Understanding and Calculating Your Job Costs
For many Tradesmen, job costing is the golden ring that they just can’t catch. Our company sees it all the time. If you are in the construction trades and you are wondering how to capture job costing so that you can monitor your company’s performance, this article will help guide you.
First, let’s understand what job costing is exactly – Job costing is the determination of all income and costs related to a given project. The costs are reflected as a percentage of the income so you can compare projects across the board and easily see if job performance is varying from one project to the next. Using a percentage will help you to find your ‘norm’ and your ‘goal’ and adjust your pricing and/or costs to meet your goals. It is actually quite easy to determine the cost of any given project as long as you are following some simple processes within your company to make sure that data is captured. We will talk about that next.
The capturing of job costing data is generally where contractors fall short. We hear any number of excuses but the most common are: ‘My guys have enough to do already’; ‘They aren’t going to want to do this’; ‘They aren’t smart about this stuff, they are good at _(name your trade)_, not paperwork’. All of these are reasons why the leader of the team has to be 100% behind the job costing effort. Most common best practice is to base the worker’s commissions or bonus pay on their job costing performance. They suddenly become willing and able to comply as soon as they find out their paycheck is bigger when they do. You do not want to be chasing them and babysitting the process, so make it very simple for them by preparing the forms they need in order to provide you with all of the data you need for your calculation: invoice, time sheet, and stock pull sheet. It is also advisable to provide them with a checklist that should be completed in order to submit the job as closed. The checklist might look something like this:
Job Number __________________
__ Customers Signature Accepting Completed Work
__ Payment Received In Full
__ Time sheet Completed
__ Stock Pull Sheet Completed
__ Helpers Time sheet Entry Approved
Notice that we added a job number to the checklist. If you really want to measure job by job performance, not just worker performance, you should assign a job number to all jobs. It’s just easier this way. You could have a shared spreadsheet document from which your workers can pull the next job number any time a proposal is accepted, or you can require them to call dispatch to obtain the job number. If you want to be really efficient, have each worker run their own set of consecutive job numbers and just have them precede each job number with their unique identifier followed by a dash. Example: RED – 25123. In this example, RED is the worker’s identifier (it doesn’t have to be a color, it could be a number or initials – anything you choose) and the job number is 25123.
It is pretty easy to calculate the income (also known as revenue) on a project. It is simply the total of all amounts invoiced to the client for work performed. Many contractors will opt to use only income that has been received in their calculation, so they will wait until all payments on the job have been received before calculating the job costing. By doing this, they avoid paying commission on a job that looks like it has satisfactory job costing, only to find out later that the client is withholding payment for whatever reason. If your bookkeeping is proper, you should be able to easily toggle between the amount invoiced on a job and the amount paid to determine if the project is paid in full – in fact most accounting software has a special report just for this purpose.
Measuring labor can be a little more tricky. Some service and repair companies pay commission only (be carefully to check that your state will allow this practice and structure your agreement accordingly). In these cases labor is not calculated until after the job costing is completed. They will often pay a different level of commission based on the tradesman’s job costing performance. For instance, if the company’s job costing goal is 50% and a worker’s jobs are coming in at 30%, you will want to reward them for their excellent performance with a higher commission rate. If their jobs are coming in at 75%, you will want to think about terminating them. These are examples, of course – you will want to run job costing calculations for a few periods before deciding on the acceptable job costing rates for your business. If you are paying hourly, use timecards. Any staff that tells you they do not have time to properly complete a timecard that reflects their hours worked is hiding something. Even if they are salaried, they should provide a timesheet so you are able to determine how much of their total time was spent on each job. Be sure to have a code for Administrative time (time spent filling out timecards will go here) so they have somewhere to put those hours and you know how much time they are spending not making money for the business. Use the timecard to determine the total number of hours spent on the project and then multiply that by the workers hourly rate. If they are salary, you can figure out their hourly rate by dividing their weekly salary by the total number of hours they recorded on their timecard.
If a helper or apprentice is needed on the job, that labor cost should also be figured in the job costing calculation. Whether you have your helpers schedule their job assignments by day, half-day, or hourly, their time should be recorded on their own timesheet indicating the project they worked on. Be sure to have the helper get their time approved by the managing worker on that job before moving on to the next project. Approval can be simply indicated with initials beside the time entry. Again use the timesheet to determine how many hours were worked on any given job and multiply them by the helpers hourly rate.
There are two ways to get materials: out of inventory or custom purchased for that job. Inventory in stock is the stuff your workers have in their trucks (truck stock) and the parts that you house in a warehouse or shop. You will need a list of all items that are stocked in those locations along with the purchase price of each of those items. Usually your supplier will be happy to give you that pricing if you send them the list of stock. Put it into a spreadsheet that lists the item in one column, the price in the next column, and then leaves plenty of room open for tick marks. Your workers will use a separate truck stock sheet for each job and tick off the items they are pulling. When they go to restock at the shop or warehouse, a different worker should review the ticks and restock the truck accordingly. If the truck stock count falls short, then you know that something got used without it being recorded and you will be able to follow-up on that right away to get it job costed. This simple process will eliminate theft since your workers know that every stock item that is pulled must be associate to a job and their performance will be effected by the cost of the stock item against their job.
Custom purchased materials are much easier to track. Your workers, or your runner if you have one, will make purchases at the supply house being careful to get separate receipts for each separate project’s purchases and to separate any stock purchases. Upon purchase, a picture should be taken of the receipt and shared to the Administrative email address with the job number in the subject line. If they are using a company credit card, every day you should be checking that no new charges exist for which receipts were not received. It is not suggested that this be done weekly, daily monitoring is really the best way to stay on top of company card use.
If you require any specialized equipment for a job, you will want to include the rental cost in your calculation. If you need to purchase equipment that will be utilized solely for the purpose of completing that job and cannot continue to be useful on other future projects, then you should include these expenses as well.
Now that you have all of the pertinent data you need in order to run a simple job costing calculation, follow these steps:
- Income – (Labor + Materials + Equipment) = Job Profit
- Job Profit/Income = Job Cost
- Job Cost x 100 = Job Cost Percentage
This simple job costing calculation doesn’t include your indirect expenses. Some examples of indirect expenses are: insurances, employer paid taxes on wages, interest and finance charges, vehicle expenses, equipment depreciation. An indirect expense is necessary to the completion of projects but cannot be tied directly to a single job. Instead it is paid as the normal course of business and then allocated to each job by way of a multiplier. That is a subject for another day.
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