Construction Job Costing
The experts at On Track specialize in unique accounting concepts specific to the construction industry. One vital aspect of accounting for any construction business or contractor is the correct handling of Job Costs, as these expenses determine how to build an estimate, how to track expenses during the job, and how to accurately calculate profits upon job completion.
Many companies will incorrectly post expenses such as General Liability or Worker Compensation to Overhead when these should be posted as Direct Expenses (Cost of Goods Sold) or Job Costs. Job Cost accounting allows the owner and project managers to properly evaluate actual costs versus budgeted costs during and at the end of the job. On Track has helped many clients achieve accurate Job Cost reports. The following client stories demonstrate just how important correct Job Costing can be to a growing business.
Cash Flow Analysis
Cash flow analysis ensures you won’t run out of money before the job is over.
Owner Matt Smith made decent money on his large construction projects but never seemed to have enough money to pay the bills. Despite hiring a good bookkeeper, he admitted to having only a vague idea where his money was going, and he worried constantly whether or not he’d be able to afford everything he needed to complete projects. He brought in On Track to help him analyze his company’s Job Costing Report, including cash flow analysis, to see where and how the money was flowing in and out of his business. On Track helped him establish procedures for more accurate cost-to-complete projections. They also trained him in the implementation of systems and procedures for paying bills to ensure money coming in for a job is paying expenses on that job first. With those job expenses paid, Matt was finally able to analyze his overhead expenses and determine with confidence what he could and could not afford.
Accurate Gross Profit
Gross Profit is Income Less Job Costs (or costs of goods sold). Construction company owners need to know what their gross margin should be in order to cover all overhead expenses.
After analyzing cash flow during the last two jobs, Pete Jones realized something was off in his estimates. He had been bidding jobs based on a gross profit margin that should have covered job expenses, overhead, and met his desired net income, but his cash flow was showing something different. After paying his job expenses and then his overhead, his net income was much lower than he had projected. He knew he needed to learn how to job cost, so he asked On Track to step in. Their accounting experts found many Job Costs posted incorrectly to Overhead. Not realizing how much his jobs were actually costing him, Joe had been underbidding. By accurately job costing all expenses, Pete was able to adjust his future estimates and bid his jobs appropriately. Pete did not always win the contract on smaller jobs that could not afford him, but he did reach his desired gross profit at the end of the jobs he did get. As a result, Pete’s business quickly became more profitable. He then had the stability and confidence to bid larger projects knowing he could accurately estimate their cost. By regularly analyzing his financial and job costing reports, Pete makes better decisions for his company year by year.
Achieving a desired gross profit from a job estimate involves multiple accounting variables.
Greg was aware that workers’ compensation has multiple construction classification codes based on an employee’s risk, but he had not realized he was overpaying hundreds of dollars every payroll. Brown Construction had unknowingly been paying workers’ compensation for all its employees based solely on the high carpentry rate, even though there are significantly lower rates available for work such as concrete or painting. Donna Caswell at On Track Business Management stepped in to help.
Donna explained to Greg that with the proper documentation, i.e. an “audit trail,” Greg could take advantage of lower rates. One employee could even be assigned multiple codes, based on the jobs being performed.
Once the rates were properly applied, workers’ compensation costs at Brown Construction dropped dramatically. Before, when Greg bid jobs, he would base his estimates on incorrect workers’ compensation rates, leaving little profit after expenses. Now Brown Construction is able to deliver more competitive bids and still have profit left over to grow their business. Greg also found that workers’ compensation auditors love the precise documentation of the audit trail that On Track Business Management provides.
“The On Track team saved me thousands of dollars in unnecessary expenses. I’ll forever be grateful,” said Greg.
(Company names and minor details have been changed to protect client confidentiality.)
Learn how job costing accounting allows your business to prosper with every job. Schedule your training today by filling out our online form or giving us a call at (530) 478-9234.