The Benefits of Job Costing in Construction & How to Do It

By August 27, 2018News
The Benefits of Job Costing in Construction & How to Do It

How often do you use your financial data to plan your next steps? Do you ever ask yourself: “Where exactly is my money coming from, and where exactly is it going?”

If your accounting only goes as far as compliance, it’s probably not working very hard for your construction business. Big construction companies don’t just file taxes and print reports – they turn their financials into long-term action plans for major growth.

How do they do it?

It all starts with the process of job costing.

What is Job Costing and How Can it Help You Grow?

Job costing breaks your company’s operational costs down into specific projects. It groups expenses, overhead, and labour costs into a single job.

The benefits of job costing are numerous.

Job costing can help you:

  • Understand where your money is being spent and earned
  • See where inefficiencies are happening and how to eliminate or reduce them
  • Estimate and bill projects appropriately
  • Review performance and management strategies
  • Understand which projects and types of projects are bringing in the most profit, which allows you to pivot to those services

Can I Use Job Costing for My Construction or Trades Business?

Job costing is a complex process that involves gathering, organizing, and interpreting data. Once the process of job costing is done, the data needs to be turned into a comprehensive strategy. That’s why many small to mid-sized construction and trades companies aren’t doing it.

However, it’s not impossible to start job costing. Whether your company is brand-new, or you’ve been in business for decades, you can take strong control of your finances through job costing. The benefits far outweigh the costs.

There are two main options to help you get started with job costing:

  1. Create a simple system that allows you to do very basic job costing with self-interpretation of results
  2. Hire a Controller/CFO to manage your job costing, interpret the data, and create a cohesive ongoing strategy for future growth

Who Controls Your Company’s Finances?

Let’s look at the three different types of roles involved in financial leadership within a company:

An accountant’s duties are to ensure accurate record keeping and financial reporting. This information forms the basis for the Controller and CFO’s planning and strategizing. Some construction companies and trades have internal accounting positions. Others have an external accountant who manages their financial data.

A Controller has a broader understanding of the overall financials of a business, including its financial history and current standing. Controllers typically “react” to financial standings. This person will regularly audit the financials and create strategies to make the best of the current financial situation.

A CFO (Chief Financial Officer) is forward thinking. He or she sees the overlap between the financial and operational aspects of the business. The CFO updates the business model regularly to make the business more functional and profitable in its ongoing operations.

Appointing an External Controller/CFO

For small to medium-sized construction and trades companies, it doesn’t make sense to appoint an internal Controller or CFO. The reason is threefold:

  • There won’t be enough work to maintain a full-time position,
  • The cost for internal services is high, and,
  • Controllers & CFOs require high-level training and experience.

That’s why many companies choose to appoint a highly experienced accountant as a Controller/CFO. Firms like Schwan & Associates often act as Controllers and CFOs for construction clients. This allows us to take financial data to the next level. Instead of just being compliant, we can use financial data for real-time growth and improvement. We’re able to take on an advisement role so clients can back their day-to-day decisions with data.

An Example of Job Costing’s Growth Effects

One of our construction clients recently came to us with a pointed question: “why are my expenses suddenly so high?”

After a few years of running the company with little change in operations, profitability had suddenly dropped off. The owner was left staring at his reports, receipts, and payroll, with no idea where to look for the problem.

When he came to us, we immediately walked through the last few years of projects with him. Through job costing, we could easily see that 80% of his loss of profits was coming from price spikes from suppliers. He’d been using the same suppliers for years, and in the last three years, their prices on specific products had taken a huge jump.

Once we’d determined the problem, we put a three-step plan in place. First, the owner would shop around for prices at other suppliers and distributors. Second, he would pivot his business to the services that used

less costly products. His marketing would be aimed at audiences in need of the more profitable services. Third, he would continue job costing. We also created a system in which Schwan & Associates would notify him if there was a major jump in the price of a specific product from one month or one year to the next. That way, he could repeat the process to maintain profitability.

This is just one specific example of the benefits of job costing. If you’d like to learn more about how to implement job costing in your own Alberta construction business, contact a Schwan & Associates CPA today.

Learn more about how to implement job costing in your own Alberta construction business

 

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Jeff Schwan

About Jeff Schwan

Jeff established Schwan & Associates CPA to bring unique “cloud-based” accounting services to small and medium-sized Edmonton businesses. Inspired by the quality time spent with his family, Jeff’s goal is to put more time back in the hands of the busy entrepreneurs who strengthen Edmonton’s business community. With 10+ years of experience in diverse management roles, Jeff has acquired a strong set of leadership and mentoring skills. He is, and always has been, an educator at heart. He knows the value of spreading knowledge, investing in people, and continually learning.

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