The overall success of your business is directly tied to profit and loss.
This relates not only to securing enough business to pay your bills and expenses but also has to do with pricing and costing your jobs appropriately.
Job Costing is a process that takes into account the three main elements of a job: labor, material, and overhead. Let’s examine the different aspects of job costing, why it’s important and how doing it correctly can prevent you and your business from losing money.
What is Job Costing?
Job costing is the act of figuring all the different costs associated with a job or project to determine its profitability. The most common costs to be calculated are:
- Labor: This relates to the costs associated with the employee(s) who will be directly working on this specific job. Calculate their hourly rate and multiply that by the estimated hours for the job to be complete.
- Materials: Every job will require a commitment of physical materials (we’ll discuss job costing in other industries in later articles). These materials come with a non-negotiable cost that will be spent per project.
- Overhead: Overhead refers to all of the general “doing business costs” that you associate with running your business on a daily basis. These could include rent, business insurance, accounting, billing, and office equipment.
Job Costing done right can save you money; inversely, doing it incorrectly can cost you money. Here are five tips on how to do job costing accurately so it won’t lose you or your business money.
1. When calculating labor costs, include any incidental charges
Let’s assume you pay one of your contractors $75/hour. If you estimate that a particular job will take six hours, the labor cost would be $300, right? Not necessarily.
Consider any of the other costs for which you reimburse that employee. Do they receive a mileage reimbursement? What about a per diem or a spending account for incidental project needs? These costs can quickly add up and add a few hundred or thousands of dollars to your project.
2. Overestimate within reason
Have you heard the old adage “under promise and over deliver”? In simple terms, it means telling your client you’re going to do only the work you’ve promised, and then exceed those expectations. If you’ve estimated that a job will take 10 hours and it only takes 8, that’s a positive over delivery and cost savings. Plus you get the added bonus of your client thinking you are a miracle worker.
Overestimating also enables you to account for slight setbacks within a project, that you may not anticipate. Having a cushion built into your job costing estimate means you can absorb these hiccups without having to re-approach the client to ask for more money.
3. Make a careful accounting of your overhead costs
It’s easy to overlook overhead costs. They are typically such an integral part of your business that you just ignore them. When costing out a job, it’s better to take a more accurate accounting of these costs. As mentioned above, overhead costs cover a wide range of areas that you probably don’t think about on a daily basis. Make sure to consider the following when calculating overhead costs:
- Administrative Assistants
- Office Utilities
For more information, check out this article on how to calculate overhead costs, including a formula.
4. Compare like jobs to one another
A good way to know that you’re charging the appropriate amount for your work is to compare like jobs to one another. Let’s say you have two kitchen renovations that you do within a year. When getting ready to cost out the second project, take a look at the first.
Compare your initial estimate for the first job to the actual costs. How close were you? What were the hidden costs you didn’t anticipate on the first go around? Take all of these costs into account when calculating the estimate for your second job.
One caveat: this assumes that the two renovations projects are similar in size and scope. If one project is markedly different than the other than a straight a comparison may not be as helpful. However, you could still use the final costs from one project to extrapolate data for the second.
For example, if your first renovation project was a for a kitchen measuring 1,000 square feet, but the second project is for a kitchen that measures 2,000 square feet, a good way to start your estimate might be to double the costs from the first project. Fine-tuning may be needed, but this is an initial place to start.
5. Pay attention to job timelines and deadlines
Job costing can enable you to keep your jobs on track from both a timing and pricing perspective. By having a good account of how much a job and the materials will cost before it begins, you’ll be able to track these costs as the job progresses.
This process can also enable you to bill throughout the project, allowing you to maintain a steady cash flow while the project is in progress, as opposed to waiting to bill until the entire project is complete.
Keeping track of these job costs and timing will require some minor monitoring of the project as it goes along. But that’s why you figured in those overhead costs; so you can ask your accounting department to keep track throughout.
For different industries, job costing requires different considerations. Job costing a construction project includes different variables from costing a web design job. QuickBooks will explore the nuances associated with these different industries in the coming months to provide you with more in-depth insight into this process.