The Art & Science of a Good Project Job Costing Process
Not all projects are created equal. It would be nice if there was an exact science to bidding a project but sadly many factors come into play that could malign your latest bid. You need art and science, a job costing system in place, to make it work.
Why the job costing process is so important
You can throw a stone and find a CEO in any industry who complains about:
- Shrinking margins,
- Fierce and more aggressive competition, and
- Higher expectations about turnaround times and delivery.
Almost any company bidding a project these days has to deal with these business issues. So, being able to apply art and science to job costing has become an active pursuit for many CEOs and CFOs.
Sometimes various technology tools in the company come into play. Sometimes estimates are based on pure human insight. The bottom line is that no matter how hard you try to apply a scientific approach to the job costing process, there are always things that will come back to haunt you and make your profit margin slump.
How to Bid a Project Right
Here are five important considerations that require the art and science of an effective job costing system:
1. Are your materials based on real costs?
The first step in formulating a material cost is identifying the materials needed. For many items, this can be as simple as counting up the number of items and multiplying by the direct cost of the material but this isn’t always a fool-proof formula. Some items may need to be broken down into elements in the aggregate. For example, when cabling is required for a specific job, the entire job does not require just one type of cable and there is likely an element of engineering involved. Another example is when contractors are required to create an integrated solution which may include computers, switches, racks, cabling, power units, design and engineering work and other consumable materials that go into the final solution and all of those costs need to be incorporated to determine total cost.
Additionally, the amount of waste, setup, and staging should also be accounted for on projects, as a bidder will have to compensate for the additional expense of these leaks in the processes. Items of work that use pre-manufactured products will have little, if any, wasted material or time. However, other products need to be first designed, engineered and built out. This can be a real art to account for you if you don’t have a repository of information showing exactly what was involved in the last similar job you did of this nature. With access to this information you can really nail down your true costs to apply to the next project bid.
2. Are you including warehousing, handling and shipping costs?
The cost to transport large quantities of materials to a job site can be a real hidden killer of project profitability. Depending on the job location and where material is coming from, this cost is often overlooked and simply calculated as a bulk “shipping” cost. But distance, weight and complexity of the equipment being shipped can skew costs into the red on the balance sheet. Having a better job cost accounting process in place can help with more accurate calculations of warehousing, handling and shipping costs for a specific job you are bidding on. There are also opportunities to save money through consolidating purchases across projects while still maintaining just in time cost savings.
3. Do you know what materials you have in-house?
Many companies do not have accurate tracking of what is in stock and what needs to be ordered. This often leads to over-ordering something that could have been used from the last project. Being able to track:
- what has been ordered,
- what has been used, and
- what has been re-stocked
is the key to the “art” of proper job costing. This also allows you to cut down on expensive vendor re-stocking fees and inventory write-offs.
4. Do your estimated hours accurately reflect what happened on past projects?
Sometimes, when a project is completed, the proper post-mortems are not done to analyze whether the hours estimated to complete were properly quoted to reflect systemic cost overrun areas. This has a rollover-effect that means the next project’s profitability suffers in the job costing process before it even begins if you didn’t accurately consider ‘actual’ hours on past projects and look at the ‘why’ behind variances. Equally important is the opportunity to look for increased profit on past projects; areas that came in under budget. This allows you to know exactly where you are when considering lowering a bid while safely maintaining margins.
Being able to track and analyze project hours from project to project is more science than art if a proper system is in place to manage these details in real time. Regardless of whether these hours are tracked in a project management system or an Excel spreadsheet, these hours are a profit drain or a missed opportunity if they are not realistically calculated and estimated from one project to the next.
5. Do you have a proper job costing review in place?
We all remember how painful it was in high school to have a parent or friend edit our English essay, but regardless of how skilled the editor was, it increased our chances of a better grade. A second set of eyes never hurts, so many companies institute a formal project bid review process in order to make sure:
- they have not missed anything,
- they are using accurate time and materials costs,
- they have not over-quoted or under-quoted the project, and
- they are using real numbers in the project bid, not just what they feel happened on the last job.
Whether you see job costing as art or science, you can’t ignore the profound impact of a good job costing system on a business. Better technology tools, smarter project managers, more detailed materials estimating and a variety of other ingredients contribute to positive project profitability. Solutions360 has created a Job Costing Survival Guide to highlight these and other job costing best practices.