How To Improve Profitability With Job Costing and Project Management Software
Job costing is an excellent tool to implement into your project management strategy as it breaks down project spending to micro levels so businesses can gain insight into the small, day-to-day expenses as well as the major one-time expenses to get a better handle on their cash flow. By implementing an efficient job costing method, construction businesses can compare what was budgeted for each project in the estimating processes with the actual costs as they occur during the project. Some companies perform this vital task manually. A report by Dodge Data & Analytics and Viewpoint revealed 28% of contractors still use spreadsheets to track job costs and 14% use paper forms. Manual reporting isn’t necessarily the best method.
Here’s why. Let’s say you ordered 500 steel I-beams from a manufacturing company in China. Your order comes in on time and everyone’s ready to go. You think the job order and job cost is on track. But what if the I-beams came in at a much higher cost than you’d budgeted? Or they didn’t come in on time and you were forced to buy domestic? The resulting price increase would ultimately drive up the job cost, leaving you with reduced gross profit. And little surprises like this can occur at any point during the course of the project. If you’re using a manual method of job costing, you may not realize how much your profit margin has been cut until weeks later. By then you may have lost the opportunity to cut those costs.
If you’re using project management software, you can compare actual costs to estimated costs in real time. Monitoring the budget more closely and in a timely manner can be the difference between making a nice profit or limping along, never really growing in profitability despite adding more jobs. Knowing where every dollar budgeted for the project will be spent helps businesses stay within safe margins and maintain a healthy cash flow. Proper job costing can help construction businesses reach that goal.
Done right, job costing provides a construction company with a better understanding of the job’s progress, improves the chances of the project staying on budget by tracking labor hours and labor cost, manufacturing overhead cost, material costs, and more to help the construction team become more efficient.
The Issues with Job Costing
In a recent survey by Construction Research Corporation, 75% of contractors indicated that job costing was one of their top concerns. Part of that concern is based on an indisputable fact: Job costing data is only as good as the information that goes into it. If you struggle to measure your data and ensure it is accurate, you’ll also struggle to manage that data in an efficient, meaningful way.
Job costing incorporates indirect labor, direct labor costs, materials and overhead to calculate the costs for a project. Overhead can be difficult to calculate since the costs are not directly related to a specific project. This category contains things like office rent, administrative costs, depreciation on equipment, telephone bills, travel and marketing. While it might be tempting to skip over these costs, you can’t get a full picture of a job’s profitability without them. Often construction businesses apply a blanket overhead fee such as 10% to each project.
As you’ve seen, many contractors still rely on paper forms to collect data in the field, then enter that data into spreadsheets. There are many issues with this method of job costing. For one, collecting information from work teams and reentering it later doubles the amount of work it takes to create the report. And what project manager has time for duplicate work? For another, every time entries are duplicated it increases the potential for data error. Plus, results are not delivered in real-time. By the time the daily construction reports are delivered to the appropriate people – managers, owners and other decision-makers, work on the jobsite has likely moved on to a different phase. The more infrequently reports are run, the more this is an issue. Reports that are not delivered in real-time reduce the chance to make immediate changes. And that could mean the difference between job profitability or loss is lost. In addition, manual methods are not transparent or consolidated.
Using a construction project management software program automates the process, making it much faster and easier to complete tasks. Just plug in the numbers and it does all the calculations.
Benefits of Real-Time Visibility
The main benefit of using a project management software program, many contractors say, is real-time visibility on the project. Many unforeseen factors can come into play with a project, including unpredictable direct material costs, labor overruns, inclement weather, changing regulations and human error. It’s no wonder many construction jobs have a volatile profit margin.
Relying on manual methods that take days or weeks to reach the project owners and other decision-makers can be very costly. By the time they learn about any potential issues, the project could already be beyond the point of simple corrections, leading to costly rework.
Construction project management software takes advantage of the speed and collaborative benefits of the internet and cloud-based technology to provide real-time data. It’s the next best thing to being on the job site.
That’s important for company executives such as the vice president of operations, the chief financial officer and the chief operations officer. Understanding costs in real-time can help them make better, faster decisions that improve the company’s profitability. For example, having up-to-date information about costs can provide CFOs with more relevant information about cash flow. Since CFOs see the same information the project managers see, CFOs can gain a better grasp of where there are efficiencies and where the company may be spending too much money. They can also see if the company’s billing is in sync with the work completed.
Construction project management software, including artificial intelligence in construction, can also help predict patterns and provide information about questions such as:
- Should a line of business be dropped?
- Would it be more profitable to bring jobs that are typically subcontracted, in-house?
- Should a piece of expensive equipment be purchased or rented?
- Is the company more efficient on certain types of jobs as opposed to others? For example, the company may show an overall profit, but deeper analysis shows one or two types of jobs are offsetting other less profitable ones.
Construction project management software such as eSUB’s is especially useful for project managers who need to review all aspects of the project on a daily basis. When all job data is recorded and organized, the result is actionable reporting that project managers and foremen can really use. Besides simplifying project managers’ workloads, automated project management software can help project managers see how their crews and individual workers are performing or underperforming. If a specific job is lagging behind, more workers can be reassigned to the job temporarily to keep it on track. And, just as project managers can ascertain how well an individual worker is performing overall and what jobs he or she does well or not so well, upper management can use construction project management software to see how well project managers are doing their jobs!
There are many layers to software-generated job costing. The reports it provides are valuable to many people, from those on the jobsite, to top executives to accounting employees and more. If you want real-time, job-costing reports, consider moving to an automated project management software program like eSUB.
eSUB’s cloud-based project management solution was designed specifically for construction subcontractors, giving them a real-time view and account of their workers, enabling efficient work management within an easy-to-use platform.
If you would like to improve your management processes so you don’t experience construction labor shortages, schedule a demo to learn how eSUB can help.