Improve your bottom line with job costing strategies.
By Dan Nolan III
At IFAI Tent Expo in West Palm Beach, Fla., one of the most well attended seminars focused on job costing. Why? Job costing can improve operating efficiency; it can help to determine which jobs are winners and which are losers; it can help your business manage its growth profitably.
Bill Kosty, CPA, and presenter of the Tent Expo seminar, defines job costing as the process of tracking revenue, direct expenses and overhead—by job.
Kosty suggests beginning by reviewing your current pricing method. Are you pricing to your market or following the competition? Are you the pricing leader in your market, but only just barely? If asked whether you are making money on every job, could you answer yes?
No matter what your existing strategies, you may be able to find ways to improve the process by addressing the three elements of job costing: tracking revenue, direct expenses and overhead.
Tracking revenue by job is the most straightforward: record accounts receivable by project. Enough said. Most likely, you do that already.
Managing direct costs
Next, identify—and manage—direct costs. Tracking direct costs by project is the area in which you can reap the most benefits of job costing. As a manager, you control labor, transportation, sub rentals and purchases for resale. For a benchmark, this is easily tracked as a percentage of sales. You can control transportation and purchases for the individual job. For travel, track ancillary mileage to cover the cost of your staff using the vehicle to move around the city to which they travel. Look for other ancillary costs that many managers overlook, such as go-backs, job-related mistakes or changes that you really can’t cover.
Kosty defines overhead as all nondirect business operating costs. Calculating overhead will differ depending on how you classify expenses in this category. Kosty suggests using a historical percentage of revenue from your profit and loss. There are not as many opportunities to cut overhead expenses without impacting the daily business operations. Eliminating office staff or outside services comes at an expense because someone has to fill the void left by eliminated staff or services. You can eliminate coffee or cleaning services, but the money saved will be minimal. The bottom line is that overhead expenses do not move much. Your efforts will be better served by efficiently managing direct costs.
After designing a job costing system that works for you, make it all come together by consistently sampling jobs and comparing the estimate to the actual job cost. That way, you can make many of your toughest financial decisions much easier.