Job Costing: What It Is And Why You Want It
By Jayme Broudy, Contractor's Business School
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:
Your gross margin dropped 10 points. What happened? How can you make sure 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 the Jones Remodel as its own little P&L (profit and loss statement): revenue, labor, materials, callbacks, etc. and see where your money’s going job by job.
Regardless of whether you had a job costing systems in place, here are the questions you 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? Without job costing you’d have to wade through piles of records, but a good job costing system will let you get these answers in minutes. And you can do the same thing for any job still in progress as well.
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 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 software. This can be confusing but there are firms that assess your requirements and come up with the best 5 or 6 options for you, and do it for free and without bias. One I’ve talked to is findaccountingsoftware.com. (As always, I have no referral relationship with any vendors I mention). Do your own due diligence before you make a commitment.
• Setting things 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.
The greater the detail you capture as you go along, the quicker and more powerful your troubleshooting and analysis will be. 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
Jayme Broudy is the founder and principal of Contractor’s Business School® - a coaching, training and consulting firm specializing in helping contractors produce more profit in less time. Since 1993, Jayme has worked with hundreds of contractors in many specialty areas to build successful stand-alone businesses. Visit www.contractorsbusinessschool.com/assessment to complete a free Business Analysis, or call (800) 527-7545 to get the FREE CD "10 Key Strategies to Build a Business that Works."
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