Job costing is an unavoidable part of a builder’s daily routine. The ability to capably and precisely estimate the work cost of a project can reduce uncomfortable surprises, or it can lead you to disaster.
According to IBIS World, in 2019, there were over 360,000 businesses in the construction industry in Australia. That’s a lot of competition!
Your sheer advantage is all the mistakes (and wins) by other business owners because they give you an upper hand on what works or will likely flop. Companies that don’t scrutinize difficult facts seriously, especially those with carefully tracked profitability, cannot grow at all. Being aware of the cause and reason for failure grants you guidelines on the actions to take for your business’ success.
A job costing system allows you to answer essential questions about the financial health of your company and these include:
• What is your main source of income?
• How is your production report looking? (Responding to this one will tell you the exact estimate to consider)
• How much profit of your profit can be used?
What is job costing?
In its least complex terms, job costing is a process that assists construction businesses to figure out the budget for any new projects. The operating cost calculation formula is helpful in estimating the materials, labour and any indirect costs needed for the project. The fees do be charged can accurately then be determined.
JOB COSTING FOR CONSTRUCTION TIPS
Trying to implement job costing in your construction business but not sure where to start? You’ve come to the right place. We’ve compiled four beginner tips that will help you to form a foundation for construction job costing.
1. Establish your goals.
You’re obviously in the construction business because you’re an expert, but that says nothing about your financial literacy. This is normal but without defined goals, it’s going to be almost impossible to track your progress. A crucial step to take if you’re a newbie in the construction industry is to pin down your business goals and run them through stakeholders.
The best decision is to understand your business's current troubles and how they can be made better to a point where your business is running smoothly. You will also find it useful to spend time with a team that is always on-site. They are in proximity to the information you’ll need to decide on your job costing (for example estimate amounts for building materials, tools, etc.), which may not be clear on-site.
Settle for a job cost that will make sense for your goals but won’t add unnecessary stress on the team that will be on site.
2. Mention all job information
The magic of job costing is always in the details. Resist the urge to ignore or look over any of the fine points. Being brutally honest about your investments upfront will be beneficial as soon as you start to see results. In the meantime, keep bettering your information process.
3. Keep an eye on your labour
One in four companies shut down for mistakes made in estimating the cost of labour. This is a frightening statistic. Chances are that labour constitutes a large number of your costs. If you’ve been in the business for a while you also know that it is difficult to precisely measure the cost of labour. Keep in mind that the profitability of your business can only be clear IF the labour hours have been accounted for accurately. Don’t forget to calculate your contractor’s hours here too! Measure accurate details and insights from your team, to make them understand why it is critical to accurately measure labour hours.
4. Take advantage of software
Save yourself time and stress of doing job costing manually by switching to job costing undeniably convenient software. This eliminates the tedious aspect along with human error. A job costing software such as Xero will integrate seamlessly with the tools that you are likely already using such as QuickBooks, so you won’t have to worry about migrating complex data. The quicker you switch to job costing software the sooner you’ll see a change in your construction business.
How to best do your job costing
The best angle to begin job costing begins with splitting down the project. Begin with each main aspect like the foundation. This will then be assorted into the work required to finish that aspect. Bigger construction companies like to add a coding system to keep this organized. These codes are distinctive, and of course, this depends on the amount of detail as well as the size of the company. Finally, once the complete list of tasks is compiled, the next stage is to divide them into labour, materials, and overhead.
It is always critical to have an accurate picture of how much your labour costs, as mentioned above. Calculate how much it costs per day to have your employees as well as contractors on the job. This can be done by calculating how long the job is going to take, then multiply that amount by employee costs.
Remember to add their hourly wages, taxes, overtime, insurance, and any other thought costs that come to mind. Contractor Labour costs are also important. Identify which contractor you need and for what project as well as if they are available to take up the job. Scrutinize their estimates when calculating for the whole project. Of course, their estimates may not be as accurate as yours possibly is. This is the perfect time to build in some special terms just in case their estimates are inaccurate.
This refers to both direct and indirect material costs. Direct materials are things such as wood, electrical wiring, steel, and concrete. The indirect costs would refer to more incidental items such as screws, nails, in perhaps fasteners. If you are hiring out any other equipment, make sure you factor it in the material costs. If your contractors are more experienced, they will advise you to include charges such as possible wastage and costs of material delivery.
Unless your construction business is being run from the back of a truck, overhead expenses such as rentals and administration are automatic. Business requirements such as taxes and infrastructure demand to be put into account. For every job that you do job costing for, make sure that all the relevant expenses are accounted for. If a job requires more administration, it’s reasonable to allocate more overhead costs to that job. Nonetheless, overhead MUST be considered when job costing.
Planning and integrating a brand-new job costing system into your business (and getting your team to comply) is not always simple. Sticking to new habits can however rapidly transform the profitability of your business. Thinking of growing your business from its current stage? Book a consultation with us for an accountant’s opinion on your construction business.