Job Costing Both Ways Is The First Key To Profitability

Job costing is critical. It is the key to pricing, cash flow, and profitability. It is the best way to stop “project cost creep” and understand where and what to focus on. But is the way you are job costing, showing you everything you really need to know?

When it comes to job costing, most of us were taught to use the gross margin or a gross profit method. This method seemed to give all the information needed. That is, until I attended a seminar this spring where Hal from Halco, “showed me the light” of job costing by the hour. As soon as he said “The first thing to remember, is that margins are not profits.” I knew it would be good.

Before we get to this revelation, it should be pointed out that traditional job costing, or calculating GM (gross margin), should be done on every job. It provides critical information showing how much is left to cover overhead and possibly some profit. For those using BIDIT, this is an easy calculation based on factors you enter into the bidding software. If you are doing this by spreadsheet, it becomes very hard to pull reports based on job type, crew and other factors. Making it difficult to understand numbers that are critical to the health of your company. That said, there are situations where it can leave you wondering where your profit went.

For most companies a 40-50% GM, leaves them some profit at the end of the day. For those who normally don’t job cost, a 40-50% GM may sound like a lot. It’s not. You’ll find when you balance that number against overhead, taxes, and any interest on debt, the number comes down quickly.

So, when you are job costing, a major consideration is how much your company needs to generate per hour. This becomes more and more important based on how much of a project is labor, versus how much is materials. Projects with low material costs don’t generate those margin boosts and they tie up your labor and equipment. Let’s compare two $10,000.00 jobs as an example:

Job A:
Labor $3600.00 (120 hrs, #30/hr)
Material $1000.00
Sales Tax $80.00
Total Cost $4680.00

Sell price: $10,000.00 – $4680.00 = $5320 GP (gross profit) or 53.20% GM

Well, that sounds pretty good. Doesn’t it? But… if we calculate or job cost this by the hour

Labor $3600.00
GP $5320.00
Total Without Material $8920.00

$8920.00/120 hours = $74.33 in revenue per labor hour. Most companies need 1.5-2 times that to make money.

Job B:
Labor $480.00 (16 hrs, #30/hr)
Material $5000.00
Sales Tax $400.00
Total Cost $5880.00

Sell Price: $10,000.00 – $5880.00 = $4120 GP (gross profit) or 41.20% GM

At first, this doesn’t sound as good. But… if we calculate or job cost this by the hour

Labor $480.00
GP $4120.00
Total – Material $4600.00

$4600.00/16 hours = $287.50 in revenue per labor hour. Obviously this was a much more profitable job.

When you consider labor as your greatest asset, you can see how tying them up can cost you money instead of making it. You have to charge big premiums to make labor intensive jobs pay off. Hal made it clear, they cost every job by GM/GP and by dollars per labor hour. They know exactly how much they need per crew member, and per hour, in order to thrive. This makes it easy to understand why they turn away many labor-intensive jobs and look for quicker turnaround or install work.

Once you’re job costing both ways, you need to track it in your bidding software. Analyzing your profit by salesperson, by crew, and by job type, is critical to making money. Moreover, it’s essential to understanding how much is left so you can reward your top performers. This is just one more reason to make sure you are using bidding software that works for your company. It is also why we are always adding to and enhancing the functionality of BIDIT to help you manage your company in this fast-paced business climate.

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