Construction Businesses Prepare For a Recession With Job Costing

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In an economic recession, it becomes even more important to know exactly how much money you’re spending and making on every job. If you’re aware of every dollar in play, you’ll be able to analyze your margins and figure out what’s been profitable for you and what’s been drawing on your cashflow. Proper job costing analysis will help you identify the profit killers and maximize the time spent landing — and completing — jobs that pay well.

Job costing helps you get to the bottom line

Job costing is a method of tracking the actual price of each stage of a project. It’s important to a business’s bottom line, and because many contractors feel they don’t have time for administrative work, job costing is often underutilized.

Job costing reports break down an entire project into individual costs, and helps you to understand where your profit margin lies.

For instance, let’s say you’ve estimated the drywall stage of a spec-home project to cost $8,500. Breaking down the project revealed that drywall, screws, mud, and tape added up to $7,000 but labor ended up costing you $2,000. You’d end up taking a $500 loss on that portion of the project. If you were just cutting checks without inputting real data into your job costing system, you’d still take that $500 loss, but you’re also likely to repeat that mistake on the next project.

Now imagine that you’ve underestimated several stages of that same home build. You could end up leaving thousands of dollars on the table. Not only will that destroy your cashflow, but if you repeat that over a few projects, you’ll be closing the doors on your business like so many other contractors during a recession.

Job costing reports can help you by estimating more accurately, and optimizing your profit margins. It may feel good to make X amount of money on a job. But if you don’t know how you made that exact amount, you may be squandering money away during the estimate process.

 

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The 80/20 Rule: Trim the fat

The 80/20 rule, also known as the Pareto Principle, generally says that 80% of your effort goes to 20% of the result (and vice versa). As it applies to construction industry payments, it makes sense that you spend about 80% of your time chasing down payment on 20% of your projects.

During a recession, it’s more important than ever to trim the fat on your books. This means avoiding the jobs that are costing you the most time, effort, and money. Job costing will allow you to identify the 20% of customers or projects that cost you the most ahead of time.

You can increase your estimates, restructure your payments, employ a more aggressive collection policy, or pass on that job altogether.

Reducing mobilization costs

If the construction business worked in materials and labor alone, bookkeeping and accounting would be much simpler. There are other values at play that job costing will help you identify, learn from, and plan for.

Mobilization costs are the initial costs when getting a project off the ground. If a contractor doesn’t account for the cost of permits or surveys, for example, they draw on your bottom line without you even being aware. Paperwork, logistics, and initial delivery of tools and equipment are also mobilization costs that job costing reports can point out. An accurate job costing report helps to determine their value.

A contractor can’t avoid mobilization costs. Even the smallest subcontractor on the smallest job can’t avoid spending the time and money it takes to get the project off the ground. A detailed job costing report will allow you to identify these costs and plan accordingly.

To prepare for these costs, you could add a flat percentage to the project. An even better, more accurate option is to add them to the contract line-by-line. This increases transparency and communication. It will also help you to avoid holding the bag if payment issues arise and you’ve fronted a substantial amount of cash to get the job rolling.

How job costing helps you protect cash during a recession

Challenging times may be in our very near future, but the truth is you can never tell for sure when a recession lurks around the corner. Now more than ever, it’s important to try to protect your cash flow as best you can.

Job costing reports are more than just box scores to review at the end of the game. They’re a fluid roadmap of where you’ve been and where you’re heading. If you maintain a highly detailed costing report, you’ll be able to tell where your failings are and come up with a plan to fix them. When money is harder than usual to come by, being able to steer the ship on a new course can be the difference between making it or losing your shirt.


Dig deeper: How to conduct a “recession stress test” to see if your construction business is ready


Identify what’s not working

Consider a difficult client or owner that believes in communicating solely through change orders. If you’re able to track how these change orders are affecting your bottom-line, you can either stop accepting them or create a basis to demand payment for them as they come.

If you’re tying up cash into every whim and desire that comes in but not keeping accurate job costing reports, you could have tied up more cash into that job than you realize. If that owner starts struggling to pay his own bills due to hard times, it may be too late for you to recover your cash without legal action.

Identify what’s working well

On the other side of the coin, if your job costing report shows that something you’re doing is working particularly well, you should continue that. For example, you should be tracking material and delivery costs.

Comparing reports from a few jobs might highlight the fact that one of your suppliers is a better fit for you over another. Also, when it comes to manpower, you may find that appointing one foreman over another has increased your margins, making them an indispensable part of your team.

After all, you can’t manage what you don’t measure. Without real data, you’ll have a difficult time quantifying the differences.


Dig deeper: Learn the 5 Steps to Recession-Proof Your Construction Business


Protecting your cash flow moving forward

Job costing reports are useful tools for analyzing past performance and current conditions, but how can they help you as you move forward?

Keeping accurate and up to date job costing reports allows you to see how one particular job is doing. But it also helps you compare it to other jobs that you’re currently running or have run in the past. They can be an incredible tool for evaluating what jobs made you the most money – and which jobs nickel-and-dimed you to death. You’ll be able to identify themes as well. One of which might be who you had to chase down over and over to receive payment.

When things are tough, it makes sense that you’d want to make the most of your time by producing as much income as possible with the least amount of effort. A recession is no time to be chasing down money that’s owed to you on jobs that you’ve already completed.

Job costing reports help you to identify the projects that bring the most value to your business with the least hassle, while also identifying payment problems that you can avoid in the future.

Recession-Proofing: Job costing is a critical part of bookkeeping

The time for contractors to start evaluating their jobs more closely is right now. If there’s going to be hard times on the horizon, construction will be one of the first industries affected. A clipboard full of receipts and timecards is not enough to ensure that your projects are on course. Utilizing effective job costing reports will help you to better estimate jobs, identify what’s working and what’s not, and most importantly, you’ll be able to avoid unnecessary draws on your cashflow altogether.