Without Job Costing, You’re Blind

Despite the many financial risks builders and tradies face, some still do not implement thorough job-costing procedures. For them, job costing is something only the largest and most organized businesses do – a misconception that partly explains why so many construction and trades businesses go under.

In fact, job costing doesn’t have to be a major distraction or expense. It only requires a willing management team and a general knowledge of accounting software, which practically all builders and tradies already have. From there, you only need to establish a job-cost budget for each project based on figures provided by your estimate. This budget can be as simple or as detailed as you like. It could become a series of small estimates. One estimate, for example, may predict how much concrete will be poured for a foundation and how many hours of labor will be required to complete that pour. Or an estimate may predict costs that will be incurred by subcontractors and/or miscellaneous costs such as equipment rentals.

From these estimates, you can then create an accounting system that enters supplier invoices and subcontractor invoices, payroll, customer billings, etc. As costs are accrued, they are tracked and compared to your estimates. Accrual accounting recognizes an expense as soon as it is incurred, not when it is paid. With a job costing system, it is not necessary to actually pay an invoice or a payroll for that cost to be included.

There are numerous types of readily available accounting software and online applications that can be used to track job costs, and most are relatively inexpensive. This software allows you to compile actual costs and compare them to budgeted costs while the project is under way, not after it has been completed. This gives you time to make adjustments when things aren’t tracking the way you expected.

Builders and tradies will find a job-costing system to be enormously beneficial. They’re particularly helpful in these four areas:

• Financial Forecasting: To maintain credibility with financial partners and lenders, you must be able to successfully forecast the outcome of projects. Those who cannot do this with confidence are going to find it increasingly difficult to get loans or additional lines of credit.
• Job Management: With the information from job-costing analyse, you can better evaluate progress and efficiency and better motivate staff to reduce costs and increase output on any given project.
• Progress Claims Support: Job costing can provide support for contractual claims. 
• Future Tenders: Job costing can provide information that helps you in tendering or quoting similar types of work. 

All builders and tradies should routinely implement job-costing, which can be tailored in any number of ways. If you don’t do this, you have nothing but assumptions to rely on in identifying you business’s strengths and weaknesses. That’s a dangerous way to operate a business, particularly for a builder.

Want to learn more about managing your business? Have a look at our How To’s or read more of our latest Blog Posts.