If you ask contractors if they job cost, a majority will respond positively. But do they really? There are two methods of job costing, which I call “passive” and “active”. “Active” job costing is much more effective in improving the bottom line than “passive”.
I am constantly surprised by the number of contractors which don’t practice “active” job costing. Just what is job costing? Is it accumulating the costs of a project and then comparing these costs to the contract price at the end of the job to see how much money the job made? Is job costing driven by the accounting department? Absolutely not, to both questions! It is more…much more.
Let’s get the role of the accounting department out of the way first. The accounting department can provide those costs that have been accumulated to date. The accounting department operates only in a support role by collecting information and generating the reports that are needed in order to do cost projections. The accounting department can only tell you what happened in the past. The accountant is the historian of the company. History can’t be changed (unless you’re a politician). This is the “passive” method in a nutshell. “Passive” job costing, as a form of project management, would be similar to driving a car forward by looking through the rearview mirror. You wouldn’t see the obstacles or potholes until you have already hit them. “Passive” job costing helps fuel a reactionary environment of constant fires which always need immediate attention.
They are not the right people to forecast the costs to complete, which are needed in order to develop the work-in-process and generate the financial statements.
Job costing is an “active” on-going process that involves each key employee that is associated with the performance of the contract, which includes the key field people and the Project Manager. Job costing is a project management tool— not an accounting tool.
There are four steps to “active” job costing:
If you were to survey contractors, you would find that a higher percentage do step #1, less do #2, and even less do #3. And #3 is most critical and is the step that will have the most impact of improving your company’s bottom line.
As a project management tool, effective job costing is more concerned with the time and costs remaining to complete the job so that corrective action can be taken if needed. I have often heard that once a job is going south, it is really hard to turn it around. There could be several reasons why, but the major reason is that the practice of “passive” job costing doesn’t recognize that there is trouble on a job until it is too late to do anything about it.
The job costing process begins as soon as the job is “turned over” to project management. Components of “active” job costing include the following:
Benefits of “active” job costing include:
The job foreman and lead personnel should be actively involved in the job costing process. After all, don’t they have the most daily influence on how much it will cost to complete the job? They need to be aware of the costs accumulated to date and, with the help of the Project Manager, be able to forecast the time and costs to complete the job as it progresses. If they don’t have the skills to do this right away, train them.
Active job costing is a critical control process. This process will enable you to know which jobs, and which employees, are generating your profits. If you aren’t practicing “active” job costing now, implementing it will improve your bottom line. It is an all important, fundamental business practice for any economic time.
Doug Phelps, President of Management Consultants for Contractors, has over 40 years experience in the construction industry and has been a trusted business adviser to many small to mid-size contractors since 1998.