By Mike Crabtree
Job cost accounting is the process of assigning project costs incurred to a specific job. This term is widely used in the construction industry, and it refers to allocating costs to individual construction projects.
The issue with job costing is that it’s an all-or-none commitment. There is no value in getting limited job cost reports that only include some of the job costs. But running a construction business without good job costing is like driving on a road without a map. You might end up someplace, but you don’t know if it is the right place.
A good job-costing system provides accurate information on how much was spent to complete a job. When comparing that to the income for the job, the gross profit can then be figured. When a job is bid, the cost components of that job are determined to create an offer. Why, then, do so many companies fail to follow through by reviewing projected spending at the completion of a project? Every time one more dollar than anticipated is spent, the net profit is reduced by that same dollar.
The following key information is required to develop an accurate job cost report:
- Equipment and Materials. Whether equipment is purchased specifically for a job or equipment that comes from the warehouse is used, it is important to know how much the equipment and materials ultimately used on the job cost.
- Labor and/or Subcontractors. The second component of a good job-costing system is the ability to track both labor dollars and labor hours used on each job. This requires the use of timecards and some time tracking capabilities.
- Overhead. All too often, overhead is overlooked in job costing, yet it can be crucial. Jobs aren’t created in a vacuum, and proper allocation of company overhead should not be forgotten. Overhead items to be allocated can include:
- Office Equipment and the cost to keep it in use
- Computers and their software
- Interest charges on construction loans
- Salaries of those not directly working on the projects but overseeing them and the administrative staff that support them
Implementing job costing requires time, a good understanding of what’s required, the right software, patience and persistence. Why should a company invest the time and resources to implement job costing? Here are four benefits:
- Proactively respond to changes. Effective and timely job cost reports comparing the actual costs to the amounts estimated allows project teams to identify trends and potential issues on the job. The sooner that adjustments are identified, the better equipped the team is to correct them.
- Improve profitability. This is always a favorite benefit from an effective job-costing system. As management is reviewing the reports, it will become clear where savings may be obtained resulting in increased profits.
- Manage the team and progress of the job. Performance that is measured, improves. As leaders monitor the jobs, teams will improve their performance. This lets the owner assist the team as required. For example, when evaluating the progress, a leader may see that 50% of labor is spent on a job, but the job is only 40% complete; is this expected or does an adjustment have to be made?
- Enhance estimating for future projects. When costs are identified by job, it enables companies to understand what it really costs to complete a job. This information is valuable in managing the current job but also when evaluating and estimating upcoming projects.
Mike Crabtree has over 20 years of experience in the commercial construction industry. He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune. Triune is a leading, integrated, design-build General Contractor in the Southwest region of the country.
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