Job costing is a method for tracking the total costs and revenue on a job that enables contractors to easily identify issues and keep close track of projects and business overall. Understanding and employing methods like this can make or break the profitability of a job and ultimately a company.
In a recent webinar for Construction Business Owner, John Meibers—vice president and general manager for Deltek ComputerEase—discussed the importance of job costing for construction company owners and addressed some common questions about the method.
Why is job costing beneficial to contractors?
According to Meibers, job costing consists of all project costs such as labor, material, equipment, applied overhead and more. It also requires tracking jobs in detail, from pre-construction through project completion. This strategy enables contractors to easily identify issues and keep close financial track of their jobs and business overall.
“Job costing tells you everything about the job,” Meibers said. “You know the score, you know where you’re at in the game and you know how many outs are left.”
Meibers also said that it is crucial to understand the true cost of jobs to provide visibility into future profitability.
“It’s the information we gain from this job that will help us understand what to do on the next job,” he said. “We don’t want to wait until the job is over and it’s too late.”
Job costing should serve as the basis to plan cash flow, according to Meibers, and leveraging job cost reports can help a company get a loan or a line of credit.
“Job costing should be at the center of your business,” Meibers said. “It affects every part of your business: purchasing and inventory, advanced reporting, HR and payroll, subcontracts, service and project management and more.”
What are the types of costs and their role in job costing?
Meibers outlined three categories that play a role in job costing:
- Direct costs are all costs directly identified with a particular job. These include materials, labor, subcontracts and equipment purchases and rentals.
- Indirect costs cannot be directly identified with a particular job, but they play a role in the completion of a contract. Examples include indirect labor (e.g., office staff), insurance, owned equipment, estimating and project management.
- Committed costs are obligations that have not yet been fully paid but need to be by the end of the project. By including these in job costing, according to Meibers, you can see them and ensure your budget can cover future expenses or additional costs. Examples of committed costs include:
- Open subcontractor agreements: You haven’t yet paid the sub, and at first glance, it might appear the money is available, but Meibers emphasized that it is committed.
- Purchase orders: Even if you are waiting for delivery or the bill for materials hasn’t been paid, these are committed costs.
- Salaries: Even if payroll hasn’t gone out, that money is committed.
- Field expenses: When you use a credit card for supplies or materials in the field, those cost are committed to the project budget.
How do you track and apply equipment expenses to job costing?
Equipment costs are your most expensive aspect of job costing, according to Meibers. Specialized equipment may be purchased to perform work on a job, but accurately charging a project and determining a fair rate for operating the equipment is tricky.
Meibers said tracking costs beyond the initial purchase price, such as cost to own and to maintain, is vital for equipment cost management. Because of this, it’s important to determine how best to track equipment costs beyond that initial price.
This could include tracking hours the equipment is used in the field, determining the cost of maintenance and regular operation and figuring out how best to allocate those costs to each job. Understanding this can take some trial and error, Meibers said, but will benefit the bottom line over the life of the equipment.
What are the key reports that serve as scorecards for each job and business overall?
Meibers described various types of job cost reports, including summaries, unit productivity and labor analysis. However, he focused primarily on work-in-progress reports, which identify the earned value of jobs in progress.
For a WIP report, Meibers said, the following five values are needed:
- Sales price (excluding sales tax).
- Total cost estimate.
- Costs to date.
- Billed to date.
- Projected cost to finish.
WIP reports allow for better management of your jobs, according to Meibers, and help produce accurate financial statements.
“You can make smarter day-to-day decisions and be proactive instead of reactive,” he said. “Companies should use this data to help grow their bottom-line profits.”