Financial risks in your construction project occur when your bid doesn't align with the project's costs. Accurately tracking all job costs, including overhead, will give you the details you need to analyze existing projects and bid future projects more precisely.
Six Areas to Review Relating to Job Costing
The accuracy of your job costing impacts your bottom line. As we hopefully move out of the pandemic and look ahead, here are six areas related to job costing you should review.
Predicting Cash Flow
Cash flow planning in the construction industry can be complex due to the unpredictable nature of billing and payments. Accurate job costing gives you insights into how much cash you should expect weekly, making it easier for you to predict and plan for cash flow shortages. As we all know, cash is king, so having a way to measure accurately will alleviate anxiety and allow you to plan.
Look For Trends to Measure
Looking at your job costing over several projects will reveal trends that you can take action on. For example, you might see labor trends higher in particular parts of a project which would allow you to reallocate staff, check on staff performance, or adjust your budgets accordingly. Using these trends will help you with future job bidding to accurately align costs in specific areas of a bid.
Software Makes a Difference
Job tracking software that integrates with your other financial reporting systems is the most effective way to align costs, sales, profits, and cash flow planning. Sage 50cloud Accounting is one solution that will meet all your financial reporting needs as it offers project and job costing and payroll. Several software options are designed for the construction industry, so start by speaking with your accountant about your goals to streamline all your tracking and reporting needs. If you aren't yet using a mobile time-tracking app, now is the time to explore that option. Mobile time-tracking apps give you real-time labor information through all stages of a project.
Know Your Cost Codes
Do you use a few cost codes or hundreds? Getting granular on your job costing can give you a lot of detail, but it can also be overwhelming to process and report on.
Look at everything with a fresh eye to help move past "we have always done it that way" and into "what is the best way to track information". Look at the least used codes to determine if they are needed.
Also, look at your most-used codes. Are costs being tracked in general categories when they should be broken out more? Look at the tracking you wish you had, compare it to what you have, and use that as a guide to take a strategic look at your cost code lists.
Account for Overhead Expenses
Overhead is the indirect costs of running your business including general administration costs, rent, utilities, equipment, etc. Overhead needs to be allocated by the project to get an accurate picture of your profit margins.
- First, you will need to determine what is included in your overhead total.
- Then, you will need to decide if you are using a predetermined rate by % of revenue or % of direct labor costs. Or you can use a proportional percentage based on your total overhead and total job costs.
Allocating overhead can be a complex discussion and how the calculation is determined varies by business. Take the time to review and decide how you will calculate your overhead expenses and the best way to apply those costs, by job or service provided. The total overhead number should be reviewed each year to accommodate fluctuating prices. Being consistent in allocating that number from year to year will give you an accurate picture of revenue per job.
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Hold Regular Job Review Meetings
Schedule weekly meetings with project managers and applicable accounting staff to take a deep dive into each project. Review each job’s cost report during these meetings including discussions on the actual costs incurred to date and estimated costs to complete (by job cost code). This is also the time to discuss and apply any change orders to the project. Change orders can throw project budgets off if they are not reviewed and tracked regularly. Weekly reviews of each job allows for quicker decisions and timely adjustments can be made.
Turn to Industry Experts for Help
These are just a few tips to get you thinking about your job costing process. Just coming out of the pandemic, construction companies need to be competitive while still generating enough profit margin to sustain the business. Utilize advisors to help you set a strategic path of understanding your profit margins and how a few simple tweaks can affect those margins.
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