A version of this article first appeared in the Builder Partnerships newsletter.
It just seems logical that every business owner would want to know exactly what each type of job costs, so they know how to price it. Right? And they’d want to monitor what’s going right and what’s going wrong (financially) as the job progresses so they can fix it. Right? And they’d want to know exactly what they’ve made on each job or home after all of the final “financial dust” has settled. Right?
The Unsettling Truth About Profits
Unfortunately, in my 20+ years’ experience working with construction business owners, one thing has become painfully clear to me. There are two types of construction business owners. Those that are using job-cost reporting and using it well, and those who aren’t (or don’t know how to fully utilize it). This is incredibly important because I’ve observed that construction business owners who use job-costing are taking advantage of the information it provides, and are consistently more profitable than the ones who aren’t using it (or those who aren’t using it correctly). So if you want to squeeze more profits out of every job, one way to do that is to use job costing.
Why Aren’t All Construction Companies Using Job-Cost Reporting to Improve Their Profits?
For those of you who are in the business, and using job-costing, it seems as obvious as 1-2-3: “Of course I need, and use, job-costing. Why wouldn’t any construction business owner be doing it? I can’t imagine why they wouldn’t!”
Well, here are the top 5 reasons I’ve found that many businesses AREN’T using job-costing:
- They think it would probably take too much time (or cost too much).
- No one in their company knows how to do it.
- Their CPA doesn’t know how to help them set up a job-costing system.
- They don’t have software that’s adequate to the task.
- They’ve tried it and the results didn’t seem accurate.
Over the years, I’ve been approached by (and ultimately worked with) a number of people who were beginning to suspect that perhaps they should be using job-costing. Even after discussing the following concepts not everyone was ready to make the move to job-costing… BUT
Making the Change to Higher Profits…
Many did decide to make the leap. Here are just some of the thoughts that I shared with them while they were in the decision-making process:
- Lost wealth and profit vampires: We looked at existing costs and estimated how much time, effort, and money was being sacrificed because owners couldn’t see exactly what was happening with job costs, change orders, purchasing, pricing, and profitability. We determined that the cost to implement a job-monitoring system was only a fraction of what they were currently losing!
- “If you think education is expensive, try ignorance.” (Quote from Peter Drucker – American management consultant, educator, and author) With the right training, nearly anyone with an interest in their business results can learn the essentials of job-costing. (As proof, I’ve trained thousands of non-accountants how to do basic through advanced job-costing.)
- Your CPA isn’t a Management Accountant (and usually doesn’t want to be!) A CPA’s primary focus is to perform independent reviews and audits and to provide tax guidance and returns. Some even like to help with personal financial planning. But very few are willing (or trained in how) to help companies set up and use internal management accounting systems. So if you’re waiting for your CPA to help you do this – you may have a long wait…
- Quality software is very accessible (and is the least of your costs) Reliable, powerful, and low-cost, off-the-shelf software such as QuickBooks desktop or Enterprise Solutions has been designed for job-costing. You can customize those products to meet the specific and unique needs of your business and your industry.
- You CAN learn how to check your own work and understand your numbers. By using month-end closing and proofing procedures, bookkeepers can provide regular, accurate reports. When information is organized in a logical format, owners can begin to gain the benefits of instant access to logical, useful reports.
Enhanced Profitability Using PM3 Combined With Job Costing
The people who converted from doubters into “believers” are now “job-cost enthusiasts”. They implemented the concepts of PM3: Plan, Measure, Monitor, and Modify into their job-cost-management toolkit. By adding job-costing tracking and monitoring, they found that they could, in fact, learn how to control their costs and manage their profitability by squeezing more profits out of every job!
What’s YOUR Job-Cost & Management Tools Proficiency? Score Yourself…
If you’d like to see where your company stands in the “job-cost and management controls” spectrum, just click on the link below to access this (confidential) self-assessment survey:
- Simply indicate your company’s current level in relationship to 25 “best practice” management controls.
- Upon completion, you will receive an emailed report that shows the questions, your responses, and your score.
- Use the results to decide on, and prioritize, which areas to improve in YOUR company.
The idea is to help you determine new ways to improve the profits you can earn (and keep) from each of your projects!