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The Key to Your Costing,
Past, Present, and Future
Deborah Rogus,
Contributing Writer
If estimating is the key to making money in
construction, then job costing is the key to staying
in business. It seems too easy, right? After all, job
costing is basically keeping track of your costs to
complete a project. How could something that
obvious keep you in business? Job costing affects
every aspect of construction, from estimating to
project management to accounting. In fact, you can
look at job costing as the past, present, and future
of your company.
While it may seem simple, not everyone in the
construction world is properly employing costing.
“I’m amazed at how few companies have solid job cost
programs,” explains Fred Ode, owner of
Foundation Software, Cleveland, Ohio. “There’s a
cost to it. The companies that have stood the test
of time have strong job costing—not just software,
but procedures. They know where they are making
and losing money, and why.” The why is truly
essential—it’s not enough to know that you are
making or losing money, you need to know the
reasons so you don’t repeat your mistakes, you can
correct any problems, and you can continue to do
profitable business.
Link to the Past
Imagine job costing as knowledge management—if
you do it right, you’ll have an entire database of
information from which to learn. For example, do
you know which jobs are the most profitable and
why? Most people might answer the jobs that were
the easiest—completed on time, no problems with
the clients, no arguments, no last-minute changes
or hassles. That answer might seem to make sense,
but is it actually true?
Gary Fortier is a CPA and partner with Large and
Gilbert, P.C., Macon, Ga. As a consultant to
construction firms, Fortier helps companies close
their books each month and analyze their jobs on a
monthly basis, such as creating and reading
percent-complete reports. He asked one client
which jobs he was making money on, and the client
answered the schools. “He thought they were doing
great because the school jobs were easy. Actually,
they weren’t making any money on them,” says
Fortier. The jobs that the client thought were
aggravating were the jobs he was actually making
money on, he says. “The reports told him what jobs
not to go after in the future because he wasn’t
making money on them. Without good job records
you might not know that.”
Strong job costing is also important when it comes
to getting bonded. “We meet with bonding agents
and bonding companies,” says Fortier, “and they
tell us that they won’t bond companies without
strong accounting packages and job costing.”
For example, if indirect costs—say repairs and
maintenance of equipment—haven’t been properly
allocated to jobs or spread across all the jobs
worked on that year, your gross margin will be
affected. That leads the bonding agents to ask what
happened to the jobs and the margins. “You don’t
want to create questions. You need a strong
financial statement to get bonds,” Fortier says.
“There’s been a tightening on the bonds due to
claim losses. Big contractors have gone out of
business, and there have been a lot of payouts.
They don’t want to bond people that they’re not
absolutely sure will complete a job,” he says.
Ode agrees that banks and bonding agents need to
know if you’ve over or under billed. They want to
know how a company really performed—not future
revenue, but actual revenue.
Historical data can also be a form of protection.
“Let’s say you get 4,000 invoices in a month,” says
Brad Matthews, vice president of sales and
marketing for Dexter + Chaney, Seattle, Wash.
“Each one of those could be the subject of or
evidence in a lawsuit. Job costing is compiling
evidence to protect yourself. It could be three to
four years later. If you’re scanning invoices, you
can look up the invoice, and print it or fax it.
Or you can grab all the invoices and timecards from
a job and put it on a CD-ROM. You don’t lose paper
copies, and you can do it in a matter of moments
instead of days,” Matthews explains.
Even if you’re not scanning documents yet, job
costing still allows you to pull up information
quickly. “With job costing, I can find what
subcontractors worked on what system quickly,”
says Brenda Braig, vice president and controller for
general contractor Versicon, Houston, Texas. “I can
print up job histories and get every single individual
who worked on a job and break everything down. I
can find the exact vendor we used. I can’t see
doing that without job costing.” After outgrowing its
Peachtree accounting software in 2000, Braig has
been using StarBuilder from Geac, Markham, Ont.
“I wouldn’t be working at a place if they didn’t use
job costing software.”
The Here and Now
In the construction industry, almost everything that
is built is a prototype. “No matter how good you
are,” says Matthews, “each project is unique. It’s
absolutely vital that you track your progress. We
are on this job right now. How does the amount of
money we spend compare to the amount of money
we planned to spend.” Matthews explains that a job
can suddenly take a terrible swing and
unexpectedly lose money. Job costing can act as an
early warning system. It helps owners and project
managers solve problems and make adjustments
rather than waiting until the 11th hour to realize
that a project is now losing money.
“I don’t see how not to have job costing,” says
Mark Willaford, vice president of support services
for Southern Piping Co., Wilson, N. C., and user of
software from Maxwell Systems, Norristown, Pa.
“You can’t read your business if you don’t know
what a job is costing you. It’s ingrained in us to
look at detail. Am I within my tolerances? If there
are any questions, I can drill down to the smallest
detail to see when and why,” he says.
With job-costing reports, an owner has a complete
financial picture of the company’s health and knows
exactly where they are. Knowing the actual cashflow
of your company is critical, and without that
knowledge owners are simply guessing. This
guessing could lead to wrong decisions. “How much
is really yours, and how much do you need to pay
out?” asks Fortier. “If you don’t know where the job
is, where your financials are, you could make a
major decision—like buying a piece of equipment—
that could kill the company.” You don’t want to
spend money you only think you have . And you
don’t want to wait until the end of the project only
to see your profits fade.
Work will always get done on a site; the job will get
finished. But will you get paid for everything? “How
would you know what was paid and what wasn’t if
you didn’t have job costing? One company I know
doesn’t even use computers,” says Braig. “You get
left behind. They miss things on billings. They don’t
job cost, and they have a lot more problems
keeping up with stuff.” The project managers for
Versicon use StarProje ct. Everything they do—
change orders, subcontracts, invoices—feed over to
StarBuilder, so Braig doesn’t miss any costs.
Braig explains that one project manager uses
StarProject to the fullest extent. He uses every
portion he possibly can because that’s the way he’s
supposed to do it. She never has problems with his
invoices or change orders. And he always does a
performance report to show where the project is at
and where the project is going to end up. For Braig,
the project management and accounting go hand in
hand because without one, you’re not going to be
able to do the other.
The economy has also affected the way owners and
project managers look at job costing. According to
Mitch Ellis, controller for Ellis Heating Co., Paris,
Tenn., and user of Dexter + Chaney’s Forefront
accounting software, “2001 to 2002 were pretty
tough years. If you didn’t know exactly what your
costs were down to the detail, you could lose
money. In a period where you had all the work you
wanted, you could raise prices and still get work.
Now margins are a lot tighter than they were.”
Job-costing software gives project owners and
project managers the ability to keep in front of
costs and to track costs and compare actual
budgets to estimated budgets. With this information
you can tell if something is going wrong and fix it
before it’s too late. Software alone can’t fix
problems; you need solid job-costing procedures.
The software backs up what a project manager sees
in the field and gives the owner and the office staff
the ability to help the project manager make
decisions and solve potential problems. Job costing
isn’t just about the software.
According to Ode, job costing is really the processes
and procedures a company has established.
Companies have to make a commitment to using
the technology to benefit their company. “It takes
time. Education is key. We need to make them
understand the level they can get to. It’s our goal
for the next few years: teaching our users how to
take advantage of what the software can do for
them,” says Ode.
Anna Becker, product specialist for Geac, has seen
a growing interest in job costing.
While it may seem that tracking costs shouldn’t be
difficult, some companies struggle to find the real
costs of a job. “It’s easy to capture payroll and
materials,” says Becker, “but difficult to factor in
burden or overhead—workers compensation, health
insurance, union dues. The software factors in
everything involved in completing a job so you can
really see how that job is doing.”
Becker says she sees more competition among
contractors, which means they’re more willing to
look at technology to find an answer. “After going
through a year or two of flat returns, now owners
are becoming more competitive. They have an
increased interest in technology and full integration.
In tough times you do whatever you can to salvage
revenues. Knowing exactly where and how you are
making money gives you that competitive edge.”
Toward the Future
Finally, historical job-cost data helps you better
prepare for the future. Jim Sprinkle, construction
manager for Weston Homes, Charlottesville, Va.,
and user of Geac accounting and ProEst estimating
software, uses his job-costing data to make
adjustments to information in his database and
change his views on estimating, where he’s been
consistently high or low. “I change my thought
process so we can be more competitive and still
make money,” says Sprinkle. “I don’t do ballpark
estimating. I build it in my mind. I use historical
data to adjust my estimates, but also for ordering
materials. [The software] has allowed us to trim
down margins and tighten down on estimates.”
The better you can control costs and have profitable
jobs, the better you can estimate and win more
jobs. You can learn a lot from your data if you have
it. Historical data matters even more when you do
the same type of work on a regular basis. Braig
explains that Versicon builds several Cingular
Wireless stores. Six years ago Versicon constructed
Cingular’s main corporate offices in Houston. Then
Cingular started to ask the company to do little
things, and now it does all its stores in Texas.
“That’s where the historical data come in handy,”
says Braig. “From job-costing reports I can find the
carpeting, paint, vendors, everything the same. It’s
a real timesaver.”
The future means more than similar jobs; it also
means growth. Essentially, every business owner
wants to grow the company and make profits.
However, Sprinkle says, “the bigger you get, the
more you have to find work to feed the beast.
People with better reputations get work. We’ve had
steady work, and part of it has been our estimating
and accounting systems. The software has helped
us. We’re operating on a fairly thin margin. Our
software and personnel have helped us move to a
place where we can operate on tight margin and
still make money.”
Ed Crum, chief financial officer for Griffin Pavement
Striping, Columbus, Ohio, uses accounting and jobcosting
software from Foundation Software,
Brunswick, Ohio. “When I came on board three and-a-half years ago, my goal was to automate
certain processes. We needed to allocate our
expenditures to jobs. A big one was payroll, and
another was third-party subcontractors.” The
company was growing when Crum came on board,
and it had outgrown its old ways of doing things.
“To continue to grow, they needed to have more
timely information. We’ve grown 30-40% since I’ve
been here. It would have taken a lot longer without
the software. Job costing is key. You need to look at
what you’ve done to see what you can do,” says
Crum.
Ellis also keeps his staff in mind when he thinks
about growing his company. “You always want to
grow, but you don’t want to do it too fast. We like
to keep our staff. The majority of the guys stay
here, and we need to maintain jobs at a certain
level. If you grow too fast and aren’t at a level
where you can maintain it, you have to send people
home. I don’t want to do that.” His accounting
software with job costing has allowed him to
improve the cashflow process and speed up the
time it takes to report costs so his managers aren’t
just winging it. He can also compare the real costs
to the estimated costs and determine if they were
high or low in hours or materials so they can be
more accurate in the future.
When choosing Dexter + Chaney, Ellis thought
about his needs and what he needed from the
software to allow the company to grow at the right
pace. “If you’re positioned for growth you want
software that will grow with you and actually stay in
front of you. There’s more the software can do, and
Dexter + Chaney continue to develop it and
improve it so we can benefit and facilitate our
growth,” says Crum. He advises new buyers should
consider what platform the software is on and who
else uses it. Ask yourself how secure is it? How
many customers do they have? If you find those
things out, you can ease your mind.
The construction industry is changing and more and
more companies are accepting that technology can
help. “The industry is getting smarter. Traditionally
they don’t think of technology as a tool; they don’t
want to touch it,” says Pam Kenwood, product
manager for Maxwell Systems. She explains
competition is getting more difficult, so contractors
need to track their costs even more. They have to
know their costs and margins so they can make
sure they really are going to get that profitability.
They also know they may have to take a slimmer
margin just to stay in business.
Technology isn’t inherent to construction. Project
managers are used to dealing with work orders and
scheduling and completing a project. And they
haven’t always done it through software. “I’m
convinced that will change,” says Bob Honeycutt,
president of Timbre Software, Berthoud, Colo.
“There’s a generic shift towards the acceptance of
technology. It was the same thing with cellphones.
They didn’t see the need. We’ll reach that same
state with field devices [and software]. The goal of
the software is to keep them focused on the prime
business—they’re contractors. I want to try to keep
them on their job.” The technology will help do just
that. Not only that, it will help them stay
competitive and stay in business.
