JOB COSTING (ESTIMATING ANALYSIS) - (Part 2)
Some of the common variations in profit are cyclical, depending on season, business conditions, availability of money and other factors. If you need the job to keep your work force intact, or to meet a sales goal, management may elect to quote at a reduced profit. Normally, extra billing will contribute to your overhead base. At all times (but particularly when business is slow), try to upgrade a job. How about recommending paddle fans, 3-way switches, fire and burglar alarms, or other improvements that will build up your profit?
Additions and change orders are negotiated, typically at a better profit margin. When changes are ordered on a job, prepare a separate estimate, and bill for it separately. Your productivity decreases on change orders, so estimate accordingly. Add additional amounts for negotiation, office labor and billing. Consider stating in your contract that a minimum flat fee will be charged for all change orders.
Unless you take steps to compensate for inflation, you may experience a serious erosion of your profits. If youre bidding on a job that will not be completed or paid for several months, you should add a percentage to your total price that will restore the eroded value of your dollars. If you anticipate inflation to rise six percent this year, or one-half percent per month and you dont expect payment to be made for five months, add two and one-half percent to the bid price.
Overhead is the cost of doing business that is not chargeable directly to any particular job. Each contracted job must pay a share of your overhead, and the most equitable way is for you to know what the percentage of overhead cost is attributable to the labor cost, then adding this percentage to each hour of labor. Part of the overhead is variable, and increases with each hour of labor that is performed. The larger part is fixed, and remains constant regardless of how much labor is done. Therefore, an incentive to the manager is to increase the amount of billable labor without radical change in the company that will increase fixed overhead. The end result is a lower percentage of overhead per hour of labor, and more competitive billing.
Check your contracts to determine whether a retainage clause is included. If so, add to your estimate the interest expense charges for the amount to be retained and duration of the retainage.
Example: If youre doing a $30,000 job with a 10% retainage held for 90 days after completion, youre losing the current value of $3,000, which is to be held. For purposes of example only, lets assume the interest rate is 15% per annum. This figures to a rate of 1.25% per month. On a three-month retainage of $3,000, its costing you $3,000 times 0.0375, or $112.50.
Expansion results in more employees. Every time you add an employee, your variable overhead increases, but your fixed overhead remains relatively constant. The result is that companies with more employees have a smaller overhead percentage per employee than smaller ones.
Prepare your job-costing analysis on a monthly basis. Use proper forms for clarity, consistency and accuracy. Youll have the records needed to review the performance of your employees, suppliers, and estimating. If the actual costs versus estimating costs are out-of-line, determine the root causes and take steps now to correct the discrepancies for future estimates. Improve your personal estimating skills, and give direction to your employees. Work toward reaching your profit goals through the production of accurate job-cost estimates. An estimate is the foundation for the management of the project. When properly estimated, it can still be improperly managed. It takes both accurate estimates and good project management to make a profit.
NOTE: This is the second of two newsletters on Job-Costing (Estimating Analysis). 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 Holts 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.
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