How much money are you making on that job that's wrapping up? Not sure? You're not alone.
Unfortunately, many contractors-some who are quite successful-are not able to effectively measure their real profit on many jobs. In a business that is labor and material intensive, with razor-thin margins and innumerable variables, tracking real profit without a high degree of accuracy can be a fatal mistake.
Beyond just knowing where you stand so you can plan for the future-two important factors-the ability to stay in business and maintain good cash flow can be threatened if you are unable to show a lender or a surety that they are making money on their jobs.
We have worked with hundreds of contractors with a variety of systems for tracking real profit and have found that the most successful among them follow a number of key steps and measure certain vital components. Among the most important are those that affect job costs, so that's the segment we'll examine first.
Job Estimating
In order to make a profit on any job, a number of variables must be accounted for and carefully considered; one of the first to think about is job estimating. You could do excellent work, manage the project well and complete the job on schedule only to lose money on it because you made inaccurate assumptions when you were estimating the job.
An important part of job estimating is factoring in a certain amount of gross profit, usually measured by percentage. However, to figure in a proper percentage, you must have a good handle on other aspects of your estimate. Otherwise, the figure that was initially a solid percentage will wind up being a much smaller percentage of what you actually spent on the job when the final costs are calculated.
Many contractors fail this important area, and when their profits are smaller than anticipated, they simply attempt to make up the difference on future jobs by increasing their fees and expecting their workers to get the work done in less time. This rarely, if ever, works and does not address the fundamental problem-a lack of knowledge about what the job will cost. This issue leads to numerous other problems and can prevent the contractor from effectively managing his business and productivity.
Successful contractors break an estimate of the job into phases and plan the way it will be billed. This helps them analyze when costs and billings will occur during the life of the job. The contractor can then project cash flow for the job and plan accordingly. A contractor should do his or her best to break down the schedule of values to his or her benefit, resulting in positive cash flow from the beginning of the job.
Job Costing
A key component of tracking real profit is accurate and thorough job costing. Job costing is the system you use to account for costs associated with each job. If these figures are not accurate, you may wind up forecasting false or inaccurate profits on a job. When the final accounting is done, you may have actually lost money on the job. In some instances, depending on your financial systems, it may be difficult to actually track your job costs; you could wind up losing money and not understand where those losses stemmed.
There are a number of key job costing components, all of which must be carefully analyzed and accounted for: (Not every component will be applicable to every contractor.)
Labor
Obviously, if you are not a general contractor, labor is one of the largest single cost factors of any job. It's unlikely to be overlooked, but can easily be underestimated. These costs can be tracked against the budget based on hours or dollars..
Materials
Following close behind labor is the cost of materials. Also a seemingly simple concept, this cost would appear to be the actual dollars paid for the materials
