0312: Job Costing For Small Construction Companies - The Key To Profitability

This Podcast Is Episode Number 0312, And It Will Be About Job Costing For Small Construction Companies - The Key To Profitability 

Job Costing, in its simplest terms, links the money you spent on a job against the money you received to do a particular job. It is the process of tracking all the costs related to a project to determine its profitability.

A common misconception is that Job Costing is only for large contractors with a dozen employees. Since keeping track of all costs and expenses involves a lot of additional work for contractors and field workers, and most construction company owners do not see an immediate benefit, some contracting businesses still haven’t implemented Job Costing procedures despite the financial risks.

In Construction Accounting, there are two types of Cost of Goods Sold (COGS) – Direct Construction Costs and Indirect Construction Costs. Both are equally important in generating useful Job Costing Reports.

 

(Everything that is not Overhead or Other Income and Expense falls under Indirect Construction Costs)

With this in mind, it is crucial to establish a Job Costing Library and understand the value of investing your time, energy, and resources to build and maintain one.

Knowing in advance which jobs have the highest probability of success and profit before getting involved moves your construction company from an unpredictable roller coaster to a peaceful merry-go-round.

The key to a useful bid is having accurate job costs. Your estimator needs access to the past job histories to accurately calculate the construction costs.

Contractors with annual sales volume under $5,000,000 are not likely to have a $100,000+ a year professional estimator on staff so do not expect them to be 100% accurate. 

The important thing is to get the final job costs as close as possible to the project estimate and budget. The only differences between your bid and the finished project should be overhead and profit.

Estimates Vs Actual Reports

Money Out – what you thought the job would cost and what it did cost Money In – how much you collected The difference between Money In and Money Out

Weighted Average Of Indirect Costs And Overhead

Next, you need to calculate the weighted average of Indirect Costs and Overhead, ignore Indirect Income and Expense as it has no bearing on Job Cost Calculations, to determine a metric you can use to allocate those costs to find the fully burdened Job Cost.

Example:

Job 001
Money In $1,000
Money Out $500
Difference $500

Annual Sales $100,000
Annual Indirect Construction Costs $20,000
Annual Overhead $10,000

Job 001 = 1% Of Annual Indirect Construction Costs $200, ($20,000 X 1%)
Job 001 = 1% Of Annual Overhead $100, ($10,000 X 1%)
Job 001 = Burden $300 ($200 + $100)
Job 001 = Profit $200 (Money In $1,000 - Money Out $500 - Burden $300)

With this information, you can create more accurate quotes when you bid on future jobs. Job Costing will help you identify the most and least profitable areas of your construction company and most profitable clients (and projects) and outsource or subcontract the less productive aspects of your contracting company.

If your construction company is not paying you an owner's salary, what it would cost to replace you, and at least 15% return on your investment then you need to rethink the intrinsic value of your Construction Accounting System.

Over to you:

Over to us:

Our Account-based Job Costing and Job Profitability Reporting option is the best value for contractors working on short projects that last between one hour and two weeks and do not need Estimates vs. Actuals report.

The Job Costing and Job Profitability Reports are based upon the direct and indirect cost codes in the Chart of Accounts module we use to set up your QuickBooks for Contractors file, which is based upon the type of construction your company performs.

Item-based Job Costing and Job Profitability Reporting is more comprehensive and recommended to contractors working on longer projects like residential remodelers, land developers, and spec home builders.

This option is based upon direct and indirect cost codes in the Chart of Accounts module we use to set up QuickBooks for contractors and we include data from the Items List with breakouts for Labor, Material, Other Charges, and Subcontractor costs.

In conclusion:

Job Costing is a lot of work but the results are worth it. It requires a constant balancing act between profitability and competitiveness. Knowing how much profit you made on your last job will make you earn more on the next one. Thus, mastering Job Costing is critical to your business.

 

 About The Author:

Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant, and construction accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and Xero accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.

Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes. 

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