Job Costing 101: Learn How to Set the Right Price for Your Business Services
Job costing is key to profitability for many small businesses. Are you doing it right? For companies that provide long-term projects to clients—such as landscaping, construction companies or consulting firms—determining how profitable a project will be is key to the success of your business. Job costing—that is, tracking all of the costs related to a project—is essential to projecting a project’s profitability.
How effective are your company’s job costing tactics? A survey commissioned by QuickBooks looked at how companies handle job costing in seven industries: construction, landscaping, legal, consulting, creative services, remodeling, and engineering. Even if you’re not in one of those industries, if your business is project-based, there’s a lot you can learn from the results.
The importance of cost estimates
Estimating costs and profitability accurately can make or break your business. In fact, one in five companies surveyed admit that just one bad estimate could destroy their business. About one-quarter (24%) of businesses say two or three bad estimates could cost them their company, while 23% say four or five bad estimates would kill the business.
Just because your business is growing doesn’t necessarily mean it’s more profitable. In fact, growth that’s not profitable can actually destroy your business. That’s why job costing is so useful: It can help you determine if a project will be profitable or not.
How to improve job costing accuracy
There are a couple key steps that can greatly enhance the accuracy of your job costing:
Use software: Shockingly, almost half of businesses (46%) are still using primitive methods—paper, spreadsheets or their memory—to track project costs. Somehow, 64% of this group say their final project costs either match or are very close to their cost estimates.
However, more than three fourths (76%) of those who use a job costing app or accounting software that includes a job costing system say the same. Clearly, using professional tools can help to improve the accuracy of your job costing.
Monitor costs daily: Tracking your costs daily is a great way to keep on top of job costs. About four in 10 respondents say they do this, and of those, 25% say their cost estimates exactly match their final projects.
In contrast, among companies that never review their costs during a project, only 8% say their cost estimates usually match their final project costs. (Almost 20% of these firms say their profit usually turns out to be lower than they expected.)
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The real cost of flawed job costing
What happens when your company’s project cost estimates are off base? Here are some common problems QuickBooks discovered among survey respondents.
- Cost overruns: When costs get out of control during a project, it can be difficult to get them back on track. Keeping tabs on costs daily and measuring actual expenditures against projections can help keep cost overruns to a minimum. For example, using time tracking software allows you to monitor your labor costs. As soon as you notice costs are out of whack, take steps to get them back under control.
- Cutting corners: If your cost estimates are wildly out of line, you might have to resort to using cheaper materials, less experienced labor, or otherwise cutting corners in order to remain profitable. This isn’t always possible, and even if you manage to do it, it can damage your reputation with the client.
- Renegotiating contracts: A poorly defined scope of work is a common factor in cost overruns. Ideally, every project should start with a detailed contract that takes all possibilities into account and allows for adjustments if necessary. For example, you could write a contract that allows for price increases to cover any increase in the costs of labor and materials; you could also build some “padding” into your contract. Otherwise, you may find yourself asking to renegotiate the contract or reduce the scope of work. Both can annoy the client and harm your reputation.
Using job costing software, or accounting software that includes job costing functionality, is an easy way to simplify a time-consuming task. You can use the data you collect to learn from completed projects and apply that cost information to new bids or proposals. The better your job costing skills, the more profitable your business will be—and the more success you’ll enjoy.
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