In the first Surety Corner construction accounting instalment we will be exploring the topic of job costing for contractors. As identified in the introduction to this series, job costing involves recognizing the expenses for items such as labour, materials and overhead related to ongoing contracts. Proper job cost tracking allows contractors to recognize profitability on specific work to identify whether business objectives are being met.
How does a contractor track job costs?
While some contractors may choose to use a project management software, or some may choose to use their own internal spreadsheets, the fundamentals of job costing remain consistent. When reviewing a job, a project manager or controller should be able to narrow their focus onto specific cost metrics to determine where cost overruns may be occurring.
For this reason, it is crucial to categorize and group costs not only by job, but also by other easily identifiable figures. For example, within a job cost tracking spreadsheet, a contractor may wish to group as follows: by job number; then by job area (ie: foundation); then by cost type. (ie: material/labour/equipment/supervisory).
By identifying costs with specific labels, a review of the job costing report will glean insight into overruns related to any of the identified categories. Not only will this allow for mid-contract workflow adjustments to maintain profit targets, but it will also provide a strong baseline for future projects of a similar nature and assist estimators in developing pricing on a go forward basis.
By exercising diligence in tracking costs, contractors can take the high degree of variability from contract to contract and detect actionable trends.
Calculating job costing
As outlined above, job costing is typically broken into three categories:
- Labour: While many construction entities will have a project management software that allows for tracking of employee hours, this may not be the case for all. For those who do not make use of such software, it will be important to use another tracking technique. For example, having employees record their time on a timesheet which identifies the number of hours spent on a specific task and/or project. These hours can then be appropriately allocated within the contractors’ job cost report based on the applicable hourly rate or reasonable pro-rated salary allocation.
- Material: The same principles apply to the tracking of materials used in the course of construction as identified with labour. It is also important to identify direct costs versus indirect costs. As an example, a direct cost would be the glass windows installed on the exterior of a building. An indirect cost is the cost of materials needed for completion, but not a part of the finished product. A relevant example of these costs would be the cost of PPE for employees such as masks, gloves or hand washing stations.
- Overhead: Overhead tracking is the recognition of shared company resources that are to be attributed to specific jobs. An example of this would be a piece of rental gear that is used across numerous projects on the go. The portion of that rent that is to be attributed to each job must be recognized in order to determine the true profitability of each job.
Good data in, actionable data out
While adequate cost tracking is a necessity for internal management decisions, these figures are also what will form the data pool for your accountant to perform their quarterly or annual review.
As a contractor, you will have many stakeholders requesting timely and accurate financial information from you. Whether it is your bank, surety company, accountant or shareholders – people will expect that the in-house data provided to them is up to date and an accurate reflection of project progress. These records need to be maintained on a frequent basis for the purposes of generating work on hand reports, which feed directly into the recognition of your revenue and profits. This will be discussed further in Surety Corner’s next instalment.
The importance of accurate records when disputes occur
Whether a lien has been filed, a notice of default is received, or a claim is made against your surety bond, proper job costing is going to be a crucial piece in defending a contractor’s position. Set aside the need for accurate data to analyze as an arbitrator, court or claims adjuster – today’s construction environment has strict deadlines that must be adhered to. Adhering to these timelines requires contract specific information to be at the fingertips of the management of each construction firm.
Sunny Nagra from I&A Professional Corporation backs this up when he says, “It is imperative that all construction companies incorporate some form of job costing. The level of sophistication will of course depend on the size of the entity and the resources that are available.
“For companies just getting started, it may be as simple as ensuring all your labour and materials are being correctly attributed to a job. This can then be compared to revenues at the completion of the job to determine the job profitability. For more complex organizations, the estimating system being used will provide the project budget. This breaks down the estimated cost to the company for every component of the job. Costs are then attributed to a component of the job and management can later look back and determine where the execution and the estimates differ. In any event, by implementing a system for job costing, management will have the ability to determine exactly where they are in a job.
Beyond just tracking job profitability, the various reports and data produced in job costing is that data that will then be used in determining the companies work in progress or deferred revenue for that period.”
Andrew Cartwright is the vice-president of surety for FCA Insurance. Andrew recently joined FCA after a decade long tenure as RVP for a large national surety company. Matt Manol is the manager of surety for FCA Insurance. Manol recently joined FCA after spending his last six years underwriting contract and commercial surety products for a large national surety company. Send comments and column ideas to firstname.lastname@example.org