Job Cost Accounting The Right Way

Most contractors want better cost information about their jobs. They need it timely, they need it accurate, and they need it relevant to managing their jobs properly. Unfortunately, many contractors struggle in this area. How do you get it set up right so that you get what you need? We’re sharing our tips on this week’s episode.

Topics we cover in this episode include:

  • The main categories to consider in a job cost accounting system
  • The benefits of job costing for your business
  • Common headaches with setting up job costing and how to address them
  • How job cost accounting helps you get bonds
  • Common misconceptions about job costing

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

TRANSCRIPT

[00:00:05] Wade Carpenter: When I speak with a contractor, I almost inevitably hear that they want better cost information about their jobs. They need it timely, they need it accurate, and they need it relevant to managing their jobs properly.

Unfortunately, many contractors struggle in this area. How do you get it set up right so that you get what you need? Come on in, let’s talk about it. This is the Contractor Success Forum, and if you’re new here, I’m Wade Carpenter with Carpenter Company CPAs. With me is my co host, Stephen Brown, with McDaniel Whitley Bonding and Insurance.

Stephen, this is a topic you wanted to address today. Any initial thoughts about what we’d like to accomplish today?

[00:00:41] Stephen Brown: Yes, absolutely have some initial thoughts. The important thing about job cost accounting to me is getting things set up right and understanding what it is. It’s amazing how many new customers come to me that just, they don’t get job costing. They get to it later after the job. Nobody wants to deal with it, but it’s the number one tool you have to have in place in order to gauge how to bid jobs, and whether you’re making profit or not. And your performance on the job.

So today’s podcast, I was thinking we’d break it into, what is job cost accounting? And then the benefits of job cost accounting. And then, just some common pain points regarding implementing job cost accounting.

And then maybe you could talk to us a little bit about getting it set up the right way. And, some basic myths and misconceptions about job cost accounting. Is that all right?

[00:01:38] Wade Carpenter: Sounds great. What I was going to do was basically talk about job cost accounting in general, real quick.

With any business, I think the accounting function is not something that most business owners want to mess with anyway. When you get into construction, adding job cost on top of that is an even bigger problem and a lot of people struggle with, number one, getting it set up and knowing what it’s supposed to look like when it’s finally done. So that’s one of the biggest hurdles that people have to get past.

And the next hurdle is once you’ve got it set up properly, is actually spending the time and taking the time to actually report the job cost information.

And I think some of the things we’ll talk about today is it doesn’t have to be as onerous as most people make it, you just have to change the workflow so that it suits your business.

[00:02:31] Stephen Brown: Yeah, that makes sense.

The main categories to consider in a job cost accounting system

[00:02:33] Stephen Brown: So, job costs. What are the main categories that you need to consider for putting in a job cost accounting system?

[00:02:41] Wade Carpenter: Well, I know you had on here that you said three general job cost categories. I actually say five normally.

[00:02:48] Stephen Brown: Okay.

[00:02:48] Wade Carpenter: The three you had listed here was materials, labor, and overhead. And we can probably spend a lot of time talking about overhead, but you know, I say there’s the labor, materials, subcontract equipment, and overhead, other, basically.

The subcontract can be a big difference if you are subbing most everything out like a general contractor. The equipment for a, say, a heavy equipment guy, a grading contractor, utility contractors, you’re spending $100, 000 easily on equipment. That can be a huge cost factor that a lot of people don’t really get into the job. So that’s generally the five main cost categories I use.

[00:03:33] Stephen Brown: Okay. And then would you consider profit, it’s not a cost category, but I know in Profit First accounting, you literally set up a separate account to pull your profit out.

[00:03:44] Wade Carpenter: Right. Well, when I think about job costing, you have the costs out of it and what actually is allocated to the job. And those five that I listed mainly are the other categories, not necessarily probably the same thing you mean by overhead. Because you have overhead, so you’ve got the office supplies and rent and utilities and those kind of things, you got to cover those things.

So when you’re talking about taking the job cost and what it actually costs you to get the job done, the direct costs as well as some of those indirect costs like payroll taxes and workers comp, you need to account for that. But all this other stuff, the overhead factor, you’ve got to figure out what that is, and you can’t use what you think the industry standard is because it’s probably not relevant

to your company.

[00:04:30] Stephen Brown: Yeah.

[00:04:31] Wade Carpenter: Yeah. So I see it basically in the three different buckets of the, job costing, overhead and profit. So if you’re bidding a job, you need to cover your job costs first. You need to cover your overhead. That probably needs to be a separate factor. And then. You need to figure in some profit on that job. Do you agree with that? Do you see it differently?

[00:04:50] Stephen Brown: No, I, I agree with that. It’s just you were right earlier when you said you could talk about overhead for a long time and how to allocate it to job costs. And as an insurance agent, I would argue, well, workers comp and general liability is based on payroll, so you can allocate that to the amount of payroll, it’s allocated to a certain project as a direct job cost.

But other than that, you have trucks, equipment, office, administrative staff, utilities, travel expense you could tie to a job cost. I’m thinking of all the categories that you can’t specifically tie to one job. Do you just take that percentage and allocate it toward each bid as an expense item?

[00:05:34] Wade Carpenter: Well, it depends on what it is. And if I can clarify too, when we say overhead, my definition of overhead is more of what I was thinking, like the office staff and rent and utilities, those kinds of things. That’s what I think of the overhead. And then we have job costs as direct job costs, like labor, materials, subcontract, if you rented equipment on a job, some of those things you can directly tie to a job, as long as you set up the system right.

But then you have other factors that are indirect job costs, and I think that’s what you’re talking about. And that’s where it gets a little squirrely because, depending on what you’re talking about, you’re going to allocate it different ways.

So, say you’ve got something like your own internal labor, that’s where you’ve got some payroll taxes that are associated with that. You’ve got workers comp and general liability and those kind of things that are. Tied to the payroll.

So number one, you got to figure out getting your labor costed properly, but then if you got that, then you can figure a burden to cover workers comp and these other things that are tied to payroll.

The benefits of job costing for your business

[00:06:41] Stephen Brown: I wanted to talk about the benefits of, of job costing, real quick before we get into more nuts and bolts of it. It’s, it helps you control the cost. Would you agree with that?

[00:06:52] Wade Carpenter: Absolutely.

But it also helps you know if you’re winning or losing, because you could be doing very different types of jobs, but to you, all the jobs look the same. Like you got one sub working on this, but you always tend to lose on that sub. Or you got certain type of things where, we didn’t bid the materials markup properly, you can lose very quickly.

The other example of the indirect job costing, that’s where I’m saying it depends on what type of indirect job costs you have to allocate. But I think again about these heavy equipment guys, the ones that have the heavy yellow iron. If you own that equipment, you may not be thinking about the maintenance on that equipment, the depreciation on that equipment. You may be thinking about the fuel.

The insurance on that equipment can be very costly too, so that’s where, you may have a different, factor for not labor hours or something like that, you want maybe equipment hours if you got like equipment meter or maybe just days on a job or hours on the job or something like that.

[00:07:56] Stephen Brown: I was on a much simpler basis, I was thinking, it controls cost. And I think you put it very well when you said you don’t know whether you’re losing money on different projects. So the faster you can get your cost information into a job cost accounting system and have it generate relatively accurate timely reports, the faster you can make a decision if you’ve got a project that’s bleeding money that you need to move on quickly.

So managing your company, it controls the cost. Another thing is, it allows you to run the reports and forecast a lot better how your jobs are performing and how they are going to perform. It helps you target in key. The right job that you want to bid for your company, because all the elements that go into you bidding that job are right there in front of you. And then you have a historical record of projects that you’ve bid and the data you used to bid it and whether you got the job and whether you could have gotten the job and made the profit that you wanted.

From just a most common type of basis. I just wanted our listeners to be reminded of the importance of it.

[00:09:11] Wade Carpenter: Well, what you said, absolutely, it definitely helps control the costs as well as forecasting the job and, if you can get good job costing, if you can know if you actually won or lost on that job. One of the keys that I mentioned when I was doing the opening is getting that accurate and timely job costing because if you get that timely, and things are going south on that job, maybe you can make some adjustments on that job before it’s done. That’s one of the biggest keys of doing that.

So, absolutely agree with, having a process in place where you can forecast. And for a contractor, getting this in place is not just forecasting like revenues and billing, but the cash flow is one of the biggest pieces that we talk about all the time on here.

So I hope that helps a little bit.

Common headaches with setting up job costing and how to address them

[00:10:04] Stephen Brown: It does. What are some of the common headaches that folks have when they’re setting up a job cost accounting system for the construction company?

[00:10:13] Wade Carpenter: Well, there’s a loaded question because, that’s one of the things I spend a lot of time with let’s say a new prospect that they come to me. They universally want better job information. But they don’t know how to get it. And they will get caught up in designing the system and they get this analysis paralysis.

And I break it down into, I’ve said it before on here, do you want it at the chart of accounts level? Where it’s just, as I said, just labor, materials, subcontract, equipment, and then other, which may include your, you know, burden, stuff like that. Or do you want it on a phase code cost code level, where we’re getting more detail that will also translate to the chart of accounts?

And when you can get more of a phase code cost code, that’s where you can tie it into your estimates versus actual on a more line item basis. So I love to get a contractor to getting the detail where they know where they are and how much they’ve, burned off on the billing and how much they’ve already spent on the job on a line by line basis. But a contractor that has never had any of this, a huge step forward is just at least getting the basic level of job costing.

Designing the system, there’s several situations I see, but a lot of times they’ll go buy this, third party software or something that plugs into QuickBooks Online or something, and I don’t want to throw out any names because they all have their sample cost code structure that’s just sort of baked into it, and then they try to build it.

And there’s so many codes, they just, they get overwhelmed with so many of them, and they don’t know which ones to use, and then they got to try to marry that. I see it all the time, and that’s where, I hate to say it, after so many years of this, it’s like, you need a process.

And that’s where a lot of times I’ll spend some time with a contractor and say, let’s just start with the top level phase codes and what are you not going to use?

And then we carve it down and I think I’ve said this before, but, I tell people, unless you’re a really big general contractor and you’ve got the bandwidth to do it, don’t ever get more than 100 cost codes. You’re just getting into the weeds and you’re never getting any benefit out of it.

[00:12:23] Stephen Brown: So one of the key tips is getting with a good construction oriented CPA and helping them get your books set up properly, just like you’re building a building. You get the foundation wonky, the whole building’s off. I’d say it’s the same with setting up your cost accounting system.

So, it takes some work. If you don’t understand it, you need to take the time to learn it and get a professional to help you with it. Because it’s so important, Wade. And also, when we talk about cost accounting, we talk about a lot of contractors that have cost accounting systems in place that are, everything’s done manually. Technology is not used to help speed things up. You’re waiting for paperwork to come in. You’re probably still issuing paper checks as well.

What are your thoughts about that?

[00:13:10] Wade Carpenter: There’s a lot of loaded stuff in there, too. You want me–

[00:13:13] Stephen Brown: Just in general.

[00:13:14] Wade Carpenter: In general one thing, exactly what you said, a lot of people think, well, this is not rocket science. I can figure this out myself. But yet they struggle with it year after year. I mean, I’ve seen people, they’ll buy the software and they’ll play with it for two or three years before they finally give up on it.

And even just your chart of accounts level, spending a little bit of money up front to get a good process in place is worth, from my perspective, it’s well worth spending a little bit of money. I know we recently did an episode on accounts payable and that one process where I told you we saved three people, they’d spend four days a month pulling together bills because it was all paper and getting it digitized, getting a process in place, we brought it down to five minutes to get the information for their billing, and another five minutes to compile the the documentation for their bills. And this technology is amazing, but you’ve got to not just only get the technology, but sometimes pay for getting it set up right.

[00:14:18] Stephen Brown: That’s great advice. And, not only getting set up where it works for you, because this is just a tool like any other tool you have in your business. Making sure it works for you, but also getting the information.

How job cost accounting helps you get bonds

[00:14:30] Stephen Brown: Every single bond underwriter, when you’re requesting a bond and your customers already pushed their bonding capacity a little bit and they’re plates full as far as the bonding company thinks, but there’s another job that comes up. First thing they’re going to ask for all the time, Wade, is they’re going to want an interim financial statement, balance sheet income statement, and a work in progress report. So, can you provide any of that without job cost accounting?

And Wade, why do you think they ask for that information?

[00:15:02] Wade Carpenter: Well, can you provide interim balance sheet and P& L? Yes.

[00:15:08] Stephen Brown: Yeah.

[00:15:08] Wade Carpenter: Are they necessarily classified properly? No, not necessarily. Are they up to date? Since we’re doing all these misconceptions, QuickBooks made it sound like anybody can plug their, they’ve stopped marketing it this way, but they used to say any idiot could pick up QuickBooks and run with it.

And even with the QuickBooks Online, it’s hey, we plug in our bank feeds and it’s all done for you. And that’s just unfortunately not true. And if anybody has been working on this kind of thing, you probably already know that. But to answer your question, there are a lot of things that we can do to get these things in place.

But yes, you do need a proper system first to be able to get this interim Balance Sheet and P& L, and it may be tied down. You may not have all the detail behind it, so pulling together a WIP schedule for you to do a bond can be a major chore for a lot of contractors that don’t have this in place.

[00:16:05] Stephen Brown: If you don’t have a cost accounting system in place, you can’t produce a Work In Progress report. If you can’t produce a work in progress report, then you don’t have all the details involved on each project.

How much have you billed to date? What are your costs to date? What are your estimated costs to complete the project? All these are in a Work In Progress report, and so that progress report literally shows you, the owner of the construction company, how much profit you have left in a job. So your backlog of gross profit. And you’re fine tuning each project.

And you might say, well, I have a lot of small jobs that it’s just too much trouble to put them on the WIP schedule. And I generally say, well, it’s okay to lump them into just one category. But at the same time, the closer that you can look at all your projects, the better. information you have about future bids and how each project’s performing.

[00:16:55] Wade Carpenter: Yeah, I was just having the same conversation yesterday with a plumbing contractor that, they’ve been trying to track all these higher end jobs, but they slap everything in the lower end. And I’ve seen it both ways. Sometimes they don’t realize how much they are actually losing on some of these small jobs, but it’s like, hey, it’s cashflow. It’s keeping my guys busy.

But then again, everybody also thinks that, Hey, I’m going to get this big job. It’s big cashflow. It’s my ticket to getting to that next level, getting out of this cashflow crunch. And a lot of times these profits on the lower end jobs, or even the higher end jobs, can be a lot lower than you think, and sometimes those are the ones that sink us.

[00:17:38] Stephen Brown: They’re eating your lunch and you’re doing favors for people. You’re trying to help people out. You’re trying to be all things to all people. And as you analyze each one of those smaller projects, there may be a reason you do it, but at the end of the day, it needs to cover its share of overhead and make a profit.

[00:17:55] Wade Carpenter: Right.

[00:17:56] Stephen Brown: That’s a great point, Wade.

Common misconceptions about job costing

[00:17:58] Stephen Brown: What other myths do you see that contractors think about when you mention job cost accounting to them? What misconceptions do they have about it?

[00:18:06] Wade Carpenter: People think about a lot of different things, but the old way of thinking is like, hey, I can run this by what’s in my bank account. And a lot of contractors, we’re all aging. There are some newer people coming into the business, but I think if you look at the studies, a lot of us are aging out and a lot of us are still tied to the paper that we’re used to.

 I know one of the things you had on the list was automation, mobile technology, and there are a lot of things out there that can do things like tracking your vehicles on the job. The GPS or equipment. Automation can do a lot of things for you too, and so many contractors are, they’re not really tech savvy and they don’t know what some of these things can do, but if you set them up properly, it can save you a ton of time.

The mobile technology, that’s one of the things where we’ve. sort of leaned into the accounts payable process. We can never do that if we can’t get information out of the contractors or the PMs that are working on the job. And nobody wants to work on the job all day and come back and do paperwork all night.

So we have an app that they can see on their phone really quickly hey, what is this? What does it go with? And they can do it and click it and be done and it sends it right back to us. Stuff like that, where, people are not going to do it if it’s just, it’s, it’s going to be a lot more work.

And the traditional way of doing it, where if you’re doing an outsourced thing or having to bring it back to the office, know, you’re trading emails. And it just doesn’t work and you need a workflow that works. So just streamline that and it can make a ton of difference.

So.

[00:19:49] Stephen Brown: I think we’ve covered everything that, that I wanted us to talk about. Just reminding our listeners, why is job cost accounting so important? What are some common problems you have getting it set up? And what kind of fruit does it bear? Job Cost Accounting is like planting an apple tree. You get it planted rightly, you get it fertilized, you get it growing, and then it produces a lot of fruit for you.

And so, it may not sound glamorous, folks, but Job Cost Accounting is glamorous, and it’s exciting, and it helps you really sleep at night as a contractor, I think.

[00:20:26] Wade Carpenter: Okay. Well, I know you’ve been quizzing me. I know we need to wrap up here pretty quick, but, from your perspective, I know you already brought up the WIP, but why is it so important to you?

[00:20:36] Stephen Brown: Because I have to get your bonds approved, and the bond underwriters want to know how you’re performing. I can just tell you, the better information they have about your projects and how they’re going, even if you have one that’s not going very well, the sooner you can talk about it and your game plan to deal with it, getting advice from your underwriter as to some ideas that might help you, it’s all about teamwork. And without that information, you can’t be a team player for bonding. It’s just that simple.

[00:21:06] Wade Carpenter: Good point.

[00:21:07] Stephen Brown: Okay.

[00:21:07] Wade Carpenter: All right. Well, thank you all for listening to the Contractor Success Forum. Check out the show notes at Contractorsuccessforum. com or on the Carpenter CPA’s YouTube channel for more information. Consider subscribing and follow us each week as we post a new episode. We will look forward to seeing you next week.