Job costing in construction business – what you need to know

Business owners in construction business face challenges not only from running the project on schedule but also from assessing the profitability of the job/project. Those business owners are not alone. A lot of contractors, even manufacturers are facing the similar challenges as well.

Why?

Let me give you an example. One carpet installation business owner works so hard and makes decent income. He is asked which project he made the most of money. His answer may surprise you, “same. I am working hard for each one. I am loving it.” There is no doubt about his dedication. But the question is, does he know which project is the most profitable or even if he allocates his time in the project? Probably not. So the real issue is ,if you are not able to measure the profitability of each job, then you dont manage the business very well. This principle applies to all industries.

How do we measure the project profitability in construction business, then? So, the first question, how businesses prices the job?

In general, construction businesses price their job by:

• Fixed costs, which covers everything

• Variable costs + margin, which means margin is fixed, the rest like material and labor may vary based on the project details.

Each pricing model has the similar components when an estimate is prepared.

Labor: the majority of labor costs related to subcontractors as well as site supervisors.In general, small builders have a structure like project/business owner, site supervisor, then a number of trade subcontractor. The estimate of the labor costs relies on the prior experiences. Even subcontractors provide an estimate,sometimes due to availability or other delays, the estimate may get stretched. And one key item being overlooked quite often is the labor cost for you, business owner who oversees/communicates the project with their clients. Your time is valuable as well. Don’t forget about that.

Material:this category related to direct materials used in the construction.Nowadays, there are a lot of changes in construction business, prefab homes, container houses,new materials bring options to home owners. Builders may need to get updated on the market trends and know the cost factor. Always, have some provision on material loss or waste in the estimate as well.

Overhead: overhead related to the office rent, equipment rental, even administrative staff payroll cost. Those costs are not directly related to the project itself.But they are part of the costs running the business.You need to allocate certain % of overhead costs to the project.

Once all the key cost components are estimated, the pricing for the project should be ready. In some cases,builders may price it at a lower price in order to promote the brand in the industry or utilize the extra capacity.Now, price is set and the project starts. It is time to see how the profitability is measured.

Can we do this in Quickbooks online? Currently, the answer is maybe.

I recently had a chat with Yuki Djaja, account consultant in QuickBooks about this topic. She did some research and noted some construction clients who are using Quickbooks Online, and they would integrate one of a 3rd party apps along with QuickBooks Online to do all the functionalities they require. Here is an article that could be useful.It suggests integrating QuickBooks Online with Knowify for Contractors.https://qbochat.com/quickbooks-online-for-construction-companies/

My personal view, as each construction business varies from size and project, some may find QuickBooks online fits the purpose.But others may not agree. As we know, the accounting technique used mainly in construction business is called job costing. The process involves the allocation of expenses for labor, materials and overhead to a particular job. As a result, it allows businesses to see profitability on jobs that they are running. The costing approach is not that simple. You have to run a multi-leveled process to ensure the real picture of each job is presented.

Other QuickBooks pro-advisors have talked about this as well. Diane Gibson, a consultant said “If you’re in manufacturing, construction, or an industry that provides services that require job-costing information, it’s highly likely that you should get one of the desktop versions.” I think it is fairly said. Here is the link to read through if you are interested.http://www.linkedin.com/pulse/quickbooks-online-vs-pro-premier-pricing-job-cost-features-gilson

Here are a few critical steps in running job costing in on QuickBooks desktop version.

• add additional job under the customer, How? When creating a job for a specific customer, open the customer list and click on the name of that customer. Find the “Add Customer/Job” button and click it. The “Add New Job” feature will open with the name at the top. Name the job, “demolition” or “foundation,” for example. This will help accurately manage the cost associated with each sub-jobs.

• assign materials costs to jobs, How? Assign all bills for that job using the “Customer/Job” column in the “Enter Bills” section. When a bill is paid for the related job, “Customer/Job” column is used

• assign Payroll costs to jobs/allocate a standard rate for owner time to jobs,How? If you are using its built-in payroll feature, it is easy by finding “Customer: Job” in payroll centre and clicking on the small arrow and scroll down to find the appropriate job(assuming it is set up already).

Some practices to avoid

It is common to see business owners DIY on their books. As we know, each company has its own Chart of Accounts as the accounts set up are for its unique projects. Some business owners believe they should use the exact same Chart of Accounts as all his friends are using it. All businesses are unique to certain extent. Chart of Accounts helps to precisely track down each cost component.

I even saw that one client created 3 Quickbooks files for 3 projects respectively.Well, it seems he has not mastered the beauty in QuickBooks yet. Other Quickbooks advisors also pointed that the built-in estimate function or an estimating program that interfaces with QuickBooks are not being used. As a result,the progress of the project cannot be compared to the estimate. The impact will be the revenue not being invoiced or costs may be over-run.

Finally

If you are still struggling in figuring out how to do your job-costing, give us a shout. We surely can help.