had historical information to determine that the job wouldn’t be profitable (selecting instead to judge each job on the amount of profit expected, not simply accepting all high volume jobs).
One of the areas they found this the most useful was in hardware. When they looked at their hardware operations, they found the time it took to help the customer pick out the hardware, order it, receive it, process payment, etc, they were lucky to break-even on it. While Northland Woodworks still provides this service their customers upon request, they have no problem saying yes to customers that ask if they can provide their own hardware. Before they saw it as lost revenue, but now they understand that when customers want control of the hardware component of the sale it actually has a positive impact on the bottom line. Again, through job costing, they learned volume isn’t everything – it can be more costly to do a job than to be idle especially when you add risks to the equation. Winning a bid is only a good thing if you make a profit, and no one wants to do a bunch of work for nothing – or worse taking hit to your bottom line.
Job Costing – Done Correctly Will Alert You to Problems or Missed Revenue Opportunities
With job costing, costs are tracked as the construction progresses and compared in real time to the estimate to identify cost variances. This helps the management team to deal with issues timely, resolve changes accurately, evaluate process and improve efficiency. Job costing can support any claims against the project – in the event you need to provide the customer with a list of materials, subcontractors’ uses, etc if any disputes arise.
Matt from Northwoods Woodworks, Inc., discussed with us how job costing has allowed them to do spot checks on jobs and find the alarming things while the job is in progress rather than only at quarter end when it’s too late. They’ve also been able to find pricing errors in their accounting system by creating a mini income statement by product or job. A case in point: They sell shelves at varying lengths. Once they reviewed the mini income statements they saw their 24” shelf was losing money, which it should not have been. Upon further research it was then determined that there was a data input error of the sales price in their computer. Without job costing, this could have gone on indefinitely as a single length of shelf in the grand scheme of things is too immaterial to the total revenue to find such an error.
Employee Incentives through Job Costing – A Win for All
Northland Woodworks, Inc. is working on taking the job costing one step further and is working to use it as part of a bonus or incentive program for their employees. Ideally, they would like to communicate with their employees on a job-by-job basis and if a job reaches a certain profit margin, a bonus would be given. Matt believes that if they let employees know how a job goes and bonuses them for the profitable jobs, it will benefit all. Too often, Matt has seen when an annual or Christmas bonus program is used it becomes an entitlement program to the employees and not an incentive throughout the year.
Realizing the Benefits of Job Costing – Commitment is Needed
Job costing is a continual effort, but it will help you get work at the optimal price for the right cost! Matt found that it was not the most fun part of his job to do, and making the commitment to do it and sticking with it is the hardest part, but the benefits far outweigh the headaches and inconveniences.
If you would like to improve your job costing system or set one up, please contact us.
Disclaimer: All content provided in this article is for informational purposes only, and is subject to change. Contact a DS+B professional before using or acting on any information provided in this article