Every company, regardless of the industry, is in business to make a profit. In good economic times construction projects are more abundant and typically fewer companies bid each project. In the current economic climate, there are fewer jobs, so more companies are competing for each one. The profit margins are smaller, and companies that do not understand exactly how each project is performing in regards to costs, projected costs, and schedule are doomed to fail.
Most small construction companies do very little job costing. Those that do track job costs often use Excel spreadsheets that require duplicate data entry resulting in hours of extra work and, in many cases, in costly errors. These companies track the obvious items, such as accounts payable costs and the pay rate for each employee. However, this information does not provide the owner or project manager the details needed to accurately bid or track projects for maximum profitability.
Overlooked Job Costing Issues
There are other costs outside accounts payable and employee pay that must be accounted for in bids and tracked accurately to provide management with the details they need to understand their costs at any given point in time during a project. These costs include:
- Corporate overhead - a portion of business expenses such as office space, administrative staff, and utilities should be included in each job bid
- True employee costs - in addition to their hourly rate, employee benefits, workers comp costs, and the like, should also be factored in to each job
- Equipment costs - if you own equipment used on the job site, an hourly rate should be charged to the job for each piece of equipment used
- Change orders - changes on projects need to be well documented and monitored as they can have a significant impact on the cost of the job and ultimately the profitability
- Inventory costs - if you maintain inventory, it is necessary to track the inventory and associated costs for the job on which it is used; effective management can save significant costs as well as help keep projects on track per budget and schedule
Construction companies that don't understand their true job costs will struggle to make the profit on a job that was anticipated when they won the bid. Most likely, the same mistakes will be made over and over. Without properly tracking and measuring the job, problems cannot be identified and won't be fixed for future bids. Bidding jobs under false assumptions can result in underbidding jobs that cannot be executed profitably or in overbidding jobs and losing out on potentially profitable opportunities.
Benefits of Accurately Tracking Job Costs
Accurately estimating and tracking job costs will give you better insight into your business and help you identify variance items on a project that impact your bottom line. These are the items which you are not able to execute in line with the project budget. When jobs are being bid too low and these variance items are identified during the execution phase of a project, changes should be made to help you avoid the same mistakes on future bids. Potential reasons for underbidding a project include:
- Materials - Prices of materials never stay the same. If you use the same price for lumber, for example, from project to project, and the price of the lumber goes up, your profits will go down.
- Hours - The number of hours required to complete a job could be higher than anticipated. This can result from having the wrong type of worker on the job, using workers that are not appropriately trained, or an ineffective project manager
- Task overrun 'Tasks are identified on the job that were missed in the original bid. If estimators are missing specific tasks during the takeoff and estimating phases, perhaps the estimator needs additional training. Items that are not on the original bid should automatically initiate a change order process to ensure the costs are covered.
Identifying these variances and correcting the underlying problems will allow your company to accurately bid construction jobs and execute them profitably. Learn from your mistakes.
About Maxwell Systems Maxwell Systems is a leading provider of complete construction business management software solutions and services. Founded in 1975, Maxwell Systems is dedicated to helping its 10,000 customers streamline their estimating, job cost accounting, and project management processes using construction business software to improve profitability.