Building, Construction and Trades

Job costing: finding the true cost

Unlock your business' full potential with better job costing

Tracking, recording and analysing the costs associated with the products you sell or the work you fulfil is no easy task. But you already knew that. In today’s climate – where it’s necessary to serve customers on an individual basis – access to reliable, up to date information is of paramount importance.

If you want to achieve operational excellence and ultimately succeed (whatever your definition of success) you need systems and processes which support your goals.

Get started fixing your job costing

In this feature on job costing, we hope to provide some insights into some of the ways you can tackle the challenges of costing jobs.

What's holding you back?

What’s holding you back?

Over-reliance on spreadsheets

One of the chief culprits in the battle against unseen costs is the spreadsheet. Don’t get us wrong, we love a good spreadsheet as much as the next person. But, if you’re using spreadsheets for quoting and calculations, this method of job costing is going to bite you soon enough.

As a tool, spreadsheets are capable of performing great feats of business wizardry. However, they were never designed to perform the role of a sophisticated, streamlined, and connected job costing system. Job costing is much more than just knowing your costs. It’s about understanding the health of your business, keeping a veritable finger on the pulse of performance. Relying on the integrity of the data manually entered in a spreadsheet won’t give you a reliable source of information. 

Ineffective systems

Guaranteeing proper cost recovery on jobs can be challenging, especially without the right systems in place.

Case in point, around 95% of Australian service provider Eastern Tree Service's (ETS) work involves clearing vegetation around power lines. It operates on various types of contracts and has to handle multiple timesheets submitted by its crews in the field. Doing this manually, it was difficult to verify that the data being captured was accurate, there was no certainty that a correct bill was being sent to the customer.

This challenge of systems often manifests itself in the following: 

1. Inaccurate data
  • Manual data-entry can lead to human errors
  • Duplication of data duplicating effort
  • Outdated information due to manual data entry, disconnected systems or intermittent data entry
2. Reduced profits
  • Limited scheduling capabilities to estimate when labour is required
  • Inability to assign labour hours to specific projects
  • Missed revenue opportunties due to unbilled work
  • Exceeding project budgets or estimates due to inefficient planning and no job scheduling
3. Poor customer service
  • Frontline staff can’t provide clients accurate information about orders or visibility into progress
  • Order information not flowing accurately to operations/production/field teams creating errors
  • Additional 'un-budgeted' costs are disspointing customers
4. Inability to react to change 
  • Leadership team have limited visibility into costs as data is not flowing into business performance reporting
  • Lack of visibility into costs inhibits ability to adjust to trends
  • Limits ability to innovate and take advantage of new growth opportunities or meet individual client requirements

If you’re using a spreadsheet, it’s all too easy to overlook any one of these. But it’s not just spreadsheets that are to blame.

There are plenty of off-the-shelf products out there that simply don’t have the flexibility to record all the data businesses need to get an accurate view of their costs.

"The contracts we have, typically with the power clients, are anywhere between 5 and 10 million dollars a year and if you’re out by 5 or 10%, that’s a lot of money to not invoice"
Paul Tymensen CFO, Eastern Tree Service

If you’re using a spreadsheet, it’s all too easy to overlook any one of these. But it’s not just spreadsheets that are to blame.

There are plenty of off-the-shelf products out there that simply don’t have the flexibility to record all the data businesses need to get an accurate view of their costs.

Misunderstanding the true costs

It’s one thing to have small accounting errors that can be ironed out by your accountant. It’s another thing entirely if you’re relying on a system to accurately cost jobs on a daily basis. Because with tight margins, the smallest oversight can mean the difference between profit and loss.

A common oversight is to underestimate the number of costs involved serving your clients needs. It’s easy to account for labour and resources. But there is a host of other costs to consider. Even costs you don't tipically bill should be accounted for, consider that you may at one time need to reduce 'unprofitable' work. Without the insights, you may never know truelly control your costs.

Common Costs Not Tracked 

Costs building, construction and trades businesses should be tracking:

  • Costs as they are accrued rather than at the completion of the work
  • Employee time, sub-contractors, materials, distribution, storage and inventory
  • Accumulated un-billed costs like administration or debt collection
  • Accounting for costs for consulting, and equipment use
  • Tracking billable and non-billable items
  • Shared and/or overhead project expenses
  • Billing rates by individual, job role, or project and tracking/assigning customised pricing
  • Costs associated with importing materials such as currency conversion, import taxes and distribution
Planning for the future

Where to now? It's time to plan for the future 

Like any successful business, you most likely have an outline of your businesses short, medium and long-term vision and financial goals. However, what you likely haven’t done is develop the accompanying review of the technology and applications that will support this growth. As you know future planning is about establishing where you want to be. So, why not plan what your technology needs for that future? The task then is incrementally delivering initiatives that move you closer to achieving your vision of the future. As they say, Rome wasn’t built in a day!

6 steps to planning your businesses technology requirements 

If we're being honest you can tackle this task a number of ways. There are literally 'heaps' of methodologies out there. One particular process, which in our opinion offers a lot of merit, is the ‘Lean Innovation’ approach. 

Don't be intimidated if the literature out there seems overwhelming, it can be a simple process. Look at breaking down the tasks and only tackle them in a way that is achievable for your business. A great place to start is aligning your goals with the applications your teams will need to achieve those objectives.

Innovation sourcing: this is about collecting ideas for change, this task involves identifying problems, ideas and potential technologies or applications that will address the needs.

Curation: this phase involves workshopping the ideas and potential changes with stakeholders to determine what is achievable within specific time frames. The intention is to decide which opportunities aren’t feasible and what is the minimum viable solution.

Prioritisation: this is simply about prioritising ideas in terms of importance and impact. One method to adopt at this phase is the McKinsey Three Horizons Model. It was designed to manage innovation, but it provides a great framework for rating opportunities for change. It should be a good exercise to put your team in the right frame of mind.

 

McKinsey's Three Horizons Model
McKinsey Three Horizons Model

Exploration: once you’ve prioritised the initiatives for change the next phase is to put them under the microscope. The goal is to determine whether there is compelling evidence to suggest they will deliver the results you seek. This phase involves combining your own insights with customer insights to pressure test whether this is the right approach. Think of this phase as a quality assurance step.

Incubation: this is your research phase determining what is needed to get the initiative off the ground. It involves building teams or working groups to support the change and getting everyone excited about the new opportunities!

Integration: last but not least, putting your plans into action. The business needs to incorporate the new solution and retraining staff to adopt the new approach. This phase will likely be the most challenging as the rubber hits the road and your organisation's appetite for change is tested. 

How Leaders Are Preparing For The Future

Review your team's skills, knowledge and abilities to objectively determine whether they can support this change and identify gaps

As we’ve touched on a lot of the energy and effort is going to bring your staff on the journey to a new normal. For many businesses, this is where change becomes scary. To borrow the ‘golden cow’ analogy, in many business systems and process are sacred. Staff are often not open to change. Especially in established successful businesses.

One of the biggest challenges is reviewing your business skills and aptitude for technology to determine if what you plan for the future is achievable.

It stands to reason any project to update and improve anything will fail if the very people who use the system are not able or willing to use it.

One of your goals in this exercise will be to determine whether you can develop the skills to manage new systems. If not, you’ll need to plan for acquiring the skilled employees needed to achieve your vision of the future.

building_leaders_graph
Building good systems

Improve your systems

The more efficient you are as an organisation, the easier it is to convert opportunities into the change that positively influences your businesses growth trajectory. The trouble with efficiency – or, more precisely, the lack of it – is that the less efficient you are, the harder it is to turn the tide. Especially if your business doesn’t have the support of tools and systems that make your life easier.

Connect data sources for a total business view

To work properly, job costing needs to be integrated with other functions, such as Financial Management (General Ledger), Asset Management, Payroll and Reporting.

  • Provides ability to analyse expenses that contribute to profitability of product lines
  • Drill down into cost centres to isolate costs and develop a clear picture of what costs are incurred producing or providing services

Engineering firm Riley Industrial and Marine Sales has gained visibility across its business. “We can produce figures by a workshop, or on work in progress, and we can easily identify costings anywhere in the cycle, from quote through to invoice,” says General Manager, Peter Buzza.

Prioritise getting live data

Provide systems that cover the entire operation so everyone has access to input information at every stage so you always have up-to-date data

New Zealand-based Paramount Services, credits accurate job costing as a key to keeping clients happy and winning new business. Job costing is an integral component of Paramount’s business system, whose CRM component enables customers to log on and see what work has been done for the rates charged. This transparency provides what Bill calls “a closed loop result” for the client.

Incorporate a rules engine

A system that offers rules and escalations capabilities allows your business to identify and manage events that impact your business. Managing disruption is hard enough without a system that allows you to set rules and escalations for both the events expected to happen and those that are unexpected.

Store data centrally

Ensure everyone has the ability to share data and update information in the one place to improve visibility into project/job cost data. 

“Our warehouse people can also run reports to see where stock is, so if we need to move it to another city to fill an order, we can do it instantly. This makes it seamless, rather than having to check 100 emails and make lots of phone calls,” says Dennis Ghetto, Co-owner, CFO and Operations Manager, Raw C - Coconut Water.

Invest in a customisable system

Want a system that can be tailored to your specific needs to deliver tools that can be customised to your needs to streamline business processes and workflows and improve productivity

Types of customisation you want to look for:

  • Custom reports for menus and portals
  • Creation of ad hoc reports and queries
  • Ability to add user-defined data fields
  • Construct personalised dashboards with drill-down capabilities
  • Construct personalised portals combining functions needed for specific roles
  • Tailor pre-defined workflows and/or construction your own workflows
  • Add custom logic to workflows to respond to customer needs/wants
  • Add or change data models or structure
Offer mobile tools

Provide staff flexibility, help your staff work how they want, on the go or at the desk.

Provide an opportunity to go paperless and improve the speed of approvals and reduce manual data entry meaningless human errors.

Here is a great example, we mentioned Victoria-based Eastern Tree Service before. ETS’s trucks are equipped with iPads, which send data to their Job Costing module in their software. The billable and unbillable hours (downtime due to bad weather, breakdowns or illness) are now accurately captured.

“We’re more efficient and more accurate,” says Paul. “We can now have faith that we can go into a new contract area and know exactly what the performance of that contract area is doing at any time.”

Focusing on processes

Improve your processes

There are plenty of pitfalls along the way to improving your business, even for a successful business, and many exceptional companies fall victim to external pressures and market forces beyond their control. But some businesses are able to recognise that inefficiency is a real and present danger that, if left unchecked, can set in like a rot.

Whatever business you work in, it’s all too easy to get caught up in the day-to-day-intricacies – whether that’s calling customers, reordering stock or chasing down debtors. And when that happens, you stop looking at the big picture.

"We’re now more disciplined in the way we do things. With better processes, we’re able to offer our customers a competitive level of personalised service."
John Rose Warehouse Manager, Martin Kellock Pots

Map, improve, automate

Process mapping and process improvement are interconnected. Usually, mapping comes first. Put simply, process mapping means taking daily business processes from hard copy manuals or peoples’ heads, and transferring them into a computer system – there are a number of software options to help. It sounds simple, but it can actually be incredibly complex: processes that are second nature for your staff can be very difficult to explain or clarify on paper. 

Improvement comes next. Once your processes are visible, it’s easier to see what needs to change. In fact, the act of process mapping itself can lead to improvement – as people record processes, double handling and inefficiencies become apparent and can be changed on the spot.

process_mapping

Process improvement can also offer opportunities to innovate within your business. For instance identifying opportunities for automation. For example, you could use an automated system to inform staff about shift changes, rather than posting a paper roster. Or you could use an automated system to answer customer emails, with the most urgent or unusual being flagged for review.

One example is Australian telco Codecom. They relied on accounting software to handle many of their financial, customer service, payroll and sales processes. But as their business expanded, they outgrew the software. Moving to a new solution, designed for bigger businesses, allowed them to unify all their business tools. In turn, they were able to review and change all their processes. They identified unnecessary manual processes and automated them. They implemented new functionality which enabled them to innovate their sales and customer management processes and improve customer service and retention. But they didn’t stop there. The new system gave them access to all their data in one place, which gave them the insights they needed to find more opportunities for positive change.

But process improvement isn’t something you do once and never think about again. Improvement needs to be continuous and ongoing to have the most impact. As your business grows, technology gets more sophisticated, and customer demands change, your processes must also evolve to keep pace – and that commitment to continuous improvement requires a top-down approach, with senior leaders at the fore.

There are a number of strategies and methodologies around process improvement, but Six Sigma and Kaizen are probably the best known and most established. If they’re new to you, you can read a little about them here in our feature on process improvement.

Summary

Above all, it must be remembered that Job Costing is not a standalone function. It needs to be part of a connected system that enables single-point data entry, eliminating those human errors or instituting an automated approval process that flags any discrepancies on the spot. It also delivers real-time information, which managers can access easily and produce reports that show them the key performance indicators (KPIs) that show where the business if profiting and where it’s losing money.

With such invaluable information at your fingertips, you can gain or maintain that competitive edge.

 

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To gain more insight into improving job costing, talk to a MYOB consultant.