The project sounds good and at a glance, the dollar signs look good too. Be careful, though. If you don’t have a way to assign expenses to each project—-aka job costing—- you don’t really know how and when your company is actually profiting from the work. Read on for pointers to help you protect your margins and move your contracting company forward.
Appearances Can Be Deceiving
Shauna Huntington of Small Business Bootcamp offers a cautionary tale about a construction company that seemed to be growing every year, hiring staff, increasing customers and bringing in $11 million in revenue. However, its actual profit had actually declined to $350,000, because:
Sales staff were signing new projects regardless of margin, administrative staff weren’t capturing the right data to produce relevant financial reporting, ownership and management struggled to interpret the financial data they had, preventing them from making informed decisions that would have had a positive impact on the bottom line. Project margins were too low to sustain the overhead costs of the business….Through review of the company’s margins, it was clear that low margins were one of the biggest problems. Because its margin percentage was so low, it did not serve the company well to increase revenue. Each new dollar of revenue did not produce enough margin to cover the increased cost of doing business.
Understanding and solving gross margin issues is not a quick fix, though it is clearly vital, and entirely possible, via diligent attention to job costing. By regularly subtracting the materials, labor, equipment and supply expenses of a project from the revenue it brought in, company leaders can assess whether or not a project was actually profitable. Over time, the discipline of job costing on every project can lead to dramatic improvements in business performance, because job costing gives business owners intel to guide all the big and small decisions that stack up to success. Specifically, “Job costing is the accounting activity of assigning your revenue and expenses to the specific jobs/projects that they relate to. This allows you to see the profit you’re making on each specific job instead of only seeing your revenue and costs in total.” Huntington offers this guidance on implementing job costing:
Implementing job-costing is no small feat. Job-costing requires increased tracking, additional tools, and participation from more than just the accounting team. With job-costing, every cost associated with producing a project is assigned to that project or customer – materials, labor costs, equipment and tools. Every cost should be assigned. For example, labor cost is not just the hourly wage or salary paid to a team member. Labor costs include benefits, taxes, workers comp, retirement match, paid time off and any other costs associated with that team member. While it is a big undertaking for any business, the insights and data job-costing provides are invaluable.
Job Costing In Action
In order to get the most from job costing at your business, it’s important to be disciplined and consistent about how revenue and expenses are assigned to projects:
For every expenditure, note which project the transaction was for. When you enter that cost into your accounting system, you’ll assign it to that job. As you bill customers, you should make sure that you record the revenue to the specific project as well. All revenue and all costs should be assigned to a project. If you have administrative or overhead expenses, you can assign those to an “Overhead” project … .After recording all revenue and expenses to each job, you’ll be able to run profitability reports for each job … .Once you have this information, you should use it to evaluate your business. If it’s clear that you are making better margins on one type of work versus others, consider focusing on getting more of that work. Or, spend some time adjusting your pricing on the other types of jobs so that you can achieve better margins on all.
Analyzing and comparing the costs and profits behind each job puts the spotlight on
the niche areas where you are most likely to truly win, and informs decisions about marketing, bidding strategies and more. For example, looking at your total revenue from three projects, you may conclude that you are running a solid 30% profit margin, but job costing is likely to help you do even better. Through a deeper analysis of the projects, you may discover something like this: “Two of the jobs…have greater than a 60% margin, while another actually lost money. If those two jobs that are a higher margin are similar in type, this might tell you that you should focus your effort on those types of jobs. You will also want to dig into the details of Job #2 to see where you went wrong.”
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