Job Costing – What is it and Why is it Important?
Proper Job Costing is the process of tracking the labor, material, and equipment costs on a disaggregated basis. Disaggregation is simply dividing the cost into smaller discrete groups.
Maintaining good job costing practices, and therefore knowing your costs, is the difference between success and failure for any company. Consider the example below where I have used cast in place concrete to illustrate this concept. Many General contractors, particularly small ones, would have their costs accumulated into one cost code called concrete. Their thinking is something along the lines of, “I have a lump sum contract with my concrete sub. I don’t need to be that detailed.” This could not be further from reality!
Look at the example below at a direct cost found on nearly all construction projects, cast in place concrete, and consider what is the benefit of tracking costs on a disaggregated basis.
What is the benefit of having detailed information? How would your decisions, and company’s outcome and positions, differ with each level of detail from the examples above if:
· Your concrete sub hands you a change order for additional labor due to delays.
· The owner wants to change the project by adding 5000 sf to one side of the building.
· Your concrete sub is filing bankruptcy halfway through the job.
· The market changes and we have a major recession.
· The cost of rebar increases 200%
· You want to accurately update your WIP report.
All the above scenarios happen every day on some construction project. I have seen companies, that built hundreds of millions of dollars of work, go out of business as a direct result of not having good job costing processes. This is one of the most important business functions you can implement. You will be able to protect yourself against overbillings by subcontractors and collect more money on change orders. The starting point for all good job costing is the estimate.
Without data at least as granular as that shown in example C, you will be forced to guess what to do. Furthermore, better cost data helps you win you next bid. Let us show you how by visiting www.junctureestimating.com.