Ask a group of contractors if they job cost, and the majority will respond positively. However, many of them are operating under a misguided notion of what true job costing is. Is it merely accumulating the costs of a project and then comparing those costs to the contract price at the end of the project to see how much money the job made? Is job costing driven only by the accounting department? The answer to both questions is a resounding no. Job costing is much more than an accounting function—it is a project management tool that can be used to improve productivity.
Contractors use one of two job costing methods, which I call passive and active. While the majority of contractors would say they job cost, many of them are missing out on the bottom-line benefits of the active approach.
While the accounting department plays an active role in a firm’s finances, it only can provide those costs that have been accumulated to date. The accounting department only can collect the information and generate the reports that are needed for cost projections. The accountant is the historian of the company and can tell you only what has happened in the past. This is the passive method in a nutshell.
Passive job costing, as a form of project management, would be similar to driving a car forward by looking through the rearview mirror. You wouldn’t see the obstacles or potholes until after you hit them. Passive job costing fuels a
reactionary environment of constant fires that need immediate attention.
Job costing is an active, ongoing process that involves each key employee who is associated with the performance of the contract, including key field people and the project manager. Job costing should be used as a project management tool.
Active job costing requires four steps:
- Accumulating the costs to date
- Projecting the costs to complete, which is a forward-thinking process
- Using the information to change (improve) the outcome
- Performing an end-of-job autopsy
If you were to survey contractors, you would find that a higher percentage complete step 1, fewer complete step 2, and even fewer use step 3—which is the most critical step that will have the most impact on improving your bottom line.
As a project management tool, effective job costing is mainly about the time and costs remaining to complete a job so that corrective action can be taken if needed. I have often heard that once a job is going south, it is hard to turn it around. This is because the practice of passive job costing doesn’t show that trouble is on a job’s horizon until it is too late to do anything about it.
The job costing process begins as soon as the job is turned over to project management. See Figure 1 for a list of the components and benefits of active job costing.
The job foreman and lead personnel should actively be involved in the job costing process. After all, they have the most daily influence on how much a job will cost to complete. They must be aware of the costs accumulated to date and, with the help of the project manager, be able to forecast the time and costs to complete the job as it progresses. If they don’t have the skills to do this, train them.
Active job costing is a critical control process that will enable you to know which jobs—and which employees—are generating your profits. If you aren’t practicing active job costing now, implementing it will improve your bottom line. It is a fundamental business practice for any economic time.
Active Job Costing
- An estimate based on direct and indirect costs to complete the work
- An accounting system that is capable of capturing and charging costs to the appropriate cost codes
- A job estimate that has been broken into intermediate phases that reflect the construction plan to perform the work—it is impossible to manage a job for which the costs are lumped together.
- The total costs for each intermediate phase, separated by labor (including man hours), materials, equipment and subcontractors’ costs
- A daily field report that is completed by the foreman/superintendent that allocates the man hours worked in each phase
- A weekly man-hour report that requires the foreman/superintendent to track job-to-date man hours and to project the man hours required to complete each phase
- A project management review of the weekly man-hour reports to identify phases that may require corrective action
- A job cost summary report that is periodically generated (at least monthly) and accumulates all the phase costs to date
- A documented monthly review process to project the costs to complete each phase of the project
- A close-out meeting to review the final time and costs as compared to the estimated time and costs, along with explanations for variances in case estimated productivity rates need to be changed in future bids
- Knowing the estimated time and costs of a construction project from the beginning enables the project manager and job foreman to preplan the project and establish intermediate milestone dates to protect the estimated gross margin (gross profit) of that job.
- Because it is a forward-thinking process, job costing reinforces project planning.
- It gives the job foreman and his team benchmarks from which they can measure their own performance. It provides a method for them to keep their own score—a strong motivational tool.
- Employees are better able to connect their performance—what they do each and every day—to beating the estimated costs.
- Sharing job performance and job cost expectations is a critical ingredient to being able to hold the project manager, job foreman and construction team accountable for their job performance.
- Actual productivity is tracked, and estimated productivity rates can be verified and/or revised for future bids.
- An estimated final cost that is based on how the job is performing will enable your accounting department to generate more accurate monthly reports—financials that you can trust.