As a professional in the construction space, you know all too well that project budgets are tight. You also know how troubling it can be going into a job and not knowing every cost associated with said job.
Many businesses that struggle with project budgeting, cash-flow projections, project profitability, and bonding capacity typically do not have a solid job costing system in place. Having a functioning system in place, where vendor invoices are timely recorded, payroll and overhead costs are directly allocated to a job, and billings are remitted timely, is a pivotal part of running a successful construction business.
Importance of an Accurate Job Costing System
Job costing, by definition, is a costing method used to determine the cost of jobs that are to be performed according to client specifications. This costing approach involves the accumulation of the costs of materials, labor, and overhead for a specific job.
When using the job costing method, the cost of each job is determined separately, thus helping management discover the profit or loss of individual projects. Additionally, job costing sets the tone for ascertaining the cost of similar jobs to be performed in the future and submitting accurate and profitable bids on future projects.
The Larger Impact of Job Costing – Improving Your Bottom-Line
Job costing carries significant weight in both calculating and improving your bottom-line. Here are some of the improvement factors:
- Gain clarity on actual vs. estimated costs. Proper job costing uses the costs recorded to a particular contract to reveal the profitability of that job, which can be compared to the original profit estimate. Profitability can vary from the estimate for a variety of reasons. i.e.: the price of materials went up since the bid was submitted or a special skill was needed from a subcontractor that cost more than expected. Identifying why a job did not go as planned will allow for better profit estimating, cash flow estimating, budgeting, and bidding.
- Reduce your “cost of production” by reporting projected and actual costs as you move through each job to locate variances, reduce direct costs, save money, and enhance gross profits. If management can identify why a job did not go as planned, adjustments can be made on estimates for similar jobs in the future.
- Charge for lost or hidden costs by entering and monitoring costs for all individual jobs. Avoid missing invoicing to specific line items and avoid burdening the cost of a job (and forgoing the markup profit) because it was not recorded correctly. The benefit of recording costs to jobs goes beyond accurate profitability, it also creates better accounting records. Having good accounting practices, such as accurate and timely cost allocation, helps prepare precise reports and perform an analytical review of contracts, which is crucial to making management decisions.
- Spot and eliminate low-profit jobs and make room for more profitable ventures. When you replace project types where money is lost or the yield is marginal with jobs that reach your gross profit targets, you, in turn, increase your gross profit.
After understanding the general importance of job costing, we can go a few steps deeper to learn more about how job costing is integral to bonding capacity.
The Role of Job Costing with Regard to Bonding Capacity
From the position of a construction business owner or contractor, job costing plays a powerful role in qualifying for bonding by the discretion of surety companies. One of the most reviewed items in determining bonding capacity are job costing reports.
Surety companies want to see that a company or contractor is financially stable and job costing reports speak to that. Companies and contractors can leverage these reports to prove that they are 1) organized and forward-thinking, 2) responsible with forecasting financial expenses, 3) staying within budget parameters, and 4) achieving profitability.
Regardless if you are a contractor or construction business owner, the return on your investment when choosing and utilizing the job costing approach is undeniable. To start improving your bonding capacity, bottom-line, and general operations, get in contact with one of our Construction Specialists today by calling Ryan & Wetmore at 301-585-0506 or by clicking below.
About Jason Dudas
CPA & Senior Manager
Jason is a Senior Manager in our Vienna, VA office. Since joining the firm in 2009, he has worked closely with clients on tax, audit and accounting issues. Jason has become an expert in construction accounting and is a member of the Real Estate and Construction CPA’s. He also has experience with research and development credits, and tangible property regulations.
Read Jasons’s full bio.