FINANCIAL MANAGEMENT
JOB COSTING (ESTIMATING ANALYSIS) - (Part 1)

In order to project the potential amount of profit or loss that results from each job, you must prepare a job-costing analysis. Not only does job costing act as a measure of your success, the historical data that it provides gives you a basis for more accurate estimating of similar jobs that you get in the future.

When reviewing actual job cost, compare the figures with the estimate you originally developed. It’s not too difficult for a skilled estimator to come close on the actual cost of materials. The problem is in estimating labor where significant deviations are usually found. To calculate labor in your cost accounting, you must know your shop-charge, labor-burden, and overhead percentages. Improper estimates of labor will also affect the amount to be allocated to overhead expense, since overhead should be calculated as a percentage of labor. Therefore, the greater the error in estimating labor, the greater the error in overhead and the less money you’ll make. Or worse yet - the more money you lose!

If you were to use the same employees for all jobs, and the type of work remained the same, you could arrive at a close comparison between estimated and actual hours. However, an estimate on a changing labor force with different types of work will not be consistent. When this is the case (the usual pattern in contracting companies), you can significantly improve the accuracy of your estimates by basing your labor estimates on labor-units.

Labor-units include more than the actual time to install the item or assembly. These additional factors are discussed later under “Labor-Units.” Once you’ve established the labor-unit for each item, it will remain constant on all estimates. You can make adjustments through percentage changes to compensate for changes in productivity, weather factors, etc. Keep accurate records for labor hours (actual) per phase (slab, rough, trim, final, etc.) as you go along. It’s too late to do this at the end of a job.

Basically, job expenses are the costs of doing a contracting job that do not include material or labor that is incorporated into the actual work. Permits are an example, as well as financing costs and special job insurance costs. Determining what is a job expense ties in closely with estimating. For example, government quotation requests limit the percentage of overhead that may be applied to an estimate, and limits the percentage of profit that can be added on. In such circumstances, certain overhead expenses (such as the cost of tools) become a job expense instead of overhead, and so does supervisory labor and equipment rentals. As an aid in determining assignment of specific cost to overhead or job cost, one need only to ask - if it were not for this job, would we have incurred this expense?

Determining what profit to add to an estimate is influenced by various factors. How many contractors are bidding? Studies show that if four contractors bid on a job, a median profit is established. When only one contractor bids, the estimate will be an average of 135 percent of median ranging down to 89 percent when there are ten bidders. Don’t feel guilty about earning excess profit on a job because the time will come when you will have to settle for minimum profit.

NOTE: Because of the length of this article, it is being published in two separate newsletters, Part 1 (#51) and Part 2 (#52). For other closely related topics, be sure to review the section on Profit (#55) in this series of articles on Financial Management, and on Labor-Units, Estimating, and Estimating Procedures (to be published later) on Job Management.

Mike Holt’s Comment: This newsletter was extracted from my Business Management and Management Skills’ Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to Barbara@mikeholt.com <mailto:Barbara@mikeholt.com>.

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