Tie goals and job costing together and become the master of your destiny—well, of your company’s destiny.
The typical Job Costing discussion throws a large smattering of options into play. Watch any job costing question posted on a financial management forum and see the wide range of options. And the options are excellent. However, they do take time to wade through.
So, where do you start?
How do you tease this apart into bite-sized steps?
As you may suspect, to get a handle on job costing means you know your profits, costs per job and overall company profitability during and immediately after jobs. And, can effectively project job costs and profits. You become a master of your destiny.
First, get a good team in place: accountant, tax accountant, bookkeeper who know the ins-and-outs of construction accounting and job costing—an excellent first step to guide you through the process.
Time and again, questions come up about what standard to follow for job costing. The answer invariably emerges as “it depends.” Which can frustrate the person asking.
So, to skirt around this frustration, consider asking a different question.
“What are my business goals and reporting requirements for those goals?”
The answers to this question of goals guides job costing efforts to a clearer path to follow. Job costing become much easier than wading through long lists of options and discussions of, “If you do this, then allocate that.”
Guide to defining goals and job costing
Follow this guide to help refine exactly what you need in job costing. Otherwise you might hear “it depends” when ever you ask what should be done.
Here are 9 questions to guide you through defining goals and job costing:
- What level of growth do you want? Do you want larger contracts, more smaller contracts, mix of both.
- What target market do you want to spend your time developing? public, commercial, residential, local, building type, owner characteristics, multiple states, national, or something else?
- What level of supervision do you plan to assign per job or across multiple jobs?
- Will you stay with one contract type?
- Lump Sum or Fixed Price
- Unit Price
- Cost Plus Fee
- Cost Plus with a GMP (guaranteed maximum price)
- What profit per job do you want?
- Determine the level of rigor do you plan for Change Orders, WIP management. What is your process?
- What level of investment are you willing to make to get details and accuracy?
- The more details, the more accuracy the more time and money spent to get it.
- Do you want superintendents, project managers to capture daily field reports with job costing, labor, OT, incidents, POs, COs?
- Do you plan to automate what you can?
- Who will review the job results?
- What level of detail do they want?
- High level profitability, issues and “what are you going to do to improve?”
- Some details about job costing? Look for discrepancies.
- Lots of details. Want to go over each job with all costs involved.
- How often? weekly, monthly, quarterly?
- How will the reports be delivered? digitally, in person with discussion, both.
The answers become a guide
The answers to the above goal questions will guide the discussions around the following questions:
- Do I include burden and overhead into one percent calculation? What percent do I use?
- What level of small purchases in a job can simply be allocated as indirect costs?
- Should I use percent of labor, percent of revenue, or percent of costs as a basis?
- Should some indirect costs be allocated based on one or more cost bases?
A few of good best practices to keep in mind as well:
1. Nail down company goals. Spend some time on them so they don’t turn into new “goals-of-the-month.” You can optimize profits this way.
2. Start with estimating. Estimating defines the structure of job costing. Otherwise you have multiple competing processes in play.
3. Get conversations going between accounting, estimating, and those capturing the job costing data.
4. Become extremely consistent with allocation.
5. Once you have a good set of goals in place, processes will emerge, then you can automate to get benefits of effective job costing.
Job Costing is an involved process. Take a step at a time no matter where you are currently in the process. And be sure to go back to your company goals to get focused on the right tasks.
Goals set direction, simplify job costing decision making, and let’s you become master of your destiny.
Contact us today to discuss more about setting goals, direction, and job costing solutions in your company.
Phil Bride, firstname.lastname@example.org 503-753-9971 for Company goals, direction, business planning and processes.
David Holler, Nov 6, 2017 “Should Company Overhead Expenses be Included in Job Cost Reports?”
“The Book” “Financial Management and Accounting for the Construction Industry” section 3.15 (1).