04 November 2016

Is Your Payroll Getting the Most out of Job Costing? Tips for Prospective and Experienced Job-Costers

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When it comes to accounting for labor costs, most other industries have it easy. If you were to run a bait and tackle shop, you might have cashiers and stock persons and back-office staff, but all of those cash registers, stock invoices and paychecks would tie to one profit center: your shop. Apart from the changes in technology and legislation that can make construction appear like a moving target, what really makes the industry unique — and challenging — is that its companies operate multiple profit centers that continually open and close when new bids are won and completed. Most contractors have learned that, unlike the tackle shop, a solid general ledger isn’t enough to see what’s going on in your construction company. But are you getting the full benefit from job costing your payroll?

Get Your True Job Cost Numbers, Then Make Them Better

When each invoice that hits your accounts payable ties to a job, it’s easy enough to add them all up and get a cost total — but of course that leaves a lot missing from your true job costs. Labor can be trickier to tie down to a job or job area, especially if on a single day you have Bill working six hours on one site and another three hours on site prep for a different project. Where does that hour of overtime get assigned? Or what about the burden and payroll expenses that are incurred on both jobs? Now we’re getting to some of the real costs that go into your jobs, and timekeeping apps, integrated construction accounting software and construction-specific payroll services can all help to manage the complexities that go with it.

Capturing your true job costs through payroll, however, is an ongoing process of continuing improvement, so in addition to the aid of technology and industry-specific services, contractors are also helped by beginning small and challenging themselves at a pace that makes sense for them.

Begin With Broad Strokes, Then Layer

Anything worth doing is worth doing well — but that doesn’t always mean with minute detail. A successful job costing system above all has to be usable, especially as it applies to payroll. It might be simple enough to cost a quantity of salt remover to a given job and cost classification as an invoice arrives, or as you move your inventory, but any payroll costing system needs to be known, understood and practiced at the ground level by employees on their timesheets. Without a system in place where the job cost information on timecards can be verified and trusted, contractors should keep in mind another maxim: no job cost data is better than wrong job cost data.

Additionally, a fully formed job cost system that attempts to anticipate every eventuality for breaking down costs might not leave you with the flexibility to revise, adapt and grow your costing system as you learn. And job costing is all about learning. A successful start to job costing will give you both answers and questions. Your epoxy job ran over its budget hours — but which stage of the project cost you in overruns? Your surface prep sometimes dips into overtime — but which project managers should you be looking at?

Contractors who are just putting their first job cost system to paper can feel free to start small, broad and manageable. Even if that means simply coding payroll costs to a job, contractors will still benefit from recognizing multiple profit centers as they track their jobs over time. Plus, since each project requires its own certified payroll form, the heavy lifting for this reporting will be done for prevailing-wage contractors as a matter of course in doing their normal weekly payroll, saving countless hours later.

Learn What You’re Looking for, Then Report It

Once contractors begin job costing, and then as they create more detailed systems to capture multiple levels of costs, they create a lot of data. But raw data without any questions put to it is a lot like having a book that contains the answers to all of life’s questions but just sits on your coffee table unopened. The varieties of reports available to contractors who job cost are innumerable, and what kinds of reports contractors look to bring into their repertoire should be directed by the kinds of questions they have about their costs, profits, productivity and labor force. But there are a handful of major job cost reporting opportunities worth calling special attention to.

To begin with, a job-to-date labor hours report will compare your estimated hours and cost amounts against the actual amounts incurred, both to-date and over a specified reporting period, to provide you with a variance for each cost category of a job.

A simple labor unit cost report will take hours estimates, labor cost estimates, and to-date labor hours and costs to produce several other sets of data for each cost area on a job. The first is a simple percentage of completion, based on the hours to date divided by the estimated hours. An “estimated unit cost” will be calculated from the estimated labor costs divided by the estimated labor hours. Likewise, an actual “to date unit cost” will come from dividing the actual costs and hours. From here, contractors should consider separating out burden costs from regular labor costs both in their job cost structure and in a report like this.

Cost
Code
% Complete Estimated
Unit Cost
To-Date
Unit Cost
Estimated
Labor Hrs.
To-Date
Labor Hrs.
Estimated
Labor Cost
To Date Labor Cost
100 64.76 16.47 13.96 850 550.5 14,000.00 7,685
200 86.08 11.33 11.59 750 645.6 8,500.00 7,483


Labor productivity
reports will show the number of units completed per labor hour for each activity or phase under the job cost structure — estimated, to-date or for a specified current period. From here it’s easy to see how variance, percent variance and productivity for quantities remaining can be calculated.

Cost Code Estimated
Labor Hrs.
To-Date
Labor Hrs.
Est. Qty. To-Date Qty. U/M Estimated
Production
To Date
Production
100 850 550.5 9,000 6,350 SF 10.59 11.53
200 750 645.6 12,000 9,610 SF 16.00 14.88

 

A projected cost analysis may take several forms. Building off the labor unit cost report, it can take the current unit costs and the percent complete to project the labor costs at completion, helping anticipate overruns specific to each designated cost area. Under this principle, contractors can also, for example, look at hours under- or overestimates using a percent complete based instead on quantities, billings and so forth. The possibilities become very open-ended.

Cost Code Estimated
Labor Cost
To-Date Labor Cost % Hours Complete Forecasted Cost at Completion Forecasted Cost
(Over)/Under
100 14,000.00 7,685.00 64.76 11,866.89 2,133.11
200 8,500.00 7,783.00 86.08 9,041.59 (541.59)

 

Finally, overhead allocation may be a major step for many companies, even if they’ve already been job costing. The practice of allocating overhead, however, allows contractors to see a truer account of a project’s cost by distributing a proportional amount of expenses that don’t belong to any one job. Of course a number of methods exist, and contractors should consult with their construction CPA beforehand, but one related method is per-labor-hour allocation, which treats overhead as a kind of “extra burden.” For example, then, if it’s determined that each hour worked costs an additional $1.25 for liability insurance, overhead allocation reporting can assign this “extra burden” to the cost areas of each job as an added factor to the total job cost, to be factored into profitability reporting and — eventually — more accurate bids in the future.

Job costing isn’t a practice that’s ever completely mastered, but practicing it and learning from it continues to help contractors master their expenses and profits. By maximizing their job costing efforts when it comes to payroll, contractors are not only able to better see their true labor costs to jobs; they can also more precisely identify productivity successes and lags so they can make corrective decisions and better budget in future; finally, they can leverage successful payroll job costing to assign certain overhead costs that further the accuracy of their reporting and their managing of a job. While these growth areas may be challenging, there are fortunately industry-specific tools and technology to help, but it’s also these types of challenges that give contractors a vocation to construction and leave bait and tackle shops to others.

*A version of this article was originally published in CoatingsPro magazine.

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