Enhance Profitability Through Proper Job Costing
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A key metric of success for many companies is profitability. Most management teams are looking for new ways to expand profitability through new products, markets or pricing strategies. The truth is that profitability is easier to manage for some companies over others. For construction companies and contractors managing profit is crucial, but also quite difficult at times. Since no two jobs are the same it’s quite difficult to determine the actual cost of each project. There are several variables which need to be considered including labor, materials, supplies, machine rental and more. If not properly accounted for in the estimating process a construction company could lose a large chunk of anticipated profits. For this reason, effective job costing is necessary to ensure profitability goals are met. Unfortunately, all too often construction companies struggle with implementing an effective job costing process. To help clients, prospects and others optimize their job costing process, Hanson & Co has provided a list of best practices below.
Job Costing Best Practices
- Review and Optimize the Estimating Process – A robust estimating process helps to ensure the company identifies project costs correctly and prepares a bid that enables the desired profitability. Start the estimating process by arranging costs in the same order and categories as will be used during the project. This linear thinking will help to ensure nothing gets missed or goes unaccounted during estimating. This also helps accounting keep track of costs and identify where overruns are occurring. The end goal should be a thorough and comprehensive list of expected costs to complete the project.
- Change Order Process – Change orders on a construction project are often inevitable, and they can happen for many reasons. When a change order occurs, it’s essential to communicate with the customer immediately regarding the new project specifications, a detailed listing of costs (both material and labor) and an estimated completion timeframe. All of this will ensure that the customer understands the changes and agrees to pay additional costs. The last thing any project manager wants is to incur the expense of a change order but not receive payment for the work completed.
- Integrate Purchase Orders – It’s common for additional materials, supplies and other items to be needed in a construction job beyond what was initially ordered. Requests often come from the job site to order additional items to complete the job. Leveraging purchase orders as part of the job costing system is a great way to track these costs and allocate the expense to the corresponding job. Purchase orders also reduce the likelihood of surprise expenses. When transitioning to the use of purchase orders for the first time, it’s important to make vendors aware of the new policy.
- Communication with Accounting Staff – Lack of communication between the field and accounting team is a common problem that often results in errors with cost tracking. It’s essential to ensure that corresponding job information is being communicated along with each purchase made. Without this information, the accounting department will not able to accurately match costs with specific projects, which results in inaccurate cost reports.
Maintaining profitability is essential to the company’s vitality. The key to achieving this objective is an effective job costing process. If you have questions about job costing or other construction accounting issues, Hanson & Co can help! For additional information call us at 303-388-1010, or click here to contact us. We look forward to speaking with you soon.