What is Job Costing?

Here is a fact that will surprise few contractors: building is the highest risk industry in the Us economy. There are more company failures in building than any other industry, both in amount and as a percentage. The reason for this gloomy statistic is the reality that most contractors fail to monitor building costs, so they get out of control. Before the undertaker of a package deal knows it, a job has lost money and the company has deteriorated toward insolvency. If things are not turned around, the owner's home is soon being foreclosed on and another marriage ends up in divorce court. It's ugly!

Here is a real life example, with a twist. A undertaker of a package deal had just complete a job that he bid with a 0,000 built-in profit. He complained that when he paid the last bill, instead of manufacture 0,000, he had lost 0,000. He was fortunate that this 0,000 swing would not cause his company to fail. His big concern was the reality that he had no idea where things went wrong, so he didn't know what to fix!

In response to this risk, some contractors reason that the best clarification is to keep their company small, thereby reducing the risk of failure. Surprisingly, the same study that documented how risky building was (done by the Us Small company Administration) also complete that staying small in fact increased the odds that a undertaker of a package deal would fail. In fact, of all the industries in the study, the one that benefited most by increase was construction!

How can a undertaker of a package deal monitor costs And grow, thereby increasing the opportunity for success? The sass is to use job costing. There is an old axiom, "Use the right tool for the job." When it comes to construction, the right tool for accounting is job costing. That is why contractors need it.

Now, we get to the heart of the question. What exactly is job costing? Job costing is a special accounting process that was designed specifically for contractors. It's nothing mysterious and it doesn't need a costly accountant or costly software. It is uncomplicated a two-step process. The first step is to set up a job and enter a "budget" for that job. Where does the budget come from? The budget is nothing more than the "estimate" that was created by the estimator when this fine visionary calculated the expected costs for the job, line by line, phase by phase, from start to finish, for the job. Logically, an evaluation is not a particular figure, but a series of small estimates, each exterior a distinct phase of the job. For instance, how much concrete at what cost per yard will it take for the foundation? How many hours of labor, at what cost per hour to get ready and then pour the foundation? What will the costs be for subcontractors, if any? Will it be indispensable to rent some equipment, like a concrete pump, and what will it cost?

Each phase of each job has a potential budget for labor, material, subcontracts, equipment, and a general, catch-all "other" category. In addition, there may be a "burden" category, which adds a portion of general and administrative overhead to each job, thereby spreading the whole cost of execution back to each job. This is a fine way to decide if each job is carrying its share of the load.

In actual practice, setting up a budget is not as complicated as it might sound. Estimators do it all of the time. In fact, the building Specification organize (Csi) created a numbering law to help contractors budget and track costs. This numbering law is called the Csi Cost Code. This is a tool created specifically for contractors to help them do job costing.

The next step is nothing special. In fact, the accountant does what the accountant all the time does: Enter seller invoices and subcontractor billings, enter payroll, and do customer billings as usual. As costs are "accrued," they are tracked. "Accrual accounting" recognizes an price as soon as it is incurred, not waiting until it is paid. With job costing software, it is not indispensable to in fact pay an invoice or a payroll for that cost to be included. The underlying difference in job costing is that as each cost is entered, it is assigned to one of the Csi cost codes for one of the jobs. The supervene is that private actual costs are compiled and compared to private budgeted costs. True job costing software will in fact go one step additional and forecast the "cost to complete" for each cost code, based on a series of "algorithms." If a undertaker of a package deal uses "field reports" that show what remains to be done on each phase of each job, job costing software can override the algorithms and add those numbers to actual "costs-to-date" and then assess them to the budgeted costs, line by line, phase by phase, job by job. The supervene is up-to-the-minute cost information. That means contractors can sleep well at night, knowing that they are manufacture money as the job progresses. They never have to wait until the job is completed to see if there is anything "left over" for them. Job costing provides peace of mind to contractors.

If a undertaker of a package deal is using job costing software and actual costs get out of line, there is time to find out why. This should be an ongoing process, not done after the fact. Was the undertaker of a package deal double billed? Was an invoice double-paid? Was more work done than was originally budgeted? Is a turn order necessary? Only by knowing that costs are out of line can administration address the causes on a timely basis. Job costing allows administration to monitor and thereby operate costs. The supervene is reduced risk, increased profitability, and something sweet, something called "success." Job costing is more than a tool that contractors need in order to avoid becoming a statistic; it is the key to their success. possibly it is bold, but one accountant said, "Contractors that don't use job costing are either lucky or bankrupt, and no one likes to hang their future on luck!"

Yes, the professionals are right; contractors Need to use job costing. Taking that a step further, they need to use Real job costing software to do it right.