Accurate job costing
Job costing is one of the most important tasks you can do for your company. Unfortunately, many owners are too busy to job cost or their dislike of math or bookkeeping keeps them from it. If you are the type who is intimidated by math, this article is for you.
As you read on, you might find yourself feeling a little skeptical and wondering how some simple math can possibly make that much difference in your bottom line. However, I am convinced that it is no coincidence that, of our 7,000-plus clients, the ones with the highest profit margins are the ones who track their job costs.
Here are a few easy steps to help you achieve healthy profit margins.
A big question
First, you should ask yourself, “If I am going to lose my shirt, am I likely to lose it in labor or in material?” In other words, if you miscalculate on your bid, will you blow it in man-hours or in other unforeseen job variables?
A common misconception in the green industry is that construction jobs are more profitable than maintenance jobs. I believe that this misconception is perpetuated by those who job cost maintenance jobs by the same methods that they use for construction jobs. But job costing maintenance is very different and should be estimated differently. To job cost construction, you add all your materials, labor, contractors, overhead and other costs, and contrast total costs with total revenue. Materials often constitute a large proportion of the costs, and it is more likely that this is where a miscalculation may occur. Not so with maintenance. If you're in the maintenance business, it's more likely that you're going to miscalculate labor dollars rather than materials.
Job costing…the short way
Job costing is so important that I recommend you check out a workshop or seminar for a more thorough explanation of it. However, there are long ways and short ways to job cost; so to get you started, let's look at a shortcut.
The most important figure related to labor-intensive jobs is the amount of gross dollars per hour your employees need to generate to meet your expenses and your profit margin. We refer to this target figure as your man-hour rate. Man-hour rates allow you to compare one job against another to precisely identify which jobs are bringing home the bacon for you and on which you are losing your shirt.
To arrive at your man-hour rate, you first have to answer the following questions:
How many production workers do I have?
How many hours do my production workers work per week?
How many production weeks are in my season? (Use the actual figure; don't simply plug in 52 weeks.)
What are my total yearly costs and my desired profit margin? (Hint: a good place to begin gathering costs is your income statement.)
For an example of simple job costing, see Table 1, below. In this scenario, your gross dollars per production hour (or your man-hour rate) is $24.69. To arrive at this figure, take the figure in Column A (total costs plus profit margin) and divide it by Column E (your total yearly man-hours). This is the first step in job costing.
The next step
The man-hour rate tells you what you need to make per hour on each job to meet your expenses and your profit margin. Knowing what your bottom-line dollar figure must be enables you to make more accurate proposals.
However, it won't tell you which existing jobs are the most profitable for you and which ones are losing money. You've identified $24.69 as your target man-hour rate per job. Now put this figure to use by comparing it to the actual man-hour rate you're getting for various jobs. Use this equation to arrive at your actual man-hour rate per job:
Amount of man-hours to-date ÷ Gross revenue from property to-date = Actual man-hour rate per job
Did you get the idea from the “to-date” in the equation that it is important to track your jobs continuously? This can be a tedious process and one of the reasons why many companies don't track their man-hour rates. However, computer software now exists that allows you to easily keep track of income, time and expenses. This makes it simple to keep accurate, long-term records. Such software also allows you to manipulate the numbers and perform calculations to easily arrive at the all-important man-hour rate.
Don't fall into the “shiny apple” trap
It's tempting to think that the more dollars a job brings in, the more desirable the job is and the more valuable the client is. But, beware: A lot of our clients find that once they start tracking actual against projected costs, they are in for a big surprise. To illustrate this point, examine the following scenario.
You just closed two contracts: Mr. Smith and Mrs. Jones (see Table 2, page Contractor 15). You are especially pleased with Mr. Smith's contract because total revenue for the job is $1,750. Mrs. Jones' contract is substantially less. While it is nice to be adding more customers, it's a smaller property with a gross revenue of only $280.
Mr. Smith looks pretty good so far, but take a closer look. After completing 10 weeks of service, you print a job-costing report (which you really should have been printing all along) with the results indicated in Table 3, below.
Now that you are tracking your costs, which job would you rather have more of? Servicing Mr. Smith is actually costing you more money than you are receiving! The money you make on Mrs. Jones' property is helping to subsidize Mr. Smith's job. Obviously, you don't want to perform jobs at a loss. But how do you know whether that's the case if you never run numbers like these? There's a lot at stake in knowing! Sometimes, poor man-hour rates are disguised in large gross-revenue numbers, as is the case here.
It is certainly not always the case that smaller maintenance jobs are more profitable than the larger ones. But, when you track your man-hour rates, you can know whether your actual gross revenue meets your expectations. It will reveal which types of jobs are your most profitable and enable you to focus on those accounts. Just as important, you can analyze the jobs that are not meeting your expectations. This will allow you to adjust rates accordingly and bid more accurately on future jobs.
There is a lot of money to be made in maintenance. But you must track your gross dollars per hour on each and every job. The beauty of maintenance jobs is in their predictability and manageability. Why not take advantage of that? Tracking your man-hour rates takes the guesswork out of maintenance. Unlike construction jobs, once you are awarded a contract and satisfy your client with good, reliable service, it is likely that you will continue to service the property for years to come. You should be sure you're doing so profitably.
Dave Tucker is president of CLIP Software (Ijamsville, Md.), which produces software designed for the green industry. CLIP's website is www.CLIP.com.
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