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Let’s talk about job cost. Wade, Rob, and Stephen discuss why it’s important, their approach to doing it right, and why there isn’t a universal answer.
TRANSCRIPT
Rob: [00:00:00]
Good morning guys. I’m Rob Williams with IronGate Entrepreneurial Support Systems. I am driving profit in contractors’ businesses. I’d like to welcome Wade and Stephen again to our program.
Stephen: [00:00:12]
I’m Stephen Brown. I’m a surety bond agent, with McDaniel Whitley in Memphis, Tennessee.
Wade: [00:00:18]
I’m Wade carpenter with Carpenter Company CPAs outside of Atlanta. We do remote construction bookkeeping for clients across the country and we do it right.
Rob: [00:00:27]
Today we’re talking about what goes into job cost and particularly from the standpoint of a bonding agent. Why is that important to you, Stephen, as a bonding agent?
Stephen: [00:00:40]
It all boils down to, why I’m excited about being part of this profit first, bond underwriters don’t care whether you can finish a job in order to bond you, they assume that you can finish the job. But all I want to know is that you can maintain your profit, that you can make money on your jobs and, that’s everything.
And if you’re not tracking job costs, then you don’t know how much profit you can make, and you can’t explain to a bond underwriter, why certain jobs bled profit and what happened. There’s always circumstances where a job, may bleed profits circumstances beyond your control for the better systems you have in place to track your job costs can keep that from happening.
Rob: [00:01:20]
I appreciate it. And you were asking me earlier, Stephen, what was important to me as a contractor and a developer about these job costs. It was so hard for us to know. We do our budgets and figure out what we’ve left out. And for us, it was difficult. We had purchased order systems and things would show up.
But it was always difficult to get the right things in the right buckets, especially if we had jobs close to each other, and we didn’t learn how much is pilfered or how much our estimates were off. And I know sometimes in the commercial area we were off by significant amounts, just sometimes from our estimates or our back-office people that when they were putting the items in, maybe they didn’t pick the right items.
I remember one time it costs me about a hundred thousand dollars just for one line item, on a siding. Those are so important and getting that job cost down to know where we stand and how we can continue to improve when we bid our jobs. And Wade, I talked a little bit about what that meant to me. What’s your take on this and the different standpoints?
Wade: [00:02:28]
When Stephen brought this up a week or so ago, we started talking about that and I started thinking about who are the different stakeholders , and thinking about job costs.
What goes in job costs? Well there’s no consistent answer. Unfortunately, with generally accepted accounting principles, what Stephen should get on a financial statement should be consistent, but I will tell you that, different CPA firms treat that very differently. Some of them just look at direct job costs, some of them allocate properly, and we can talk about some of those things.
When he gets a financial statement from a CPA firm versus a six months in-house statement, he probably gets very different job costing. Like you said, the stakeholders would from an IRS standpoint, there are actually different rules if you’re a large contractor or a small contractor, or you’re a developer, a home builder, Stephen, the way you track things there they’re very different.
And lastly, job costing for the owner of that construction firm, they typically want to throw everything in the whole bucket, in the job costing so that they end up with profit versus a project manager who, typically, maybe they’ve got a bonus coming from whatever their job does. So they want to take everything out of job costing.
So it’s a different take. But I want to throw it back to Stephen. What have you seen from getting financial statements from different places?
Stephen: [00:04:01]
You’re right, Wade. I appreciate you bringing that up because, they all are different, and the different accounting software programs that let you track job costs.
There are just many different ones and, probably be a good topic for us to talk about in the future. How you allocate job costs, a lot of times just, insurance is based on, worker’s comp rate and general liability, that can literally be applied to a job.
That’s the kind of degree of job costing. And a large industrial contractor once told another one of my contractors when they were talking about secret to his success. And he said, I have, I’ll put a price on even a shovel. It’s gonna wear out at some point and I’ve got to replace it and that’s going to come right out of my profit if I don’t plan for it.
And he said, as crazy as that sounds, that’s the degree of obsessiveness that we control cost, and our ability to do our projects and make a consistent profit. (It’s) what drives everything. And, it’s so powerful Wade, and understanding how to implement those job costs and get the proper reports and information is something that’s totally beyond me.
That’s your expertise.
Rob: [00:05:14]
You were asking earlier too Wade about, how we did some of ours, I know we had a PO system. And so that makes it easy if the POs are related to the jobs, but we did a lot of things ourselves, from, land development operation, and our heat and air company and our plumbing company too.
So we actually formed separate billings that would go to that. But there were so many different aspects that would go into that job. Getting those time tickets to jobs and how much of that is guessed and allocated. But they, you’ve got the guys in the field that fill out their time cards and put that to the jobs.
And that’s where you really saw a lot of variances showing up, and so we broke it down into, I guess you’d call it different divisions, which actually often came, became different LLCs, different companies within one company, all the way down to we had a separate framing company, for that, with the materials. So we had fixed costs on that. Then we would track those costs, on a sub-project type basis.
It gets confusing and complicated. I may be getting too deep there, but it, this topic just goes forever. It gets so deep. Wade, I’m curious from your standpoint, we did all our cost accounting in-house. So it’s so great to see to think that we could get help from an outside source.
Wade: [00:06:42]
We have that conversation all the time about what goes into it. One of the other things that we, could lead into it as another is what is overhead because too often people have no idea what their overhead – they use a factor they used years ago when they worked at another company.
So basically I allocate it into different buckets, and you have your standard buckets, like your direct labor and materials and subcontractors. That you can typically job cost. And that is a different element of the accounting that, you got to get that part first, the direct costs in there, but then you have subcontractors, those kinds of things are direct, but things like equipment and, sometimes your labor, there’s different factors that you may be throwing in there.
Plus the other things like, a direct thing, something like a bond. A performance bond would be directly allocated to a job versus like a bid bond. You may not get that bid and has got to pay for that kind of stuff.
Stephen: [00:07:49]
There’s still cost to putting that bid together, whether you get it or not.
Wade: [00:07:53]
Right.
Rob: [00:07:54]
That’s a great point.
Wade: [00:07:56]
But I guess we can talk because. I mainly put it into your labor buckets, where you’re going to allocate like worker’s comp and those kinds of things. And, if you’re heavy on equipment, a lot of times people will buy their own equipment and they forget that maintaining that equipment, the insurance on that equipment, just the depreciation on it – they forget that’s all costs of doing business. Whereas when you rent equipment. So I thought maybe we could chat about that for a little bit on some of those indirect…
Stephen: [00:08:29]
Wade, how take equipment, for example, how would you break down all the costs and maintenance and projected costs onto a piece of equipment and divide it into a particular job for example?
Wade: [00:08:44]
Typically, we would look at the whole cost for a year. You have your repairs and maintenance and all that stuff, the fuel injected into it. Usually, it would be based on number of hours on it, like a piece of heavy equipment, but you know what I tell people, even, if you can’t do that, you can probably go out to a rental place and say, what would you rent this equipment for?
And even if you just take their base rental rate, That’s better than nothing because people forget that how much, all this extra stuff adds to the cost of having that equipment in house.
Rob: [00:09:23]
We had a lot of that. I think a lot of our pieces of equipment, our bigger ones would have a job cost to it. Just like it was a different job.
And then we would have quotes per job. And that’s one of the ways that we did it. And it was based on basically what the bid would be if we did it externally and then we would have that piece of equipment or that area be a profit center in its own. And that’s how we kind of balance it out later to see whether we were charging enough for that.
And then on the labor side, one interesting thing we found is when we were doing these inside things, we may have had our direct costs for the labor. And even we would put the cost of workers’ comp but we typically did not have the cost of the profit as if we were doing it as a different profit center.
We did when we really made it a different profit center when it was a whole nother company that we had, but we had that discussion with some of my partners that did the things for themselves, where they needed to not only add the burden for the worker’s comp and the insurance and the taxes, the social security, but they also needed to have that profit for operating a framing crew or a carpentry crew internally that may be 30, 40, 50%, which basically doubles what that burden was. So when you were doing them in house, it looks cheaper, but you’re operating a whole other business. So that $15 to $20 per hour charge should really be $40, $50 an hour, by the time you’re operating that.
Stephen: [00:11:08]
And right now you’ve got all those added job costs to deal with the COVID issue.
And, got a contractor that travels with us a lot and his guys are, used to double up on rooms to save their per diem expenses, triple up, quadruple up. And now they’re all staying in different rooms and all the costs are going up. Just little things like that.
Wade: [00:11:30] I
‘m sure we can take a lot deeper dive at some other point going into these particular things, but I guess I want to throw it back to Stephen. have we answered your question or what’s your take on what we’ve talked about today?
Stephen: [00:11:44]
You have, because in my way of thinking and understanding is, typically the old school way of job costing was just to be a tightwad. Next thing you know, you become paranoid, that your workers and everybody else is ripping you off.
I had a guy once that knew exactly how much every oil filter cost on every piece of equipment he had and he had a ton of equipment and he was obsessed with the minute details. And, just seems to me with the right systems, you can live with a lot less stress and, and still manage your profit.
And, I think this is a great topic Wade. Thanks for bringing it up.
Rob: [00:12:23]
I love these questions, these conversations that we have, like here, what really just starts the conversation. It gets us asking ourselves these questions. There’s no way in 20 minutes, we can possibly even get close to answering any of these things, but it just starts our minds thinking.
So at this point, I think we’re going to need to wrap it up for today and this brings us up to a lot more future conversations that we’re going to have. So I’m excited to have the opportunity to talk some more.
Wade: [00:12:54]
I’m Wade Carpenter. We do, remote bookkeeping for these contractors and we do a lot of these, job cost analysis and overhead analysis for people. and I think it’s an excellent thing for people to think about as they’re going into a brand new year.
Stephen: [00:13:08]
I’m Stephen Brown, I’m a 32 year veteran of this business.
And, it’s just fascinating how things change and, over the years, how different contractors make money, and, how they keep their money and, it’s everything I do in my business because without, these systems in place, I just simply can’t get people bonds. And, it’s, like I said before Wade, your financial reports are the literally it’s the hammer that just this fundamental, basic tool that I need and job costing is just all the costs that go into a job.
It’s so simple. And you don’t know what those costs are, but with experience, you know what the job costs are, and also having good advisors like you Wade to bring up some topics and ideas, is everything to a contractor. So I’ve enjoyed this a lot.
Rob: [00:14:01]
I’m Rob Williams with IronGate Entrepreneurial Support Systems.
I’m a Profit Strategist. I’m a Mastery Certified Profit First Professional, and I am driving profits in contractors’ businesses. And thanks very much for today. See you all soon.
