The critical components of building a job cost system￼
The first job costing episode we shared was one of our most popular episodes ever. This week, we’re revisiting the important topic. Wade breaks down the most common problems contractors have when implementing a job costing system and how to address each one. You’ll learn what you can do now to build or improve your job cost system for consistency and numbers you can trust.
Topics we cover on this episode include:
- Why job costing is more complicated in construction
- How to build a solid foundation for your job costing system
- Why consistency is key in job costing
- Issues with applying overhead in job costing
- Choosing the right job costing software
- Why a good job costing system needs a champion
Want to learn how to reverse engineer your cash flow? Sign up for the free seminar on 5/17 at 10am EST: https://www.eventbrite.com/e/reverse-engineering-your-cash-flow-tickets-332475953527
Listen to our first job costing episode: https://podcasts.apple.com/us/podcast/job-costing-for-contractors/id1562503965?i=1000516583302
Join the conversation on our LinkedIn page: https://www.linkedin.com/company/contractor-success-forum
FIND US ONLINE
Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum! Today, we’re discussing the critical components of building a job costing system. And with us today, we have Wade Carpenter, Carpenter, and Company, CPAs. And we also have Stephen Brown with McDaniel-Whitley bonding and insurance agency. And I am Rob Williams with IronGate Entrepreneurial Support Systems. And today we are talking about the critical components of a job costing system. We don’t even need a guest today because we have our very own job costing accountant. Stephen, do you know this guy, Wade Carpenter? He is our expert.
[00:00:50] Stephen Brown: And I hear he’s the best.
[00:00:52] Rob Williams: He is, and we have him right here on our own show! It’s amazing. That’s amazing.
[00:00:57] Wade Carpenter: The check’s in the mail, guys.
[00:01:01] Rob Williams: All right. Well tell us Wade, man, or even Stephen, what, what is you as a bonding contractor, you know how important the job costing is.
Why job costing is so different for construction
[00:01:10] Stephen Brown: Right. Job costing is everything. Job costing is so different in construction, becuase you’re job costing for each project, and you’ve got to know how that project is performing. So a good job costing system in place can tell the project managers how their cost are running and they can benchmark their narrow profit margins and see how they can maintain that throughout the project.
So without great job costing, you don’t know anything, you can’t track anything. It’s the number one tool of construction accounting. Wouldn’t you say, Wade?
[00:01:43] Wade Carpenter: Well, absolutely. It’s key to cashflow. It’s key to profitability and that’s why we want to talk about it again today. One of our first episodes about a year ago was on job costing. I think it was, it has been the most downloaded episode we have. And I wanted to kind of recap that real quick to start, and then just talk about some of the problems people have getting started with it.
[00:02:05] Rob Williams: Yeah. Yeah. Yeah, it really is. You know, and as we’ve done all these shows for over a year, I realized that job costing isn’t just important for us to know whether we’re making a profit or not. It is the basis for so much of the accounting system and the cost, of the way that you record things, as I’ve learned this.
Because when I was a contractor, I didn’t do my own books. You know, somebody else was doing that. I didn’t really know exactly where all this was coming from. But the completions and all this stuff, it’s, I didn’t realize how tied in that is to those job costs and getting the accurate projections and stuff are just so much easier and more accurate, or even possible to do because you have good job costing. Or on the flip side, if your job costing is really bad, it’s impossible to do those reports.
[00:02:57] Wade Carpenter: If it’s bad or non-existent, I suppose, for some people.
[00:03:01] Stephen Brown: I wanted you to tell us about how to set up this job costing system. And what’s the most important from your standpoint? It seems to me like the more that the contractors know, like you were just saying, Rob, about how the components of the job cost system pull the information together to help you track your profit is everything.
[00:03:21] Wade Carpenter: Well, so just to kind of recap the episode we did before, and then, I don’t know that we’re going to get in the weeds today, the real nitty gritty details. But what I wanted to talk about is some of the problems people have in implementing a good system and getting good numbers out of it.
That episode we did about a year ago, we talked about some of the inconsistencies in applying job costs. You have job costing for a financial statement that we would turn into Stephen, for bonding or a banker. You have job costing for tax purposes, and depending on what they refer to as a small contractor versus a large contractor, which is now over $26 million in revenue, the costing rules are different. And then you have the in-house statements.
How a contractor keeps their books in house. And some people are more like, let’s just do direct costs. Others are, we need to get all these other indirect things like workers comp and payroll taxes. How somebody keeps it in-house versus how an accountant reports it. And I think Stephen would tell us that, you know, sometimes, if the contractor is self-reporting their job costs in the middle of the year, they get a different answer than when the CPA turns it in. And sometimes it’s because of, how they were applying the job costs.
I kind of want to talk about, and not go into those weeds today. But you know, I’ve got five points on problems contractors have in implementing and being consistent and getting good numbers.
[00:04:53] Rob Williams: Yeah, that’d be great.
Build a foundation for setting up a job costing system
[00:04:55] Wade Carpenter: Okay. Lack of a foundation for setting up a system. When people are trying to get started or build their own system, they get tied up in the details, and they don’t know what level of detail to start at. And if you are starting with no job cost, I would rather see somebody at least break it down into the five main categories: labor, materials, subs, equipment, other. If you can get that by job, that’s something. But depending on the type of contracting, sometimes you want to You know, get a lot more detail. And Rob, I know the one you were wanting to throw out there, there are different industry standards out there. Did you want to talk about the one that you guys used?
[00:05:37] Rob Williams: You mean our system? Well, we, I had a couple of different systems because I started off as home builders. And so we used the home building system, which we actually helped– do I say, I was a baby, but Dad helped form the home builders code of all the different topics. So it just split up into so many different ones compared to the general category.
So when I started doing some commercial contracting, I had a lot of learning to do, to figure out what those codes were, and trying to fill out the forms and the bids, with the cost codes. So we had different ones. And then I got specifically into framing. A lot of my costing was in there, but we definitely had, in addition to that–
[00:06:17] Wade Carpenter: Did you make it up? Or…
[00:06:18] Rob Williams: Oh no, we didn’t make it up. We did tweak it, though, for our own purposes for our management purposes. We had, well, I guess we talked about RSMeans. We can even– there we go. Yeah, because when I was in college, we had the Means book. This Means catalog, cause it was still a physical book, and we had to code all these projects.
I was a real estate finance major. And then I took construction technology and we had to estimate a steel manufacturing plant, all the concrete. And it was so interesting. We put all those in there, but, and it was so different because by college I had already been estimating houses for six years. I think I started like an eighth grade doing the estimating. And that was a home builders way.
So when we did the RSMeans and getting all those estimates, that was one of the advantages of RSMeans at least it gave us a number, which some contractors actually use this. Some of my clients use it, which that number does not reflect what our cost was. Because when we would compare the RSMeans, what it is per square foot or linear foot, it was rarely very close at all to what we had. And a lot of contractors actually use those numbers to bid and estimate the jobs, especially insurance jobs. I did a lot of insurance work for a phase. And then they got their own costing on that.
So we did a lot of work estimating the insurance costs, basically that tells you what you get paid. And then we would estimate what it’s really going to cost through the takeoffs. And maybe we had our own metrics that we had used, you know, by square foot or concrete or cubic foot or–
[00:07:51] Wade Carpenter: Right. What I was trying to get to is like the system. Whether we had a standard system for costing. People look at third party apps and stuff like that. And they come in with their own system. And so that’s where I was going with it.
[00:08:05] Rob Williams: Okay. Yeah. Yeah. And we had that and I guess, yeah, that was a long answer then for your simple question.
Job Costing and Analysis Paralysis
[00:08:11] Wade Carpenter: But, you know, what I see, the first problem with this is people get analysis paralysis. They start off with one system, they’ll pull in these third party apps. They have somebody else come in and use their own system and it becomes a jumbled mess and they’re not consistent. So if you have analysis paralysis where you’re sitting there thinking about it and, you know, get somebody to help you with it.
[00:08:33] Rob Williams: Well, I just gave you the example of analysis paralysis and all the different systems. And my conversation is where everybody gets so confused because there’s so many different ways to do that, but you do need consistency. And I think we got confused sometimes. But under each company that we had, we ended up with a system. And that’s how you did it. The homebuilding was a different system than our commercial contracting, RW. And then our framing was a different system. But we kept the same system in each company.
Consistency is key in job costing systems
[00:09:08] Wade Carpenter: You kind of lead into the second point I was wanting to make. The lack of the consistency. That’s, you know, applying it and people changing the system every time we turn around. We can’t do that and give numbers to Stephen one year and, you know, what was applied, like indirect job costs, were different from year to year. That leaves people like Stephen to not trust the numbers when they’re fluctuating and it’s not always apples to apples.
[00:09:34] Stephen Brown: Yeah, that’s a good point. How do you do that? What are the keys to keeping it consistent?
[00:09:39] Rob Williams: I think one of the great things that we’ve mentioned in some other shows is when you have these totally different type of jobs, have a different company, if you can. I don’t know if that’s always true, but I know for us in hindsight, that was a big benefit that we didn’t have everything under one umbrella.
We had framing under the framing company and we had home building under the home building company and we had commercial contracting under the commercial contracting company. And we had manufacturing under the manufacturing company. And that did keep our books consistent, so we didn’t have these crazy changes all the time.
Applying overhead in job costing
[00:10:14] Wade Carpenter: Well, we talk about the consistency and the foundation for it. But if we know what goes into job cost and we can be consistent, people are not consistent with how they are applying job cost. And when I say that I mean things like payroll taxes and workers comp are one thing, but when you get into equipment like depreciation and repairs and the fuel and all that stuff, people come in with different ways and they ended up changing the way things go. And so that’s where, when we go shifting money around to make one project look better than the other, number one, we’re not learning anything. But number two, those kinds of things tend to make Stephen a little…I put words in your mouth, Stephen.
[00:10:57] Stephen Brown: We had that great podcast on the Work In Progress report, the WIP report, and how fundamental that is to tracking profits and how can help explode your bond program and what a bonding company will do for you.
Getting the right job costing software
[00:11:12] Wade Carpenter: I guess my fourth point is lack of having proper software. And I don’t mean you have to go out and buy– we recently did a episode on software like QuickBooks. Software like QuickBooks Online, honestly, they tell people it can do everything with job costing. It does not do a great job. The desktop version, I said it in that episode, I’ve got a $150 million general contractor running on QuickBooks Desktop. That’s not to say it’s the best end all be all and you should be doing that, but you gotta realize program like Xero and QuickBooks Online are not built for that.
And we talked about those third-party apps, but you know, you need some particular level of, one of the biggest things that comes to mind is labor costing. And if you can’t tie that in and integrate that– QuickBooks Online, even though they’ve got their own payrolls, it does not integrate and do that job costing well.
So does that make sense, guys?
[00:12:12] Stephen Brown: Sure does.
[00:12:12] Rob Williams: Yeah, it does. You know, I think a lot of our job costing were third party. Well, our home building, we actually had it integrated in our thing, but our other companies, we had spreadsheets or some other integrated softwares. We did use QuickBooks by the way. But QuickBooks was just our end product. And I don’t know how our controller got all that stuff into QuickBooks for the reports, but the job costing and stuff was not generated inside there. It was some kind of a programmed number that would go into there. We didn’t look at our QuickBooks to get our job costs. Our job costs came out of the other apps.
Job costing requires a champion to lead the effort and encourage consistency
[00:12:49] Wade Carpenter: The fifth point that I wanted to make, and this is probably the most important one, is the lack of a champion or a leader that says this is what we’re doing, and this is how we’re doing it. And everybody’s going to do it the same way.
That is the number one problem we see when we’re trying to help a contractor put together a system. And I realize contractors, they work all day in the field and they don’t want to come home and do paperwork at night. I realize for most contractors, they hate the paperwork side.
But if you don’t have somebody that is going to consistently say, you’ve got to do this, and if you’ve got project managers, you’ve got to turn in your job costing and you’ve got to do a timely. And if you’re putting that off on the contractor, spouse or whoever, they’re doing the books internally, they’re probably not going to get that kind of stuff. Especially if they’re struggling to know the accounting system to begin with, much less the job costing side of it.
But number two, sometimes you got to have a backbone to say, this is what we’re going to do. And I don’t mean this to sound this way, but people do not like being the bad guy. That’s where we kind of have come in with working with our contractors on the back end, where, they can make me the bad guy. I don’t care. I just want to get you good books.
To have somebody that’s going to say, work with you to get the system set up, number one, is one thing. But number two to consistently say, we didn’t get this job costing. We’re going to be like in your face, got to have it, or we’re not going to be able to give you the level of detail that we promised you. I’ve seen some great successes when an owner says to the project manager, your bonus is not only tied to your profit on your contract, but it’s tied to the fact that you’ve got to get this stuff in on time. And when somebody misses a bonus or something like that, or I’ve seen a situation where people have actually fired project managers and estimators for not turning that stuff in. And when you do that, you’d be amazed how the rest of the team will shape up.
[00:14:56] Stephen Brown: It’s something that has to be done, wade, isn’t it? The government contracting requires that you have an approved job cost system in place. And a lot of projects require certified payroll reports. So even if you don’t like job costing, it’s not a necessary evil. You can embrace it.
And like you said, Wade, the main thing I hear my contractors complain about is their project managers not getting their information in. But the best ones I see have an accountant key person that is pushing for that information and deciphers it if it’s not in correctly. And then they put it in their system. So it’s a lot of work, but it’s also has to do with habits, doesn’t it?
[00:15:39] Wade Carpenter: Absolutely. When we start working with somebody, we’re constantly like we, a lot of times we’ll touch base every day for the first 90 days to get that habit. Because sometimes it starts from the top. We know people don’t want to do this, but if you don’t do It you’re never going to get it.
[00:15:57] Rob Williams: It was so interesting to me when I became a subcontractor, framing subcontractor for these other guys, because when I was the owner, you know, everybody, when I’m in the field, they tell me what I want to hear. And when I was at these meetings, the superintendent sitting there, man, then I heard what they really thought about the job costing and the payroll and the cuss words, and everybody’s real opinion about that. And it was all sort of an act to get all that information in. And the attitude of most of the guys, it seemed the older guys had been around, that had been in an upper position and then had gone there and maybe they had owned their own companies, they kind of got it a little bit. But the majority of these superintendents that made their way up as a laborer, they didn’t get it. And man, they cussed behind their back about all this stuff. And it was just something that they had to get off their desk and they dreaded it and hated it.
[00:16:50] Stephen Brown: But if their bonuses are tied to profit, Rob, you would think they would embrace it.
[00:16:55] Rob Williams: Exactly. Well, that’s what I was saying. You got to do something to overcome. One, you need to educate them about it. So they would understand. Because I guess that’s why some of these other guys that had had other experience would be better about it than some of the pure labor superintendents that just never got the books. They wanted to build the building and be macho out there, swinging the hammer, you know, or whatever it is, get in that crane and they were there to do it. They didn’t look at their job as making the money, you know, or counting the money. It was just physically building the building. And I’ve got some owners that have not made that transition. I’m working with one right now that I’m hoping will kind of get that, but I kind of see that he’s all about building and working and they just think all that’s going to work out. They don’t think about the money side. It’s, the more they work, the more money they’re going to make. And that doesn’t work that way all the time.
[00:17:47] Wade Carpenter: Yeah. Well, we’ve had plenty of episodes talking about that, but.
[00:17:50] Rob Williams: Yeah.
[00:17:51] Stephen Brown: Wade, what kind of systems can you put in place to make it easier for the project managers to do their job?
How to make job costing easier for project managers
[00:17:57] Wade Carpenter: Well, again, education is one. But number two we have proprietary systems that we’ve actually built in-house to be able to do that, where they can actually go on their phone and cost code and click and go. You know, make it easy for these guys. If you can’t, then we understand, they’re not going to do it unless you have somebody make them do it.
[00:18:17] Rob Williams: Well, I think you just said it, Stephen. Have a system. You get a system in there, because as soon as you said that, it triggered a lot of memories. These guys are frustrated in the field because they don’t really even know how they’re supposed to get the information. There’s not a documented standard system. And it’s just a big pile of stuff that they’ve got to get from the field and their desk back to there. That’s literally how it happens, or I don’t know if it does anymore, but it used to be paper. It was a box that they had to drive back to Little Rock or Memphis or wherever it was and give that box of papers to the office. Then their job costing was done.
But the system and having some kind of semblance of understanding it. And if you’ve got, like, we had twenty-something neighborhoods. If you’ve got a different system in each neighborhood, if you haven’t developed the system, how to get that back, that’s tough.
So standardization of systems is almost more important than having– it is probably more important than having the best system. It’s having a system that everybody’s going to follow, even if it’s a B-plus system, rather than having an A-plus system in this neighborhood, then it’s different system in this neighborhood. And I’ve, I’ve seen that a lot. So yeah, having a system is, is huge.
[00:19:32] Wade Carpenter: Well to kind of wrap these things up, I just kind of wanted to hit every point real quick. The foundation or the structure. If you’re in analysis paralysis, get some outside help to put that together. Don’t go to the software vendors and all that stuff. Get a construction-oriented CPA.
The consistency between in-house and all that stuff, and what you’re doing, again, a good construction CPA. There are plenty of CPAs, they say they know something about construction, but they do not know these job costing rules.
Number three, the methodology of applying overhead. It’s different for different types of businesses. And some types of construction are more labor driven versus the heavy equipment guys and that kind of stuff. So get outside help. If you’re, again, analysis paralysis on the methodology.
The software, again, talking to a couple of software vendors, but people get snowed by these smooth-talking salespeople and they say the software can do anything and everything under the sun, but it’s never set up right, and that’s where we got another whole episode on that. Get a couple of opinions, talk to a construction CPA that knows some of these softwares.
Last one, the champion or leader on it. If that’s not your personality, if you’re the owner, which we do have several owners that hate that part of it too, or, if you’re your in-house accountant or whatever, get somebody outside that will hold you to the fire to do that.
So those are my points to kind of overcome some of these problems people are having in implementing it.
[00:21:07] Stephen Brown: Those are great points, Wade.
[00:21:10] Rob Williams: Yeah, those are great. And I think Stephen, you can be a resource on that as well for your guys, even if you’re pointing the people out. But part of it is the discussion. I’m relating to when you were my bonding contractor and the importance of knowing that we need those numbers. It’s not just for ourselves to manage and correct our pricing for the next job. It is how the whole bonding process works and the approval and the importance of it.
[00:21:37] Stephen Brown: It’s everything, guys. How does a project perform? And in construction, you have to account for each project on its own. It can get complicated. It’s different from any other type of business. And again, I go back to say, find a construction oriented CPA like Wade that understands construction accounting. It’s worth its weight in gold.
[00:22:00] Wade Carpenter: To kind of piggyback off of that, job costing Is the foundation of profitability in construction, as well as the foundation of good cash flow. We talk about it several times on this podcast, but it may be great for turning it into Stephen, but when it comes down to whether you’re a prosperous contractor or not, I believe job costing is one of the key components that I preach to people. To make sure that you’re getting your construction business where it wants to be, and you’re not working day and night weekends and all, and killing yourself and never taking a vacation and can’t take home a decent paycheck.
[00:22:38] Stephen Brown: Right. Manage your company. Don’t let it manage you.
[00:22:41] Wade Carpenter: So I know we didn’t really get into details, but I hope this was useful.
[00:22:44] Rob Williams: This is great. And go to the show notes. We’ll probably have resources there. We may have other links to other shows, that would be neat. We’re working on categorizing some of these shows to put them together so you can go back and listen. I have no idea which episode our last one was, Wade. I don’t guess we know what number that was, but looking at the show notes, we’ll put it in there. We’ll put it in there if you want to listen to the last one.
So this has been one of our longer episodes, but it’s worth it. Appreciate you guys coming to the Contractor Success Forum. I am Rob Williams, ironGate Entrepreneurial Support Systems. We have Wade Carpenter, Carpenter and Company, CPAs and Stephen Brown with McDaniel-Whitley bonding and insurance agency.
Thanks a lot. Listen to our next Contractor Success Forum.