Organizing a Job Costing System
Successful job costing can mean the difference between profitability and struggling to stay afloat. You may be frantically busy but dismayed that you’re not any more profitable than before. The basic principle behind job costing is to know as accurately as possible the cost of each individual job so you can make better estimates and choices in the future.
Implementing job costing requires time and a good understanding of what’s required, yet it doesn’t have to be a major distraction or expense. What you need to do:
- Work with an estimator to implement a production reporting system to tell you how accurate your estimating has been.
- Analyze job costing reports for completed jobs and jobs in progress.
- Put in a billing system tied to actual and committed costs to keep cash flow stable.
- Account for jobs properly to discover whether they turned out to be as profitable as your job cost schedules led you to believe they would be.
- Get a more realistic breakdown of a project’s costs — even costs that may not have been expected or included in the original bid.
By collecting good data, you’ll be able to better estimate how much a project will cost on the front end and get a competitive advantage when submitting bids. Job costing involves the process of accumulating precise information about the costs associated with a particular job or construction project. The costs are categorized by their relation to labor, materials, subcontracts, equipment, and you must not forget overhead. All too often, overhead is overlooked in job costing, yet it can be crucial. A few overhead costs that are often improperly allocated include:
- Equipment and the costs of upkeep
- Computers and software
- Interest charges
- Such unforeseen events as plan changes, increased material costs or additional time requirements
- Salaries of those overseeing projects
A good job costing system can track projects by phases and types, allowing relevant information at each stage of the contract. Financial reports generated are beneficial to management in making well-informed business decisions. Benefits include:
- Effective and timely job cost reports comparing the actual costs to the amounts estimated which allow project teams to identify trends and potential issues on the job. The sooner that adjustments are identified, the better equipped the team is to correct them.
- Insights into where savings may be obtained resulting in increased profits.
- Improved management of the team and progress of the job through performance reporting.
- Identifying actual costs by job enables companies to understand what it really costs to complete a job, which provides enhanced evaluating and estimating for future projects.
- Successful forecasting of projects’ outcomes is helpful in maintaining credibility with your partners and bonding agents and obtaining loans or additional lines of credit.
Job costing provides more accurate financial information on individual jobs and company performance as a whole. This information allows management to better understand the current position of the company and future forecasts. It helps decision-makers identify changes in the market, recognize potential business opportunities and make strategic decisions about service areas. Management may also be able to anticipate future cash flow and funding needs before they arise. Together, these benefits can lead to improved profitability.
For more on job cost accounting, give us a call, and we’ll help you understand what’s right for your business.