The Challenges of Job Costing Labor

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If you’ve been here a while, you know we preach job costing and how it can help a contractor be more profitable. One of the challenges of implementing a job costing system is figuring out costing your labor. Where do you start? Let’s talk about it.

Topics we cover in this episode include:

  • Challenges with getting information for the payroll system
  • Three ways job costing labor might work in your business
  • How to get started with job costing labor

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:05] Wade Carpenter: If you’ve been here a while, you know we preach job costing and how it can help a contractor be more profitable. One of the challenges of implementing a job costing system is figuring out costing your labor. Where do you start? Come on in, let’s talk about it.

This is Contractor Success Forum. If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs. With me is my co host, Stephen Brown, with McDaniel Whitley, Binding and Insurance. Stephen, any initial thoughts on this one today?

[00:00:31] Stephen Brown: No, I’m interested in your topic. I can’t imagine how hard it is to job cost labor.

[00:00:36] Wade Carpenter: There definitely are some challenges to it. And job costing is one thing, but another thing we’re going to talk about today is more about, you getting the information you need from it. Again, we’re going to talk about the systems and how we get there and how the modern day systems have actually taken a few steps backwards in trying to accomplish that goal.

What we’re talking about is the integration between the systems that contractors use all the time, like and the payroll system. And a lot of times they’re really disconnected and you’ve got to go to multiple places to get the information we’re talking about.

[00:01:14] Stephen Brown: Okay.

[00:01:15] Wade Carpenter: I don’t know if we need to talk briefly about job costing in particular, but we do preach that all the time. And I still believe that one of the best ways for a contractor to know whether they’re coming out right is having some good job information, and if something starts going wrong on your job, you know how you’re doing, and you start making corrections to fix those kind of things.

And it’s one thing to try to job cost your materials. It’s one thing to try to job cost your subcontractors. You can always tell your material suppliers or your subcontractors you’ve got to put a job number on your invoice, right? Or we can do something like a purchase order number and say you gotta have a purchase order and that helps the accounting people like me figure out how to go cost that.

[00:02:02] Stephen Brown: Sure.

[00:02:03] Wade Carpenter: But it gets a lot more challenging when you’re trying to deal with labor. And even though they may be your own people, trying to actually get the information to accumulate this can be a little bit of a tough issue.

[00:02:16] Stephen Brown: I can imagine. Just think of a project manager that works on multiple projects and is a salaried employee instead of hourly employee.

Challenges with getting information for the payroll system

[00:02:23] Wade Carpenter: Well, I also think about, when I say labor, we can talk about subcontractors or whatever all the time. But whether they’re on W 2 or a 1099, a lot of times contractors will pay people as if they’re hourly. And they just turn in the time and they just pay them their particular rate, even though putting them on W 2 would cost them some payroll taxes that they wouldn’t have otherwise.

But however we’re defining labor, whether subbing it out, accumulating that information can be tough. And if you’ve got a true subcontractor that’s going to give you invoices, as we said, we can always make them put something on their invoice so that we know what they were doing and put that back on them.

When they’re an employee, we’ve got to either figure out our own systems or have some kind of system to where they go and put time in or, we try to have a time clock or something like that if their on premises, but if you’re out on a job site and everybody’s going in multiple places, that’s a tough thing to do. And we do have some contractors that want these time clock systems where they can clock in on their phone or whatever. But some of them have what they call geo tracking, make sure that you are, where you say you are. But the other challenge is, getting them to tell you what job it’s on.

Rob used to talk about having houses right next to each other. And so if you have the same guy bounce from one house to another, or there’s two projects with essentially the same name, a lot of people don’t really break that down properly and we don’t really get the information we need.

But that is one of the biggest challenges. Number one is getting the information back to be able to put it in the payroll system. But that’s not really the main focus of what I wanted to talk about today, although it is a major critical issue. Because construction workers don’t really want to be doing that at all if they don’t have to punch in a clock or anything like that.

[00:04:21] Stephen Brown: Sure.

[00:04:22] Wade Carpenter: But going back to the core issue, these accounting systems of today don’t really report it properly, even if we’re getting, through job costing, like we’re keeping time sheets or we’ve got some kind of tracking by the job.

Three ways job costing labor might work in your business

[00:04:37] Wade Carpenter: Let’s talk about three different iterations of how this might work in your business. We’re tracking payroll. And let’s just say we’ve got ADP or paychecks or any of the big, I’m not picking on any payroll provider or anything like that. They’re all pretty much the same.

They will be glad to give you job costing information. Some of them do a better job of that than others, but if you turn in their job costing, you gotta turn in their jobs. And you got to report the hours by job, they will do a good job of it, but the problem is you’ve got to keep that up.

And then we’ve got that in one particular place, but then we got to get it into the books. Where I’m going with this is the fact that we’ve got the payroll information with the job costing. And then we’ve got the accounting books. And even though the ADPs and the paychecks will actually do an import, it’s usually a journal entry import or QuickBooks has their Intuit Interchange format where you can import it in, which is essentially a journal entry as well, that will pull in to the major chart of accounts.

The job cost Labor, you got, Administrative Salary, the Officer Salary, and they will do a fine job of breaking that out, but it will not break it out by job.

Even though we may have all that information sitting there, no matter what you do, if you want it in one place, you’re going to have to do it, take more manual steps and manually go through there every week or every month. and do a manual allocation to the jobs to get there. And that is one of the steps that a lot of people miss.

There are also, things like allocating the payroll taxes and fringe benefits, that kind of–

[00:06:18] Stephen Brown: And Workers Comp, yeah.

[00:06:20] Wade Carpenter: Exactly. The workers comp, sometimes the general liability can be, it’s tied to payroll.

[00:06:25] Stephen Brown: Sure.

[00:06:26] Wade Carpenter: Ideally, that would be tied to your jobs as well, because that’s something that’s costing people money. And the idea is this is a manual process. That really is tough to bring it over, and a lot of people don’t go to that step to do that.

Now let’s take the next iteration of this. There’s two or other iterations of this, so let’s just talk about one that people use all the time is the QuickBooks Online, and then they have the QuickBooks Payroll System. And yes, you can say it’s integrated with QuickBooks Online. Intuit that owns QuickBooks actually bought the old T Sheets, which was a great program, and they renamed it QuickBooks Time, and it still pretty much has the same functionality.

And yes, it will actually pull that time information into the payroll system. Yes, QuickBooks Online will push the transactions back over to QuickBooks Online. But again, even though it’s the same system, it will not push the job costing information over. So it’s, again, yet another version of manually costing that, and too often that doesn’t get done.

And if you sub a lot of your stuff out, you got a bunch of equipment, you got materials, and if you got your own internal labor, that can be a huge chunk of missing job costs.

[00:07:43] Stephen Brown: Mm hmm.

[00:07:44] Wade Carpenter: You’ve got to go to two different places, create some spreadsheets and add them up together.

[00:07:48] Stephen Brown: And if you’re trying to spread out your labor cost over multiple projects on a percentage basis, you never know which job is losing money if you’re not allocating it properly.

[00:08:01] Wade Carpenter: And you’re not tracking it. The idea here is let’s get some more real time information that you don’t have to jump through hoops to be able to get the information you need. Yes, maybe you can get it, but you’ve got to go to multiple places to do that.

 Well, the third common use case I see, and again, not picking on any particular vendors, there’s Buildertrend, Jobtred, there’s all kind of Jobber, there’s all kind of all these third party plugins that work with QuickBooks Online.

Some of them will do a fine job of tracking hours, but they don’t do the payroll in the same place. So a lot of times you’ll have a standard cost and that’ll throw it over there in this third party software. But the problem is, a lot of these do not sync up properly. They will do some sync and they will tell tell you all day long that they sync with QuickBooks Online, but at the end of the day, they’re usually not set up properly. And sometimes they’re one way sync. So their idea is we’re going to put information in this third party system that is not really an job in an accounting system.

It’s probably missing transactions and really doesn’t accumulate all that properly. And so we’re depending on, we’re dependent on these other systems to have some clue of these, a comprehensive look at their job costing.

And, I’ll give them credit for several things they do very well. Depending on whether you’re residential or commercial or whatever, some of them will do a good job of, if you need to deal with a homeowner, or if you’re dealing with subcontractors, a lot of them will have things like the purchase order systems that you can actually work with back and forth.

And there are some nice features to them, but in my view, I don’t see them pulling a comprehensive accounting system together because it’s missing complete picture of the accounting puzzle.

[00:09:53] Stephen Brown: There’s just a lot of moving parts, aren’t there, to job costing labor.

The first thing that pops into my head being a non accountant and a non contractor is some sort of ID badge on each project that you literally enter the project and scan that ID badge if you want to get paid.

And then I’m thinking about traveling between projects, project superintendents. I’m thinking about general labor. And how they’re classified for workers comp based on what they do, on a construction project. I even heard of some outfit that had QRI codes on the hard hat. But what’s to keep someone from tossing their hard hat over the fence to a buddy and just having multiple people log in.

So anyway, that’s my brain is going up in outer space on this one.

[00:10:40] Wade Carpenter: Okay. Let’s talk about the fourth iteration of this.

The fourth iteration is having something integrated with your payroll system. And there are some true, construction accounting systems that will do that now. And a lot of them are a lot more expensive. 20, 000 a year or whatever. What I miss is, and we still run a lot of contractors this way, is the old QuickBooks Desktop, where we could actually run payroll on there. And it would also tie out the payroll taxes and the worker’s comp, if you set it up properly to your job, and do it to a cost code as well as a chart of accounts.

There are some third party software, just a shout out to Foundation Software has their payroll for accountants, and it will also do some job cost at cost coding level, and it will integrate to QuickBooks Desktop. But unfortunately it does not bring over those cost codes. We’re actually extracting the information. We sort of automated the process a little bit. But the ultimate goal is we can have a place where a contractor can go one place, pull it up very easily and see where they really are on a job. And so we’re still running several contractors like that, but unless you want to get on the QuickBooks Enterprise version, they won’t even sell you the payroll system.

We’ve still got a grandfathered in deal with them where we’re still able to do it. But the idea is we want to get some integrated solution where we don’t have to jump through hoops to be able to get a true picture of our cost.

So I hope that gives some idea of some of the challenges there. Again our practice is we want to either be able to either do that manual process, and we actually have built some tools to be able to do that, and we have some professional tools to get that into our accounting software, but, what I just find, and this is my gut feel, just based on what I’ve seen, but some of those people that add these third party softwares in, I would say easily over 80 percent of them never get them set up right.

They end up spending a lot of money and never really get true job costing from them. And even if they do, they never really get the full capability of that software. Too often we will see them constantly spending money on this and they sit for a few years and thinking we’ve gone down this road, we’re just, one day we’re going to get this fixed and it never seems to happen.

How to get started with job costing labor

[00:13:12] Stephen Brown: So what do you do at Carpenter and Company? When someone comes to you with a problem with their manual adjustments to the payroll, they have it automated, it may not be set up right. How do you go in and analyze the problem and help them get this straightened out?

[00:13:30] Wade Carpenter: When we start with them, a lot of times we will sit down and have two or three meetings talking through how they do things now, what they would like to get, what level of costing they really need, and they may be starting from nothing.

They would love to have super detailed records, but we have to balance, what do you need, and what are you willing to do to build a system to get you there. We rely heavily on the technology. And a lot of times some of the things that somebody else would do manually, we built systems to be able to do it very quickly and very efficiently.

But my goal is to give somebody exactly what I said is a job costing system that they can know where they are at any given time and make some informed decisions about how they’re running their business and their jobs.

And if they’re choosing the right jobs, if they’re pricing properly.

[00:14:25] Stephen Brown: Yes. Yeah, garbage in, garbage out, and are not doing anything, no telling where the labor costs are thrown in. They’re accounted for somewhere because you have to pay them.

[00:14:37] Wade Carpenter: Yeah.

[00:14:37] Stephen Brown: You have to pay your employees. So it doesn’t have to be a nightmare I see there are a lot of challenges to proper job costs reporting for your labor.

[00:14:47] Wade Carpenter: And other people will just, maybe they just get their labor, and they’ll throw some kind of labor burden factor, and they stab at that number and they never seem to get it right. So today was just a little bit of a deeper dive into the labor side of it, because that is some place, a lot of times we will spend a lot of time talking about how to get them the information and the different ways you can accumulate the information so that you can get good information out of it.

[00:15:13] Stephen Brown: Okay.

[00:15:14] Wade Carpenter: Any closing thoughts from your side?

[00:15:16] Stephen Brown: No, just the more podcasts that I do with you, Wade, and the more you explain the accounting and function of a construction company the more I appreciate what you do for a living. And the advice that you’re giving here is there’s just a lot of moving parts to getting this done right. You need to be as automated as you possibly can, but you need to have it set up the right way.

And then there’s a lot of issues between different software communicating with each other. Again I would say reach out to your construction oriented CPA to help you tweak these things so you’re not having these problems in the future. And as you grow, the problems are getting more and more complicated.

[00:15:57] Wade Carpenter: Okay. If nothing else, I hope this helped our listeners at least think about the problem. And if they’re truly getting their information in one place, and if they can move that information forward, it can help them run a better business.

So with that said thank you all for listening to Contractor Success Forum. Check out the show notes at Contractorsuccessforum. com or the Carpenter CPA’s YouTube channel for more information. We would always appreciate it if you would consider subscribing and follow us every week as we post a new episode, and we will look forward to seeing you on the next show.

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