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A Tale of 4 Companies: A Job Cost & Gross Profit Percentage Drama (Part II)

Paul (of Paul’s Perfect Projects, LLC) tackles the gross profit problem by showing Dave his Estimate vs. Actual variance reports.  (If you haven’t already read it, you’ll want to visit Part I of this “Tale of 4 Companies: A Job-Cost & Gross Profit Percentage Drama” before jumping into the following “Part II”…)

Paul’s Approach to Taming the Gross Profit Problem

When Dave arrived at Paul’s office, it was nearly lunchtime, but Paul handed over a cup of coffee and a legal pad – “For notes,” he said. “Let’s see what we can get through in the next few minutes.  Then we’ll take a break for lunch, and pick up again afterwards.”

Gross Profit Percentage

They settled in at a conference table, and Paul got straight to the point.  “Just like you, we put a job cost reporting system into place that showed us comprehensive costs for labor, materials, subcontractors, and other job costs, by account, for each job. Those reports gave us some good information – better than anything we’d had in the past. But, the more we reviewed those results, the more we realized that we wanted more.  We needed information that would show us enough details to let us manage and control our results.   Big-picture overviews have their place, but when it comes to tracking and monitoring job costs, our management team agreed that our reports needed more depth.”

“We brainstormed and decided that we wanted to see information that would help us answer questions like,…” Paul held up four fingers and and ticked off:

  1. “If we had too much cost showing up in labor, exactly WHERE in the process did those labor over-runs occur?”
  2. “If we were over budget on material costs, which materials were coming in at costs different than we’d estimated?”
  3. “If our costs were lower than anticipated on subcontractor costs, had we really saved money? Or did it just mean that some of our trade contractors hadn’t submitted their bills to us yet?”
  4. “If we had errors in our estimated costs, exactly what were our problem areas?  Were we missing some costs altogether? Underestimating the quantities required? Missing the correct unit costs?”

“Our reports weren’t telling us any of those things! AND we couldn’t see what the real financial picture was until AFTER the job was completed. So we decided that we needed to dig further into the details if we intended to actually be able to control the outcome.”


Dave nodded in agreement, “Yup, I know what you mean. Exactly the kinds of questions I’ve been asking! Oh, and by the way – you mentioned ‘job budgets.’ How were you coming up with estimated income and costs for jobs?”

“Well,” Paul responded, “we experimented with various systems over the years, but eventually we developed a fairly complex set of internal spreadsheets. So that’s typically how we created our detailed cost estimates. The problem was that the spreadsheets weren’t tied into our accounting system. So we ended up with detail in spreadsheets, while our summary information showed up in our accounting reports. Every once in a while we’d try to put together additional spreadsheet reports to compare the two, but it was a huge amount of extra work, so it didn’t happen on a regular basis and, even when it did, the results never seemed to line up with our accounting records.”

“What we really needed was to be able to see estimated vs. actual costs as each job progressed. And we didn’t want to have to jump through hoops to do it! From a management standpoint we weren’t worried about what was happening with every nut and bolt – so to speak – but we agreed that we DID need to see weekly estimated vs. actual reports for each job. And we wanted to see the results:

  • Split out by job stage or phase,
  • Organized in about the same the order that the job was being ‘built,’
  • AND to see those phases, divided into labor costs, materials, contracted costs, and other job costs.”

“We also thought we’d like to be able to see where we were in the billing process at any given point.”

“So, after you got those requirements nailed down, what happened then?” asked Dave.

Paul responded, “Well, we figured there must be SOME way to do this with QuickBooks – we just didn’t know how to go about it.  Fortunately we found a QuickBooks ProAdvisor who was a job-cost expert, and she had us prepare an outline of our normal job processes. Then she helped us set up our internal procedures and reports so that we could run a standard QuickBooks report that showed us exactly what we needed to see for each individual job.  It took some set up time, but we got there!”

“Since I invited you here to take a look at what we’re currently using, I pulled the first and last page of one of our early “in process” reports. I drew in some arrows and numbers and highlights so we can walk through it together. You can make some extra notes on that legal pad I handed you. This is the basic format of what our new reports look like. For now, let’s just focus on the top section of the report:  If you look at the red arrow and the column titles, you’ll see that we have columns to show estimated vs. actual results for both cost and income.”

Estimate vs Actual Report by Job Stage-Partial

For the PDF version, please click the following:
A Tale of 4 Companies-eBook

Dave noted the red arrow and quickly reviewed the column titles.

Paul continued, “Then, if you look on the left side of the report – under the green arrow, you’ll see specific line items. We’ve started using the Items feature in QuickBooks to enter our estimated income and costs as well as our actual income and costs. That way our ‘actual’ results always line up with our accounting records.”

“We’re still using our spreadsheets to create the detailed estimates, but we’re summarizing and entering the results into QuickBooks in the format that we’d like to see for our reports. We’ve also been thinking about how we might be able to actually quit using those old spreadsheets and just start using QuickBooks for our estimating process. We’re pretty sure that can work for us, but one step at a time, right?”

Dave agreed. “Yup, if I learned one thing about the changes that we made last year, it’s that putting a job-cost system into place isn’t a one-time event. It’s definitely a process!”

Paul smiled. “Yes indeed! So, back to this particular report… If you take a look at the top, right-hand side – see the number 1? In  the green box? You’ll notice that this report is showing one of our fixed price jobs. You can see that we’ve included our three anticipated billings to the client in this top section…”

Dave couldn’t help himself – he had to jump in at this point with an immediate concern. “OK, I’m seeing that. And wow, yes, this is exactly the kind of information that I’ve been looking for. But not all of my jobs are fixed price jobs – and sometimes I have change orders. I don’t want to be confined to fixed price basis because that’s what my accounting system requires!”

Paul nodded. “Yes, I totally understand. And no, you are NOT constrained to just one pricing method. For ‘time and materials’ or ‘cost plus’ jobs we just use the cost line items for invoicing, and then the estimated and actual revenue can show up on those lines rather than at the top, where you see them now.”

“And we have to track change order costs and invoicing in our company as well. Although you don’t see them included in this report – this is an ‘early on’ report for this job – we make sure that nothing gets missed from a cost and invoicing standpoint when it comes to change orders. We can either show change orders to be invoiced in this top section of the report OR,” he pointed at the lower rows in the report, “we can estimate and invoice for those extras based on the more detailed line items shown further down. It just depends on how our contract is structured. ”

“Ah, OK. I see.” Dave sounded both hopeful and relieved. “So I could use this approach regardless of what type of job we take on, right?”

“Right!” Paul agreed. “So, let’s take a look at the sections I blocked off with the number 2 in the red box. You’ll see that we have headers for these first couple of job stages.”

Job Cost and Summary Detail available on QuickBooks reports“You’ll notice that each header includes line items for Labor, Materials, Contracted, and Other Costs. There are also certain job stages – that you don’t see here – where we also added line items for ‘Machinery & Equipment’ costs. By using Items, you have almost total control over how these results can be entered and how the reports appear.”

Dave was puzzled. “You’ve mentioned using ‘Items’ several times now. I’ve just been using accounts. I’m not familiar with Items. It sounds like another feature in QuickBooks that I need to set up. If I do that, does it mean that I have to enter my information twice – once in my accounts, and another time in Items?”

Paul laughed “Well, I probably wouldn’t be alive if I doubled my accounting staff’s workload! No double entry is required. Here’s how it works: you set up each Item to link to your income and cost accounts. Then, when you enter an Item into a transaction and assign it to a job, it ALSO automatically posts to an account. QuickBooks handles everything in the background. That way you can ‘slice and dice’ your information based on the way YOU want to see it. So that means you can either:

  • Run ‘account-based’ reports, by job, in the traditional format, where you can see your costs summarized in the traditional account-style format. You can still see your gross profit totals by job – just like you told me that you’re currently doing, OR
  • You can create ‘Item-based’ reports – like the one that I’m showing you now.”

Paul checked his watch. “Say, I see that it’s 11:30, and I made lunch reservations, so let’s take a short break for food, and you can absorb what we’ve covered so far while we’re eating. When we get back, we’ll jump back into the rest of the report, and I’ll share more about how we’re using the results. I’ll also pull in a few of the people who are using the reports on a regular basis – so you can hear what they have to say.”

Dave grinned. “Hey, sounds good to me – I never turn down lunch when it’s offered. And I do want to thank you for bringing me in. This is great stuff, and I’m really enthused about seeing that we can do so much more with the QuickBooks software that I already own!”

Next Blog Posting:

Part III – How Bookkeeping Supports Job-Cost & Gross Profit Measurement – Paul asks his bookkeeper (Rhonda) to share her thoughts about the new process. Read Part III…

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