The request I receive most from contractors is "tell me how to job cost." Why don't they ask me to do something simple, you know, like solving world hunger.
Job costing systems are very, very difficult to get right. Setting up an effective job costing system requires a deft touch, a KISS approach, and an incredible understanding of employee behavior. Missing the mark by just a little bit results in the collection of useless information which defeats the purpose of tracking job costs.
A poorly designed job costing system wastes a lot of valuable time. On the other hand, when done correctly, job costing lays the foundation for running a successful operation. Its reach extends far and wide. Job costing is the driver of:
- Accurate estimating
- Accurate scheduling
- Effective management of field performance, and
- Effective bonus systems.
Most contractors know the importance of job costing and almost all would like to get better information out of their job costing system. The challenge is to design one that delivers the goods without being overbearing. Let's help you out with that. The first requirement is to KISS it. Keep It Short and Simple.
Short means that you should only track the tasks that burn up 80% of the job's labor hours. Simple means that you must be able to teach your employees how to use it.
With job costing, more is not better. More can completely destroy data quality. When you require your field crews to assign their time to more than a few work codes, they usually respond by randomly assigning their time to whatever they feel like, or whatever has budget left. This renders the data useless.
Let's look at an example of how to balance between too few and too many tracking codes. Let's pretend we are an electrical contractor. The time our crews spend setting the equipment, running the large conduit, running the branch conduit, and pulling wire through the large conduit and branch conduit will account for the vast bulk of a project's man-hours.
Project success or failure will be governed by your crews' ability to hit the production targets for those benchmarks. Therefore, those are the only tasks that should be tracked by code on the time cards.
All other time should be lumped under "other" on the time card. Once you've figured out which labor tasks to track, create a numbered list of the codes allowed for the job. Give your foremen a list complete with clear descriptions of what tasks are to be assigned to each code.
Don't overlook the impact time sheet design has on the quality of recorded data. Make your timesheets user-friendly. The less writing the foremen have to do, the better. Consider printing out custom timesheets for each job - the easier the recording, the better quality the data.
The final step to data collection is motivating the field crews and foremen to fill out the paperwork accurately. We both know how much the field workers HATE paperwork. If they liked paper work, they would have become desk jockeys. They didn't and they don't. You will need to sell your employees on the value of the sending in accurate data.
You must explain how the data is used to set realistic budgets and schedules. You need to explain to them that their personal financial security is tied to you knowing your costs.
After you've answered the "What's In It For Me?" question, hold your foremen accountable for submitting complete and accurate timesheets. Job costing is not as important as safety, but it runs a pretty close second.
On a related note, one factor contributing to your job costing frustration is that few CPAs understand how to set up effective job costing systems. Their expertise is tax accounting and financial reporting.
Many are not even aware of the critical role job costing plays in a contractor's success. (If you are looking for a construction oriented CPA, call me at 913-961-1790. I know of a few that are excellent, one of which has a national reach).
In closing, job costing is a MUST. You must do it and do it right. Not knowing your crews' speeds will leave you chasing the wrong work and can put you out of business with a severely blown bid.