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August 7, 2024The Importance of Job Costing in Constructionby NJBA Master Sponsor Dan Murch, Blue Collar Back Office Founder & Owner.
In the construction sector, precise financial management is crucial for achieving both profitability and growth. Job costing is a powerful tool that provides accurate information, helping companies make strategic decisions to enhance their operations and reach their full potential. This article explores the significance of job costing, key areas of focus, and best practices for implementation.
Job costing is essential for any company in the construction sector. It not only provides more accurate information but also helps make strategic decisions to improve and grow the business. There is a difference between being profitable and reaching a company’s true potential. Many builders see their profits and think, “I’m making money. My bank account is bigger this week than last week, or this year compared to last year. So, I must be doing a good job.” And to some extent, this is true. However, reaching true potential means maximizing what the company could achieve and focusing on the right areas that drive the business and its growth.
Increasing revenue without making profits only creates more problems. The goal should be to generate profits, and one of the ways to identify areas in the industry and the company where profits can be made is through job costing. This process helps identify the areas of the business and the clients that are generating the most money and eliminate the areas that are not.
Job costing allows for the breakdown of overhead expenses, such as rent, insurance, advertising, internet, and cell phones. These are overhead expenses, and as the business owner, your salary should be included in these overhead costs. Ensure you are paid regularly and, as the year progresses, either quarterly or annually, decide to withdraw additional disbursements as needed. Including your salary in these calculations ensures that, when setting prices and calculating job costs, these are covered. Every company has a different percentage of overhead, but it is generally calculated as a percentage of the cost of goods sold.
By looking at each individual category of the business, it is possible to see where money is being made, where it is being lost, what truly drives the business and what does not. This allows for a focus on the areas that need to be developed.
Additionally, regularly calculating job costs on a client-by-client basis allows for running profit and loss statements per client. Who is the best client? Who is really helping the business? Having this information allows for informed and strategic decisions, which is the primary goal of job costing.
Best Practices for Job Costing
It is possible to create summary sheets, comparing the year to date with the previous year and the year-to-date comparison difference. For example, if sales have decreased but net profits have increased, this could indicate that, despite having fewer sales, projects were better managed, increasing efficiency and profitability.
Job costing and budgeting also give ownership to the people working in the company, especially project managers. If they know their budgets and expectations, they can better focus on their tasks, executing jobs more efficiently. Sharing this financial information with project managers helps them understand the goals, manage expectations correctly, and foster a sense of responsibility.
For example, if sales decreased in 2023 compared to 2022 because the previous year had more work than could be handled, this might have affected the ability to control jobs adequately, reducing net profits. This year, with fewer sales, projects could be managed more effectively, allowing time to cultivate relationships with clients and suppliers, and, as a result, increase profits.
In summary, job costing not only improves the accuracy of financial information but also allows for strategic decisions to optimize performance, maximize profits, and reach the company’s true potential.
If your construction company is looking to refine its financial management and improve profitability, consider consulting with our accounting experts. In addition to specializing in accounting with Blue Collar Back Office, we have been running a construction company since 2005, so we know firsthand all the intricacies of the industry. Contact us today to learn more about how we can assist you in reaching your business goals.