Dear Jayme,
I hear about job costing, but I'm not clear on what this is or how it would apply to me. What can you tell me?
Max
Dear Max:
Say for example, your gross margin dropped ten points. What happened? How can you make sure it doesn't happen next month?
Gross margin is calculated by the revenue and cost totals for the month. "Totals" is the key here-they're made up of lots of individual labor, materials and overhead charges, and as one big number, they tell a limited story. If you code and assign every cost to a specific job, however, that's job costing, and that means you can look at each job as its own little profit and loss.
These questions might answer to uncover the reason for the lousy margin:
- What were all the jobs we closed last month?
- What was the margin on each one? (You'll see the culprits.)
- For the culprits, what were materials and labor cost for each?
- How did these costs vary from the amounts we assumed in the bid?
- If materials, was it a usage issue or a price variance?
- What were the callback costs? How did these compare to standard?
- Which crew/site manager/service tech was responsible for the culprits?
How would you go about digging up the answers? A good construction job costing system will let you get these answers in minutes. And you can also do the same thing for any job still in progress.
A second big benefit is the ability to analyze costs over a longer period and identify trends and opportunities. Are bid assumptions way off? Better fix 'em. Thinking about a big push in one market? Better make sure that market is actually profitable for you. Is Alphone's crew always the most expensive per job? Better know why. All of this is crucial to your business, and you won't really know it without job-level cost detail.
A couple of things to know:
- Job costing means construction accounting software-There are firms that assess your requirements and come up with the best five or six options for you, for free and without bias. One is at www.findaccountingsoftware.com. ( I have no referral relationship with any vendors I mention).
- The set-up is a significant project-The account structure, input methods and reporting, etc., all require thought and effort. And you must train employees-if Tony sends 100 2x4s to the Smith job, he has to tell the system he did that, and you have to train Tony how to do so.
It's an effort to get job costing up and running at first, but like all good systems, it'll create benefits for many years, and it's essential to really understanding your business.
Cheers!
Jayme
Construction Business Owner, June 2010
