Job costing is a fundamental accounting process commonly used by construction companies and manufacturers to measure the profitability of individual projects or jobs they undertake as a business.
It’s the standard procedure of tracking and calculating expenses that your team can utilise to effectively allocate resources, improve profit margins and make more well-informed decisions.
However, in reality, many businesses often struggle to determine the actual costs of the job as they fail to accommodate various critical elements that are essential for achieving accurate costing.
This poses a significant challenge because (like what we always say!) accuracy is the only data worth paying attention to. Overlooking all relevant job expenses means you’re underestimating job costs and getting the wrong picture.
To address this issue, let’s delve deeper into the process of capturing accurate job costs so you can make more informed decisions.
The true cost of a job
If you restrict your job costing solely to the materials used, how do you know if you are actually making any money?
While materials are a significant part of the cost, they’re just one piece of a big puzzle.
Proper job costing involves incorporating ALL of the other financial outlays associated with completing the project, which may include:
- Subcontractor Fees: Payment for the professional services provided by external parties involved in the job
- Labour Costs: From wages and salaries to the benefits given to staff and employees
- Oncosts: Additional costs like superannuation, employment taxes, insurance that go beyond direct expenses
- Overhead Charges: Indirect costs of running a business such as a rent, utilities and more
True Cost of the Job =
Material Costs + Subcontractor Fees + Labour Costs + Oncosts + Overhead Charge
By comprehensively tracking and thoroughly analysing ALL of these expenses associated with each job, it’s easier to uncover inefficiencies, enhance business processes and precisely measure your overall financial success.
Why do some businesses tend to underestimate their job costing?
There is no one-stop-shop software that addresses every business’ unique job costing requirements.
Each job varies significantly based on industry, business model, project size, costs and other resources, so it’s difficult to find a one-size-fits-all software that caters to all job costing requirements of every business.
A lot of construction companies use a combination of specialised job costing software and accounting tools to meet their diverse and complex job costing needs. However, managing multiple software can be quite costly and time-consuming in the long run.
- Some businesses have a limited understanding of their costs.
When businesses don’t have a full grasp of the variety of costs that come with a specific job, they might miss out on accounting for essential expenses.
For instance, they might overlook annual leave costs and insurance costs, therefore underestimating labour costs. Wastage and delivery fees are also often not factored in material costs, resulting in inaccurate job cost estimates.
In addition, neglecting vehicle and facility-related costs can negatively affect the overall financial assessment of a project.
- Poor management of resources might lead to inaccurate job cost estimates.
A contractor who has lower hourly rates but constantly takes up your time may actually be more expensive than the contractor who has higher rates but arrives on time, completes work to the highest quality and delivers on budget.
So, how can you prevent underestimated job costing from happening?
- Compare your job estimates to the financial results indicated in your Profit and Loss (P&L) Statement.
So many businesses often find that, despite their high selling projects, the actual money that reaches their bank account is significantly less due to deductions like superannuation, insurance and other extra fees that are not initially accounted for in job costing.
By comparing your job’s projected costs and revenues to the actual figures in your P&L Statement, you’ll be able to assess the true profitability of your projects.
This assessment enables you then to adjust strategies, accurately price services and allocate resources more effectively.
- Find the right job costing method that works for your business.
You don’t have to stick with the conventional hourly rates system.
Other job costing methods such as the percentage-based approach, might be more suitable to the unique goals and requirements of your business.
- Seek the help of financial experts.
Job costing doesn’t have to be a waste of time for your business. In fact it can be the key to your success.
There are job costing experts like our team at Dexterous that can help you gain a more comprehensive picture of your business through accurate job costing.
As your business’ growth-focused finance department, we help you become more proactive with expenses so you can make better decisions for your business.
Dexterous is your outsourced finance department solution
Dexterous plugs directly into your business and collaborates seamlessly with your existing internal model to power your business growth – today and in the future.
As your managed finance function service provider, we offer:
- The agility, flexibility and scalability you need to deal with job costing challenges in today’s evolving business landscape
- Introductions to the right people in finance to gain a competitive edge
- A comprehensive team of industry specialists who can manage your finances according to your unique needs
Do you want an expert finance team that helps you proactively manage your costs and financing?
At Dexterous, we provide a comprehensive managed finance solution.
This means that we leverage all the latest business tools, access global talent and manage your finance department with the local expertise of our Sydney team.
We also equip you with a strategic approach and cost-effective function not just to address the challenges of a potential recession today, but to help you achieve more growth in the future.