An original version of this article about construction job-costing by Diane Gilson was originally published by Builder Partnerships on their website.
5 Reasons Construction Companies Need to Job Cost –
Even When They Think It’s a PITA
Yes, we all know that PITA means “Pain in the (fanny).” But here’s why facing that job-costing PITA is critical to achieving the profits that you deserve.
1. Job-Costing Can Help You Work “Backwards” Into Your Detailed Cost Estimate
You’ll likely start out with an idea of what you’ll be able to reasonably charge for a home or job. Why? Maybe you’re familiar with the neighborhood – and shouldn’t exceed a given price range. Or maybe your customer has told you what they’re willing to spend…
Regardless of the “price cap”, if you want to hit your gross profit target for that home or job, you’ll need to work backward from your anticipated price. You can then develop very specific cost targets for each element of the project.
Of course, as an experienced builder or remodeler, you’ll factor in:
- Land and development costs
- Materials and contractor costs
- A guesstimate for unforeseen contingencies
- A “layer” of cost and related income for a typical set of customer-generated change orders.
Depending on your business model, you may also need to include:
- Employee labor and burden costs
- Equipment costs (yours or rentals)
- Selling costs (commissions, closing fees, etc.)
- Interest on land and construction loans (balances and time-frames will have an impact)
After your first rough estimate, you’ll move on to a detailed review and should ask yourself “Is the estimate complete?” and “Is it realistic?”
If not, sharpen your pencil, and go through the process again. It’s extra time, but it’s worth reminding yourself that every mistake will most likely come straight out of your pocket.
After your final review, you’ll ask yourself “Will I still be able to hit my desired gross profit margin?” If not, THIS is where you need to stop and save yourself far more in lost time and money. Estimating is frequently where the marathon is won or lost…
Don’t lose the race at the starting gate!
2. Why Items are Integral to Your Job-Costing System
When you’ve decided to move ahead on your project, it’s time to enter your estimated costs and income into your job-cost tracking system.
If you’re using QuickBooks desktop as your accounting software, you’ll need to use the “Items” list to do this. A well-designed Items list helps with estimates, provides structure as you enter actual costs and income, and yield reports to show:
- Detailed cost estimates by job “stage” (e.g., Site prep, Foundation, Framing, etc.) and by type of cost within each job stage (e.g., Labor, Materials, Subs, Other, Variance from PO, etc.).
- Income estimates for various pricing arrangements including fixed price, time & materials, and “cost plus” jobs.
- Actual costs and income (organized in the same way).
- Estimated vs. actual costs and income reports (typically called “Variance” reports).
A well-designed Items list can help you create accurate estimates and purchase orders. It will provide the structure so that you can compare estimated vs. actual results.
3. Use Job-Cost Tracking to Control Job Profitability – Before It’s Too Late!
None of the builders or remodelers I’m acquainted with want to learn two or three months after a job is completed they lost money on the job, or only made a gross profit of 2%.
While a job is underway, and enthusiasm runs high, it’s easy to absorb (what seem like) small cost changes here and there. Those minor changes, unforeseen gremlins, and random over-runs can mount up behind the scenes.
When you can’t see exactly what’s going on with the cost elements of a job WHILE IT’S HAPPENING, you’ve lost your window of opportunity to influence the final outcome.
If you’re not reviewing “Actual” and “Estimated vs. Actual” detailed job-cost reports, you’re working in the dark. And when you’re working in the dark – it’s easy to experience the business equivalent of a painful stub of the toe, or even a major fall down the stairs!
If you wait until the job has ended to see your final results tallied, it’s too late to recover.
Instead, your mantra throughout every job should be:
“Measure & Monitor, Measure & Monitor, Measure & Monitor!”
When you do this, you’ll be amazed at what you’ll see, find, and can influence as a job is underway. YOU will be in a position to make practical, cost-effective decisions. As a result you’ll be able to stay focused on the target of bringing your project in on time – and on (or under) budget.
How many tens, or hundreds of thousands of dollars could that be worth to your company? To your profitability? To your “take-home pay”? To your family?
4. Can Job-Costing Help AFTER the Job is Done?
Clients who have incorporated job-costing systems list some of the ways they use reports after projects are completed:
- They talk through what went right on the job, e.g.,:
- What processes worked well, and should be repeated in future jobs?
- Where did costs come in under-budget – how and why?
- Who should be congratulated – or rewarded?
- They delve into what did NOT go well, e.g.:
- What process did NOT go as anticipated? What do we need to change in the future?
- Which costs came in over budget? What happened, why did it happen, and how can it be corrected in the future?
- Do we have any “people” or vendor issues? If so, how should we handle them? Do we need to provide additional training, coaching, or take more drastic measures?
- Who’s in charge of making various changes? What’s our timing for implementation?
- They use actual financial details as a resource for future estimates.
5. The Bigger Picture: Use Job-Costing Data to Shape Company Direction
By job-costing, you will be able to figure your exact gross profit dollars and percentages on each job and develop a “history” for various types of work. You will then be able to extract valuable, useful, insights from your data. What you learn can make a huge difference in how, and where, you direct your company resources.
Here are some types of profitability analytics our clients have asked us to set up for them. Comparisons by:
- Model (e.g., the Bluestone, the Brookview, the Woodland, etc.)
- Community or subdivision
- Specialty (kitchen, bath, deck, addition, etc.)
- Size range (depends on sizes of projects handled by the company)
- Department, division, supervisor, estimator
Job-costing helps company owners see detailed AND summarized gross profit amounts and percentages. When this information is summarized, you can focus your efforts on the most profitable types of work. This helps remove low margin jobs that aren’t worth the time and energy (often pain and suffering!) invested.
Analytics can also be of value when it’s time to make other big-dollar decisions. For instance, when it’s time to expand or contract your business, hire or lay off, narrow into a niche, shift locations, expand divisions, broaden operations, or make changes to your marketing and advertising, you’ll want this data at hand…
Job-Costing – Is the Cost Worth the Benefit?
To lead your company most effectively and successfully, you need
- Real-time, detailed job-by-job estimate vs. actual monitoring info
- Summarized job-cost analytics
- Gross and net profit data.
Based on sheer monetary impact, as critical information, job-costing is a “central essential” to your construction financial management system. And once converted, you’ll be hard-pressed to live without it.
So, even if it initially feels like a PITA aspect of your business, it’s a PITA that pays off!
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Enjoy this story about four construction companies that run their business processes (and info systems) in very different ways! “A quick, enjoyable read.”