The Many Faces of Construction Job Costing

This article by Diane Gilson is about gross profits and various construction job costing techniques. A preliminary version was initially published on Builder Partnerships’ website…

Why Do Gross Profits and Job Costing Systems Matter in Construction Companies?

Your Gross Income minus the cost of producing that income equals Gross Profit. You might want to think of your Gross Profit as what you’ve “earned” from the individual projects you’ve decided to take on.

For example, you’ve built a $500,000 home, or taken on a $500,000 remodeling project.

If you believe your costs to complete that project came to $400,000, you’ve earned $100,000 in Gross Profits – or achieved a 20% Gross Profit Margin.
If you believe your costs were $475,000, you’ve earned $25,000 (a 5% Gross Profit Margin).

Here are some typical questions many construction-business owners initially ask about gross profits and job costing…

“Why is it important to know how much my gross profit is?”

Because your gross profit is the amount you use to run the “non-production” portion of your company AND to create your net (“take-home”) profit.

“What’s job costing and why are job cost reports so vital to the health of my business?”

Job costing is the process of tracking how much income you earn, and the costs you incur, to perform each of your jobs.

It’s how you get to see the gross profit (your scorecard) for what you’ve earned on each of your projects, and the totals for your company. You will be able to observe both the winners and the losers – so you can fix or minimize the losers and maximize your winning scores!

“Are all job costing systems and reports pretty much the same?”

Your perception of what you want to see from YOUR job costing system may be very different than another business owner’s concepts.

Why? Because there is no single prescription that fits everyone’s needs.

Why one system won’t work for everyone

When considering your job costing system, here are some facets that impact the type of system you’ll want to create:

1. What types of projects do you perform and want to track?

- Simple: Small, quick jobs with few job stages that typically last a day or two, e.g., handyman, repairs, installations, roofing, etc.

- Mid-level: Jobs with a medium number of job stages, that may last for one or several weeks, e.g., small remodeling jobs, landscaping, HVAC with various stages, etc.

- Complex: Projects with many different activities throughout its life. It may last from several weeks to even years, e.g., major remodeling or renovation jobs, custom homes, spec homes, land development.

2. What is the size of your company?

- Are you a smaller (less than $500,000 gross revenue) construction company?

Business owners of smaller companies often believe that because they are deeply involved with the estimating, purchasing, and on-site management of each job, they don’t need job costing.

However, to survive the challenges of a smaller business, company owners should insist on at least a simple job costing system! Basic job costing and company reports will reveal whether they are making or losing money for each job, as well as what’s happening with their bottom line.

Even basic reports will show if it’s time to modify prices or find ways to curtail costs. Owners will quickly see if they are making enough to stay in business, AND if they are going to be able to bring home the profits they need.

- Are you running a mid-to-larger-sized construction company ($500,000 gross or above)?

Most companies implement a more extensive job costing system when they reach $500K or greater.

Why? As operations become more complex, owners and managers find that, without an accurate tracking system, it becomes nearly impossible to determine exactly where the company is:
> Making money
> Surviving, but missing the mark, or
> Losing money.

These companies typically implement fairly detailed job costing systems.

3. Which software will you be using to create estimates and track job costs?

- A stand-alone system such as Excel or another commercial package?

- A fully integrated estimating and accounting system such as QuickBooks?

- Accounting/estimating software designed specifically for construction companies?

How You’ll Track Job Cost Information

Option 1 – Spreadsheets

Pros:
- Spreadsheets are inexpensive. Nearly everyone has access to some type of spreadsheet program.
- If you know how to create formulas, there will be nothing complicated to learn. You’ll be able to subtract (simple) costs from income to see your gross profit dollars by job and add formulas to see your gross profit percentage by job.
Cons:
- Spreadsheets can become very complicated very quickly. It may be fairly easy to track income and costs by job, but you’ll have to add subtotals to show those critical gross profits, calculations to show gross profit margin percentage, as well as more rows and subtotals for other company costs.
- Unless you’re a spreadsheet wizard, it’s easy to make mistakes or lose your data.
- You likely won’t be able to “slice and dice” your information in various ways or easily summarize your information.
- It will be very difficult to reconcile asset and liability accounts.
- You will not be able to run standard financials (i.e., balance sheet and income statements) if you need them for lenders or investors.
- Estimate vs. actual reports can become very complex and will require ongoing, manual, duplicate data entry.
- In short, you’ll spend a lot of time creating a home-grown accounting system that won’t scale up as your company grows. (Note: Is this really where you want to invest your highly valuable time?)

Option 2 – Software designed for standard accounting processes as well as job costing

For example, QuickBooks desktop products such as Pro, Premier, or Enterprise.

Pros:
- This type of software is relatively inexpensive; various versions and licensing options are available.
  (NOTE: Be sure to contact us to obtain the best available pricing on QuickBooks products and services.)
- In addition to using accounts to assign costs to jobs, it’s also easy to include your company overhead costs, keep track of other assets and liabilities, and perform reconciliations.
- This type of software automatically yields standard company-wide balance sheet and income statement reports, as well as basic profit and loss by job info.
Cons:
- Generic software such as QuickBooks will require customization to meet your construction company’s needs.
- You will need to learn basic as well as construction accounting concepts
- You will need to learn how to use the software.
  Note: Most training can occur online via videos or direct computer-to-computer support.

Option 3 – Software designed specifically for construction companies

Pros:
- Software developers have designed this type of software with specific types of construction companies in mind. Thus, depending on the specific software, you will likely find prebuilt modules and reports designed to meet construction-company needs.
- In addition to using accounts to assign costs to jobs, you should find it easy to include your company overhead costs, keep track of other assets and liabilities, and perform reconciliations.
- This type of software typically yields standard company-wide balance sheet and income statement reports, as well as basic profit and loss by job info.
Cons:
- This type of software is normally much more expensive.
  Why? Logistics. The costs of software development and support must be absorbed by a more limited user-base.If you go “shopping” for this type of software, be sure to inquire about ALL applicable costs including annual maintenance costs as well as each of the various modules you may need to create a complete package.
- Even though it has been designed for construction companies, the software will still require customization to meet your construction company’s specific needs.
- You will need to learn basic as well as construction accounting concepts.
- You will need to learn how to use the software.
  Be sure to find out whether the training can occur online, or whether it will require additional fees, travel, or time away from the office.

Four Familiar Job Costing Faces

Face 1 (Very basic):

Use a spreadsheet to track income and costs in rows, assign job results into columns, use formulas to total up rows and columns.

This approach will provide basic information, but if you forget to enter any piece of data, there are no “proofing and balancing” checkpoints unless you build a more detailed “background” system.

Face 2 (Simple, but not very helpful):

Use job costing software to track income and costs by account and by job.

Enter your job-related income and costs into specific accounts (e.g., income, labor, contracted services, materials, etc.) for your jobs. You will be able to see a Profit & Loss by Job report that shows amounts for each job at a summarized account level.

Face 3 (Now you get to see some detailed job-phase costs!):

Use job costing software to also track detailed job phases, such as site prep, foundation, framing, etc., for labor, materials, subcontractors, and other job costs.

By tracking details (rather than just accounts), you will be able to see reports that show specific job-stage detail information for each phase of your job, as well as various aspects of income. This information shows exactly where your dollars are going!

Face 4 (CONTROL your current and future operations!):

Use job costing software to also enter and compare estimated income and costs to actual income and costs.

By entering both estimated and actual costs and income, you create a feedback system that lets you compare what you thought was going to happen with a job against what actually happened. When you are able to see estimated vs. actual income and cost reports (by job stage) for each of your jobs, you can use this information to tighten up on your estimating and pricing.

Which “face” of job costing is right for you?

As we stepped through Faces 1-4, you’ve likely already noted that each version was slightly more advanced. Each step in the progression provides additional tracking and feedback value.

Every construction company needs some type of job costing!

As a company owner, you are in the best position to decide which elements best reflect your company, and which “face” will provide you with the information you need to help run your company most effectively, most efficiently, and most profitably.

Special Offer – Free eBook

Click the title link below to receive this free eBook written by Diane Gilson:

“A Tale of 4 Companies: A Job Cost & Gross-Profit Percentage Drama”

Enjoy this story about four construction companies that run their business processes (and info systems) in very different ways! “A quick, enjoyable read.”

Customer Praise For Diane Gilson, Info Plus Accounting, and BuildYourNumbers.com

⭐⭐⭐⭐⭐ From the Intuit FindAProAdvisor website:
“Diane and her team have been invaluable to our growing business! We needed to capture specific job costing, along with adding an in depth massive inventory program switching from QBO back to QBE- Diane was so willing to work with us!! She is patient and super knowledgeable in QuickBooks and knows all the tips and tricks to make your accounting more efficient and accurate! Love working with her and her team!”

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