Knowing your numbers is important to providing a quote to your customers and to be confident in your calculations. There is a final step after the job is complete that you can confirm your numbers and make adjustments to your future quotes or to learn from your estimate.
To wrap up our series on knowing your numbers where we wrote about overhead expenses and profit and how to calculate your labor costs along with production rates, we are discussing how to compare what your actual job expenses and profit was for the job that you estimated for.
Doing this after the project is complete will allow you to see where your numbers were off or where things went right in your quote. If you use our budget and estimate spreadsheet, you will be able to follow along with the process in which we breakdown our numbers by material costs, labor, overhead expenses, and profit.
Job Costing: Construction
Job costing is an accounting method in which actual numbers are compared to the estimated or quoted numbers, and we are going to take this post to discuss the advantages to using this system with every project completed in your business. It is a retrospective accounting system that allows you to compare how your estimate or quote performed in reality.
Job costing for construction is a necessity in our opinion. It helps you understand further about your numbers and adjust as you progress. It allows you to look at each variable of your quote or estimate and to see what went wrong and what went right.
For example, if you budgeted a certain amount of man hours for your project but it took 10% more to complete the project and this reoccurs on project after project, evidently your man hour estimating or your production rates are slightly off. Or you may not be factoring in something to your quotes like the drive to and from a job site.
Construction job costing is vital to the ongoing success of your business. Being able to properly calculate an estimate or quote is important. But being able to use a system that allows you to judge where your quotes are off in their calculations or where you can improve on your estimating, this is where you can really improve your business.
Characteristics of Job Costing
Job costing in construction involves precise record keeping in the field. The larger the project and the more people involved, the more complex it becomes. However, if you have the proper systems in place you should have no problem implementing job costing into your business.
The various characteristics of job costing are easy to implement in your business with some organization and a little coordination among your foremen, office staff, and yourself. It is important that you create a system for this that is easy for all to buy in to and support as you continue to evolve this part of your business.
Once you have a quote or estimate created, you should keep a copy of that available to you and recorded somewhere so that you are prepared when the client decides to proceed with your services. It seems obvious, but having a Google Sheet or Excel File for each of your quotes with a consistent title for each file like the last name or address of the customer and date it was created and put into a folder for each month or week of the year. That way you can reference the date it was created or even simply type the name or address into the search bar to find the quote or estimate. This took me a while to figure out in my business because organization is not my strong suit, but once I created a simple system for this it became much easier.
This is also great for recalling the quote in the future to be able to complete the job costing process. Along with this system, you should also create a consistent system for how you are going to keep records for the receipts in the field. A lot of vendors allow you to add a job name or number onto the receipt or order of your invoice. This allows you to create a name or number for that specific job that you can then add to the quote or estimate. From this quote or estimate, you can create a project description that includes the layout, notes, and any other important information for your foreman. From this, the foreman will know all of the information he needs for the project and the job name or number that they are to stamp on every receipt or invoice that they receive for that specific project.
In addition to keeping track of all of the receipts and invoices from the field, the foreman should also be keeping track of time for each task on the job site. If your foreman is not used to doing this, perhaps you will want to ease them into time tracking. You can be extremely fine with your numbers and measure how long it takes you to prepare in the mornings at the shop, how long it takes you to unpack at the job site and get started on the first task, how long each of the job site tasks takes you, and how long cleanup and pack down at the shop takes you.
This is a lot of note taking for a foreman that has never done this before. However, for the most part these numbers are for your production rates and efficiency factor that we discussed in another article. What your foreman should be reporting on for each project is the people present at each day on the job site and the amount of hours they were clocked in for. This is the information that is important to your job costing. You need to know how much it cost you for your labor in total from clock-in to clock-out for that project and who is included in that.
This not only affects your labor costs, but also your overhead expenses for that project. How many hours you spend on that project has a direct effect on how much money you spent on your overhead expenses. Remember that overhead expenses are the obvious and less obvious expenses from equipment to marketing and business operations costs that cost you money and are not specific to one project.
With all of this information that can be recorded in the field and added to a folder whether digitally or physically, the foreman can submit it at the end of the day, week, month, or at the end of the project. That way the office or yourself as the owner can input these numbers and compare them to your quoted or estimated numbers and see what went right and what went wrong in your estimate. You can see what you projected profit was calculated as and what it ended up being. You can see if your labor, materials, or overhead expenses costed you more or less than expected.
This is why job costing is so important to your business and why it is so effective to construction companies. Really any company that is sending out quotes and estimates to their clients will benefit from the implementation of this job costing strategy.
Objectives of Job Costing
As we stated, the objectives of job costing are simple. We want to know how our actual numbers compared to our quoted or estimated numbers. This reflection will help us improve our quoting and estimating process or even to identify something in our business that needs to be improved on.
For example, we can look at our labor costs and see if they cost us more or less compared to the estimated amount. If they were more or less, we can begin to discuss further why that was. Maybe one of the laborers missed a couple of days on the project because they were sick which allowed us to save money on the labor portion because they are not a skilled worker thus making us more efficient on site. Maybe that employee is the weak link of the crew. Perhaps the project cost us more in labor because we underestimated the amount of time it would take us to complete the project. Maybe we should be looking into improving our on-site efficiency by purchasing a piece of equipment.
Overhead expenses and labor costs will be very closely linked, but in our overhead expenses we can look into what equipment is being used on a daily basis and which ones are not. Perhaps there is a piece of equipment that just is not getting used and we could benefit from selling it and renting it when we need to. This also has tax benefits as rentals are inputted in the cost of sale of the job rather than being a depreciating asset that you will never see full value for financially. But that is a post for another day.
You can also identify your material costs and see how your estimating was. If you needed to get more materials, then perhaps your measuring was off. If this is a recurring theme, you will need to address it by ordering a certain percentage more than what you measure. This can also have effects on your labor time as somebody has to leave site to pick up more materials and drive back to the site.
Finally, and most importantly, you can see what your actual profit was for the project. What did your business earn from this project after all of the costs are taken into factor? What did you think your profit was going to be on this project? This is important to the future success of your business.
Advantages of Job Costing
There are several job costing advantages to you and your business. There is no doubt in our minds that if you are not yet using this system in your business, you should be considering implementing it or already be working on a strategy to get everyone on your team on board with this process of record keeping and comparing your numbers.
- Record Keeping
- Adjustments
- Profitability
Not only is this a good business practice that you and your crew should be getting used to, it will provide you with very important data over time in how you can be improving your business. Record keeping is just the first step to job costing, but it is also the first step to open a lot of doors in your business. It took me a long time in my business to start this thinking that it was just a waste of time. However, when I started to keep records my business became much more easier to manage with my production rates, job costing, and other systems that evolved from the data that I was able to collect.
This is the best part of job costing. You can identify what is going right and what is going wrong in your business. Where does your business need to improve or where do you need to improve in your estimating and quoting. Do you need to order a percentage more in your products so that it is available on the job site? Are you spending more time on a job site than you should be? You can then ask the foreman what happened and you can identify what were the mistakes that were made on the job site and how they can be prevented in the future. There is an endless amount of things that can be adjusted in your business from job costing.
Of course the biggest advantage to implementing job costing into your business is to know that your are profitable. Not midway through the year or at the end of the year which can be a shock for some, but from project to project you can know how your business is doing and you can adjust your future estimates accordingly. This way there are no surprises during the season or at the end.
How to Calculate Job Costing
Calculating job costing is as simple as comparing your quoted or estimated numbers that you sent to your client to the actual numbers at the end of a project. Having records of the expenses from the entire project is key to adding up the material costs, as well as records of the amount of hours for each crew member and total time on project are important in calculating your labor cost and overhead expenses.
When you are calculating your quote or estimate, you should be considering a few things:
- Material Costs / Cost of Sale
- Labor Costs
- Overhead Costs
- Profit
Make sure to check out our free course on how to price a job to walk you through each of these aspects of quoting or estimating a project to ensure that you have a strong grasp on how to ensure your business is making back the money it should be to stay in business for many years to come.
The job costing calculation involves adding up the same numbers that it actually cost your business to complete the project and comparing again the quoted or estimated numbers. There is no job costing formula. Knowing how to calculate job costing is as simple as adding and subtracting. Maybe a little multiplication and division if you are quoting and estimating.
The procedure of job costing has been explained in great detail throughout this article and we hope it brings you a lot of value in your business. The implementation of this in your business is the more difficult part. However, we have made it easier with you by creating a Budget and Estimate Spreadsheet that includes the job costing format for your business so you do not have to worry about making these calculations, the spreadsheet will handle all of the heavy lifting.
Construction Job Costing Spreadsheet
The importance of job costing cannot be talked about enough. You need to know that you are profitable. Not at the end of the year, but from project-to-project. You want to know that your business is able to perform as a business so that you can continue to operate and add value to your customers for many years to come.
The Budget and Estimate Spreadsheet will help you with all of your quoting or estimating needs from creating a budget to creating estimates. There is also an add-on available to you that will help you with your job costing. It includes a how-to video series on getting started with it in your business. You can even watch all of the videos to see if the spreadsheet would help you in your business before purchasing it.
You can also check out our free course on how to price landscaping jobs to help you with material costs, labor costs, overhead expenses, profit, and implementing job costing in your business.
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Estimate, Cost of Sale, Material Catalogue, Labor Time, Production Rates, Labor Costs, Employees, Overhead Expenses, Business Operations, Job Costing
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