For every successful construction company, accurate job costing is a must. Without an efficient job tracking process, your business is like a ship lost at sea. The earlier you identify your risks and deviations from the budget, the more time you have to adjust course and get back on track. Many avoidable problems in business arise due to lack of good processes – job costing is one powerful tool to prevent losing money and time.
Here’s how construction job costing can help you increase profit and free up time:
- Make sure you give your project managers the right budget
- Accurately track subcontractor commitments and contracts
- Monitor purchase invoices carefully
- Handle client change orders with efficiency
- Manage the knock-on effect of change orders on subcontractors
- Carry out regular forecasting
- Make sure you’re using the right formula (margin vs. markup)
- Predict completion accurately
- Time is everything so spend it wisely
1. Make sure you give your project managers the right budget
Often when estimating job costs, a firm will calculate the direct cost and add markup or margin. The budget with margin is then passed to the project managers along with an indication of how much he or she can spend from it. However, with the budget plus margin subconsciously in mind, our brains will often justify overspending as long as it doesn’t break the subtotal of the total estimate. Unfortunately, however, these projects will eat up non-direct and profit. If, on the other hand, the project manager sees only the allowed spending budget, they will be more motivated to hit the target – this is even more effective when the goal is linked to a reward system. You’ll then find that your project managers are doing whatever it takes to stick to the budget or even improve upon it.
2. Accurately track subcontractor commitments and contracts
One important aspect of job costing is to identify how much of the budget is already committed. In bigger construction projects, there are a lot of subcontractors and suppliers. The first rule is not to start work without a written agreement. It might be tempting to tie a subcontractor in with the intention of later negotiating the scope of the work as well as better prices. However, not having a fixed agreement regarding work to be carried out is a slippery slope and often leads to losing both time and money. Having a contract in place ensures the subcontractor has assumed responsibility for the job and reduces the risk in terms of finalizing the project. Any construction job costing software should allow agreed commitments to be added and then automatically update the forecast to show the potential risk or extra earnings.
3. Monitor purchase invoices carefully
If you have agreed the price for a particular job, you also need to ensure that the subcontractor is not invoicing you for more than originally quoted. The easiest way to do this is to use the pay application and track the progress claims online. This process will prevent project managers hiding costs on the budget line where the profit margin is higher. It is also sometimes the case that subcontractors may manipulate the figures, either by accident or design. A good job costing system will help to avoid these pitfalls.
4. Handle client change orders with efficiency
Client change orders can be a blessing or a curse. They’re a critical juncture that can provide opportunities but are often difficult to track or predict. While change orders can be a turning point where the unprofitable project becomes a profitable project, they can also work the other way and turn a profitable project into one that loses money if poorly managed. When all’s said and done, the main question at the management meeting will be: have we gained or lost money from the change order? An excellent job costing software can show you exactly how much profit you earned from change orders. But more importantly, it can show you overall trends in relation to change orders.
5. Manage the knock-on effect of change orders on subcontractors
So now we have identified some ways to track the variations on the client side. But how these changes will affect the subcontractors or suppliers is an even more complicated question. If a general contractor is a leading force in the negotiation of change orders with your subcontractors, it is absolutely critical that these change orders are accurately tracked – if not, you are leaving yourself open to a world of problems. The main concern behind change orders is how much extra money the client will be paying and how much of that will go to the subcontractors. A good system will make a huge difference when it comes to managing this.
6. Carry out regular forecasting
What do we mean by forecasting? It means that the project manager will add new information and their best estimates of what may affect the budget into a job costing system. Everything in the universe is continuously moving, and projects are no different. Just as when you drive along the road the GPS will continuously update itself to show you when to turn, the same should apply to a construction job. As you progress, you need to adjust the budget to ensure you make the right turns when needed. Proper job tracking software allows project managers to update the forecast on a regular basis for tasks that haven’t got a concrete commitment, while forecasts are automatically updated when commitments or purchase orders are entered into the system.
7. Make sure you’re using the right formula (margin vs. markup)
There are many companies who confuse the margin and markup. That’s not to say one is better than the other, but it’s important to understand that cost + markup is not the profit margin. For example, if you buy something for $100 and add 20% markup it equals $120 – but if you calculate the gross profit you get $100/$120 = 16.666%. If you want to add the margin it needs to be calculated correctly. For example, if you add 20% margin your revenue should be $125. If you’re not sure, it’s important to look up the correct formula for your business and check the numbers are accurate. Bauwise job costing software uses margin calculations, not markup calculations. Don’t lose money by using the wrong formula.
8. Predict completion accurately
What can we do with information about expenses when we don’t know how far along we are with our job? There are many methods for calculating the completion of a construction project – based on revenue, on costs or observational completion. However you calculate it, it should show you whether your costs and income are in line with the completion. This is critical for understanding the true picture of a construction job.
9. Time is everything so spend it wisely
Time is the most precious asset we have. We can lose money and earn it back but we can never recover lost time. Managing your job costing process in Excel or some other complicated system will definitely lose you time. Not having the right information at the right time will also lose you money. Time equals money so you need to spend it even more wisely.
One extra tip: Learn to say NO to things that don’t matter. You can’t do two things at the same time. If you say YES to one thing you are saying no to something else. Choosing to say YES to the right things and NO to everything else will help you reach your goals, increase your profit and free up time.
Bauwise is a construction job costing software what can help you with efficiency and earn more profit.
Please let us know how you have benefited from the job costing system and feel free to share this post if you have found it useful.