Job costing: the art of realizing your true profits

February 1st, 2018 / By: / Case Studies

Ryan Chism, vice president of The Chism Company Inc., a manufacturer of architectural/industrial shade and protective products in San Antonio, Texas, says that the “unexpected” can often actually be predicted—and taken into consideration in the job cost.

It’s a fairly safe bet that not many business owners started their operations because they wanted to work on spreadsheets. But like it or not, when you hang out a shingle, only part of your work will be designing a custom awning or fabric structure. Figuring out how to charge for those jobs accurately is just as critical to your success.

The importance of job costing may seem obvious—you’re in this business to turn a profit, after all—but it’s still something that many fabricators can struggle with. The burden of accounting is only part of it.

To begin with, a busy business owner may run into difficulty coming up with the minutes and hours needed for successful job costing.

Account for true costs

Steven Malone, founder and principal consultant at IronClad CFO in Salt Lake City, has worked with SewLong and other companies to establish or improve their job costing processes. He says he sees a lot of small businesses that don’t understand what it takes to do the work.

“When they go to do their estimates, they’re not accounting for everything, so they end up shorting themselves on what they should be charging,” Malone says.

“It’s critical to understand what your true costs are,” he adds. “With labor, for example, it’s not just the hourly rate you are paying someone, but there are taxes on top of that, and insurance. If you’re paying an employee $60,000 a year, you need to know the true burden is actually closer to $72,000.”

Another mistake often made in job costing is equating margin and markup, according to Malone. If the cost of your product is $100, and you require a 20 percent margin, you can’t just mark it up 20 percent, Malone adds. That results in a price of $120, which is a margin of only 16.66 percent. Instead, to hit the required margin, you need to mark the price up to $125.

“I know that can be a hard concept to understand,” Malone acknowledges. “But it’s a problem if you think you’re making 20 percent and you’re really only making 16 percent. When you start talking bigger projects, that adds up pretty darn quick.

“If you wonder why you’re always out of cash, it’s because you’re leaving cash on the table,” he says.

Then there are the unexpected developments during a project that can throw off any cost estimate. But according to Ryan Chism, vice president of The Chism Company Inc., a manufacturer of architectural/industrial shade and protective products in San Antonio, Texas, the “unexpected” can often actually be predicted—and taken into consideration in the job cost.

“We do a lot of work in general contractor–type of construction, where things go wrong despite your best efforts,” Chism says. “A construction site can be crazy; there’s rescheduling or rework that is nobody’s fault but it happens, and you lose a day. We complained about it to our accountant, and he said, ‘It’s a cost of doing business; you need to put it in overhead.’ We went back over the years and tracked what our exposure was, and put that in as a factor. It’s a fee for service and we end up using it all the time—and it sort of takes the pressure off.”

Ask the right questions

When estimating, you need a clear set of assumptions, Malone says, “and you need to review those assumptions with the client. There may be things the client assumes is part of the quote that aren’t. Make sure everyone is on the same page. When you’re not, and something happens, you can end up with a real customer service problem.”

Many business owners agree that the larger the job, the more unknowns can come into play. Even smaller jobs can present issues. “It might happen when we’re doing replacement fabric work on very old properties,” Chism says. “The job itself may not take much time, but you might end up having to take a half-dozen trips to the site, measuring different things, and that’s really hard. The sales person managing that job is going to use up a lot of time that can’t be used for selling. It’s an opportunity cost, and you have to figure out a way to account for that.”

Use the right tools

Just as methods for determining a job cost vary widely among fabricators, so does the technology used when doing estimates.

On one side of the coin is Larry Schneider, owner of Homestyle Awning & Upholstery in downtown Milwaukee, Wis. Schneider, who has been doing upholstery work since 1972 and has owned his own shop since 1983, still does things the old-fashioned way.

“I’ve always been a pretty low-tech guy. I still do handwritten estimates and receipts; I’m kind of stuck in the past that way,” Schneider says. Given that he keeps six employees busy, it seems to work for him.

Mario Nowogrodzki, CPA/CITP, founder and principal at Mendelson Consulting in Pembroke Pines, Fla., which specializes in QuickBooks® and technology consulting services, says that many people assume QuickBooks is the most common software used for accounting. He says it’s not.

“That distinction belongs to Microsoft® Excel®, but even though it’s used for accounting, it’s not really accounting software,” Nowogrodzki says.

“One of the keys in any business with job costing is looking at reports,” Nowogrodzki says, and he believes an Excel spreadsheet just doesn’t show enough. “Something like QuickBooks is so much better for showing the actual versus estimate on a per job or project basis. You’ll see where you made or lost money or where you didn’t make enough. To make the right business decisions, it’s crucial to use the right tools, and it is not difficult to do so.”

Adopting new technology can be hard, Nowogrodzki admits, and Homestyle’s Schneider agrees. “I’m the old dog, hard to teach new tricks,” Schneider says, but even he is amenable to change. “My wife is going to retire soon from her job,” he says, “and her plan is to come in and help me get this thing computerized.”

The advantage, according to Schneider, will be efficiency and organization. “We might be able to get out of town for a week once in a while,” he says.

Jeff Moravec is a freelance writer from Minneapolis, Minn.

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