You’re doing job costing wrong. Here’s why.

Here’s a question we ask trade contractors all the time – 

“What’s your average profit margin on a job?”

If you can’t answer that question, making the jump to that next annual revenue milestone is going to be much harder than it has to be. 

Success for your business shouldn’t just mean winning lots of bids and making payroll every week. Consistent, predictable growth happens when you understand which projects are right for your business, you execute those projects efficiently, and you take the time to understand what needs to change the next time around. 

Tracking your project costs is the only way to understand why you’re making or losing money on every job you take on. 

In a recent panel discussion we held here at Knowify, we polled the owners of specialty construction companies, asking them what the number one challenge for their business was today. Over 50% said that tracking project progress and costs was their top challenge and only 33% said that financial tracking was a fully integrated part of their project management solution.

Contractors know that job costing is mission-critical, but they continue to have problems putting it into practice. In this article, we’ll look to help. 

Backed by over a decade of job costing data from thousands of trade contractors, here are the three most painful job costing mistakes trade contractors are making today (and how to fix them). 

1. Their job costing isn’t granular enough

Let’s be clear: hyper granular job costing isn’t practical for single-person businesses, especially those going through a period of rapid growth. When business owners are acting as project managers, recording every small material purchase is extremely difficult. But for teams of two or more—job costing is more than a possibility—it’s a requirement to grow consistently.

Consistent, accurate job costing allows you to find the specific parts of your business that are inefficient, and work to fix them. 

Improved project efficiency is the ultimate growth lever—you don’t need to make more hires and you don’t need to take on more jobs to see growth. Optimizing the operations and financials for the projects you already have is a way to develop healthy business processes before you invest in additional resources or take on new work.

So how do we achieve peak efficiency? Every project involves multiple inputs from your business—material purchases, labor hours, subcontracts, equipment usage, etc. Your goal as a business should always be to capture as many of those costs as possible, as consistently as possible. 

Inconsistent or incomplete job cost data will distort what’s really happening on each project, and you won’t be able to make the right changes to your business. This means you need to right-size your job costing process so that you’re able to collect the same data every time. 

There are three key components to think about when sizing your job costing approach—and you can pick and choose which level of each is right for your business today. 

• Granularity
  • Track all project costs in one big bucket
  • Track costs broken down by project phase
  • Track costs broken down by project phase and cost category
• Timing
  • Collect data at the end of the project, and evaluate it at a later date. 
  • Collect data throughout the project, and evaluate on completion.
  • Collect data throughout the project, and evaluate in real-time.
• Accuracy
  • Estimate labor and material costs based on memory or rough documentation
  • Track actual labor hours on the job, along with receipts/bills for materials, subcontracts, equipment costs, and change orders.
  • Track fully loaded labor burden costs, all materials including those already purchased and stored, change orders by billing period/approval status, etc.

Whatever combination you choose, the only way to capture all of that data is by using people or by using software. Do you have office staff handling your purchasing and AR, or does that fall to you? Do you have a foreman on site to capture your team’s time on the job site that day? Do you have a team on site at all or is it just one person? Do you trust your team in the field to keep hold of their receipts, remind you of change orders that were verbally agreed to, and get all that information back to an office?  

These are some of the questions to ask yourself when determining the depth of your job costing approach and how you’ll execute on it. There are tools like Knowify to help make these processes much easier, but without the proper planning you can’t be sure that tools will be used effectively.

2. They’re not accounting for hidden costs

Remember what we talked about in the last section? That inconsistent or incomplete data is dangerous because it distorts how your business is actually performing? Many contractors aren’t considering major project costs because they’re not obvious unless you do some digging.

Labor

According to the US Bureau of Labor Statistics, labor cost in construction can account for 20 to 50% of a project’s total costs, and contractors who underestimate labor costs often face budget overruns of up to 10%—destroying their chances of hitting that target profit margin. 

One easy thing you can do immediately to make your labor costing more accurate is to consider your fully loaded labor burden and not just the hourly rate or salary rate you pay your employees. 

Your fully loaded labor burden includes things like union dues, insurance, benefits, and any other expense that having an employee on the job site costs your business.  depending on industry and location, these additional costs can be as much as an additional 50% on top of the employee compensation.

Not sure where to find all this information? An easy place to start is your payroll report—this will give you a decent idea of what those costs are relative to what you pay your employees. 

Tracking these costs consistently requires setting up a process for: 

1. Recording the pay rate and labor burden costs for each employee 
2. Turn this into a blended hourly rate 
3. Recording labor hours on site for a given project
4. Multiply labor hours by the fully blended labor rate to get your full cost of labor 

All of this can be done manually, but it’s much simpler and more accurate to use a tool like Knowify, which automates time tracking and labor costing, so you never have to do any manual calculations or tracking. It’s all handled in the background for you.

Materials

For many contractors, materials are the most obvious project cost to track. Materials typically make up 40 to 60% of a project’s cost, depending on the trade. But if you’re not accounting for material wastage, or counting the cost of stored materials that you purchased in the past as part of the overall project cost, you could be cutting into your final profit margin by as much as 5%.

Material wastage is obviously extremely dependent on the trade and on the type of project being performed, but a rough average wastage rate is anywhere between 5% and 10%. This is a cost you’ll want to account for when budgeting for a job so that your bid leaves you room for material wastage without hurting your margin. You’ll also want to track wastage as you work on a job to understand how much of an issue this is to your business and if it’s something you need to course-correct.

Stored materials are another hidden cost that many trade contractors ignore. If you buy materials in bulk and store those materials for use across multiple projects, you still need to account for the initial cost you paid for those materials when using them across jobs. Keeping detailed records for the materials you’ve purchased, when you purchased them, where they’re stored, and which projects they’re used on (including quantity), is the only effective way to account for the cost of stored materials. 

Overhead

In the world of job costing, overhead can be a controversial topic. This usually comes down to a misunderstanding of which overhead costs should be accounted for when project costing. 

A simple rule to follow is to only count costs which are direct inputs to the project—things like on-site administrative costs, insurance for specific projects, or employee lodging.  These are costs that you incur because you’ve taken on this specific project. As a result they should be considered when evaluating your final project costs since they are things that can be changed—either by seeking out new options for those costs or by not taking on these projects at all.

Overhead costs like an office lease, office utility costs, or marketing and advertising should not be factored into your project cost. Clearly these are things that should be tracked at the business level, but they are not easily changed from project to project and as such should not be factored in when understanding the performance of an individual job.

3. Finances and operations aren’t in sync

By far the most common mistake we see trade contractors making is not keeping the operation side of a project and sync with the financial side of a project. 

The most successful contractors have built processes and are leveraging tools that keep their labor, PMs, office staff, and accountant all in sync. Especially as a business grows and takes on more and more jobs, understanding which projects are on track or not and which projects need the most attention becomes more crucial. Being able to course correct on a project requires having near real time data that’s accurate and available to all the necessary people on your team.

If your purchasing, client billing, and expense tracking are happening in a different platform than your project management, you’re going to have a lot of trouble pulling a WIP report and understanding whether you’ve over or under-billed for a project.

If change orders are being agreed on in the field, and that information is not making its way back to your billing team, a change order may not be accounted for in the proper billing period, and a GC might delay payment, or reject your invoice entirely.

If your project costs are not well documented and organized, when it comes time to file taxes for the year, the conversation with your accountant may be unpleasant.

Having a single source of truth that everyone in your company can rely on as you grow is the most important piece of the puzzle that leads to you being successful as a business owner in the trades.  

If your finances and operations are out of sync, cracks will start to form, costs will start to get out of hand, project delays will happen, and you won’t have the information you need to make quick changes and put yourself back on track to hit your growth goals.

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So, do you know your average profit margin on a job? How confident are you in your answer? 

Wherever you are in your job costing journey, Knowify is here to support you with the best practices, tools, and people to help you grow a successful, healthy business.

To learn more, sign up for a free 30 minute demo.