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 see if job performance varies from project to project. 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 relatively 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 why the team leader must be 100% behind the job costing effort. The 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 more significant 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 to provide you with all the data you need for your calculation: invoice, timesheet, and stock pull sheet.
It is also advisable to provide them with a checklist to complete to submit the job as closed. The checklist might look something like this:
- Job Number
- Customers Signature Accepting Completed Work
- Payment Received In Full
- Timesheet Completed
- Stock Pull Sheet Completed
- Helpers Timesheet Entry Approved
You could have a shared spreadsheet document from which your workers can pull the following 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.
- Income – It is pretty easy to calculate a project’s income (also known as revenue). It is simply the total of all amounts invoiced to the client for work performed. Many contractors will opt to use only income 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.
- Labor – Measuring labor can be a little more tricky. Some service and repair companies pay commission only (carefully 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 – 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 member who tells you they do not have time to complete a timecard that reflects their hours worked properly is hiding something. Even if they are salaried, they should provide a timesheet so you can 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 spend not making money for the business.
- Materials – 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 stocked in those locations, along with the purchase price of each item. Usually, your supplier will gladly give you that pricing if you send them the stock list. Put it into a spreadsheet that lists the item in one column and the price in the next column, leaving plenty of room for tick marks. Your workers will use a separate truck stock sheet for each job and tick off the items they pull. When they 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 associated with a job, and their performance will be affected by the cost of the stock item against their job.
- Equipment – 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.
- Final Calculations – Now that you have all of the pertinent data you need 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