Without Job Costing, Construction Business Owners Operate Blindly

Despite the many financial risks contractors face, some still do not implement thorough job-costing procedures.

For them, job costing is something only the largest and wealthiest firms can afford-a misconception that partly explains why so many construction companies 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 contractors already have. From there, a contractor only needs to establish a job-cost budget for each project based on figures provided by the estimator. This budget becomes 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, contractors can then create an accounting system that enters vendor invoices and subcontractor billings, payroll, customer billings, etc. As costs are accrued, they are tracked. Accrual accounting recognizes an expense as soon as it is incurred, not when it is paid. With job costing software, 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 that can be used to track job costs, and most are relatively inexpensive. With the use of these software packages, contractors can assign a Construction Specification Institute (CSI) cost code to each cost incurred. This allows managers to compile actual costs and compare them to budgeted costs while the project is under way, not after it has been completed. This gives managers time to make adjustments. For example, contractors can see whether they have been double billed, if an invoice was double paid or whether a change order was really necessary.

If a contractor uses field reports that show how much work remains to be done on a project, job-costing software can look at how much money already has been spent and project the final overall cost. With access to this up-to-the-minute information, contractors can immediately see which costs have fallen out of line.

The information needed to effectively track job costs depends on a contractor’s specialty. If a contractor specializes in concrete paving, for example, job costing needs to track man-hours more than just dollars spent. For pavement contractors, knowing how long it takes crews to perform tasks is vital information. Toward this end, contractors need to track tasks that account for 80 percent or more of a crew’s time. Usually about 20 percent of all tasks account for 80 percent of the labor time.

Saw-cutting or grinding, removal, placement, rolling, traffic control and clean-up are some of the tasks that should be considered. For each of these tasks, a code can be established. Those codes can then be recorded on time sheets created specifically for each job. The time sheets should be filled out daily. This information can then be stored in a spreadsheet, which is the easiest way to analyze it. Most accounting packages do not let users analyze data across multiple projects, but the data can be exported to Microsoft Excel where it can be grouped and sorted in various ways. The information then can be reproduced in charts and tables (such as Pivot Tables) where it will reveal trends and averages.

Depending on the concrete contractor’s selection of coded tasks, spreadsheet information can provide valuable insight into a project’s various aspects, including the total amount of square feet of pavement sealed, square feet of pavement patched, pounds of crack filler used, square feet of parking lot swept, etc.

Most contractors usually find that their costs break down into fairly small or fixed amounts. Financial exposure is largely through productivity variation. Cost reporting can consist of a comparison of actual and planned man-hours for each of the cost codes. This makes allocation simple and quick. And without concern for varying wage rates, it eases the task of comparing jobs through time.

Regardless of specialty, contractors will find job-costing programs to be enormously beneficial. They’re particularly helpful in these five areas:

• Financial Forecasting: To maintain credibility with financial partners and bonding agents, contractors must be able to successfully forecast the outcome of their projects. Contractors who cannot do this with confidence are going to find it increasingly difficult to get loans or additional lines of credit.
• Job Management: With data from job-costing analyses, project managers can better evaluate progress and efficiency and better motivate staff to reduce costs and increase output on any given project.
• Claims Support: Costing can provide support for contractual claims. It must provide details of the actual cost of identifiable variations and provide background to more complex claims in the form of productivity comparisons across time periods, operations and jobs.
• Future Tenders: Cost reports can provide information that helps estimators in tendering similar types of work. These reports should highlight and separate those variable costs that require special discretion in tendering, such as productivity, wastage rates, overheads, etc. Data needs to be accurate.
• Tax Reduction: Job costing also can help contractors bring their tax liabilities under control. For many contactors, the tax burden has grown since passage of HB3 in 2006. Essentially, the law changed the Texas franchise tax from a taxed based on net income, or taxable capital, to a gross margin tax. Most affected are those contractors who, to avoid the franchise tax, restructured using limited partnerships.

A job-costing program can be broad or limited, depending on the complexity of work performed and the breadth of information a contractor needs. For assistance in setting up a job-costing program, including the selection of software, contractors can contact certified public accountants who work regularly in the construction industry. Some trade associations also provide seminars and background material on job-costing systems.

All contractors should routinely implement job-costing programs, which can be tailored in any number of ways. Without such a program, a contactor has nothing but assumptions to rely on in identifying his company’s strengths and weaknesses. That’s a dangerous way to operate a business, particularly a contracting business.

Construction Business Owner, December 2009