June 1, 2013

The six deadly mistakes of job costing


Last year, this magazine published an article on job costing, with simple steps to get it working in your business.  I received a bunch of questions by email on the topic, so I thought this time of year, as our focus shifts from selling to executing, would be a great time to look at how to make job costing better.

There might not be a topic more over-talked and under-delivered than job costing. Owners want to know how they did on each job. Almost everyone agrees you need to be doing job costing, but very few companies figure out how to follow through effectively. Sure, you’re collecting information every day, but is the information being used regularly, is the information being entered and processed in the most efficient way possible, and, ultimately, is it improving your results?

If you answered no to any of these questions, chances are your business is falling victim to one or more of the six deadly mistakes of job costing.

Deadly mistake #1: Doing job costing in your head
“We’re a small company. I know how we’re doing on our jobs.”

While this may be true, this will only work if you want to stay small and you want to stay in the field. Owners who can’t get out of the field are their own worst enemy. While they keep all the information “up here” (in their head), everyone else in the company is completely dependent on them for all the answers to who, what, where, when and why.  Employees don’t know how to do their jobs. They become frustrated because they never know how they’re doing. And the owner is frustrated because he or she feels they have to hold everyone’s hand every day to get the job done right.

Even worse, if it doesn’t look like you’re doing job costing – tracking hours and costs and comparing them to how jobs are priced – your people won’t think being profitable is important.

Deadly mistake #2: Working without a good estimate
A good estimate is essential for job costing. The estimate solves two critical problems:

It defines success for the job (e.g., the crew has X many hours to complete the work, given a specific list of equipment). It’s critical the owner and the crew are clear about how long this job should take.

It defines how time and costs should be tracked. In our estimates, each phase of the job is assigned a cost code. Our cost codes are a simple, standardized list of categories that we track revenue and costs against.  That way, no matter what we call the work on the estimate (e.g., Front Gardens, Zen Garden, Front Gates Entrance Garden, Vegetable Garden), our bookkeeper knows exactly how to enter those costs in accounting (e.g., 1090-Softscapes).

Without standardization from job-to-job, bookkeepers and crews have to guess how they should track their time and costs. Some people make no effort to guess well and the results are predictably useless. Other people try their best to guess correctly, but if they’re entering information in areas that don’t line up with your expectations, the results are still useless.

You can download a sample list of standardized cost codes I created, here: http://bit.ly/costcodes. You want to create a list of codes for your company so that every part of every job can be assigned to a standardized code.

Deadly mistake #3: Too complicated
A complicated system is another mistake many of us make. I know, because my company lived through this mistake for years. We tried to track small details for every task on every job. We wanted to know how much time every component of every job took.
How much time did it take to excavate the pad?
How much time did it take to form up the area?
How much time to install and tie the rebar?
How much time to pour the concrete?

With all this information, we were sure to become much better at estimating, right? Not in my experience. Unless I was going to pay a timekeeper to stand over this job with a stopwatch, the level of detail was far too much for any foreman to actually track. The result should have been predictable. Crews guessed at time on their timesheets. What came in at the end of the day wasn’t what actually happened in the field, it was what the foreman thought I wanted to see. They simply made actual hours as close to estimated hours as they could, filling in hours not by what actually happened, but by what the timesheet form said should be happening. The data was useless.

On top of that, the complex time breakdowns meant things often got missed and forgotten. Tasks would have zero hours applied to them frequently. That meant another task was over-estimated. More useless information.

Deadly mistake #4: Punch-clock for payroll, handwritten logs for job costing
Visit 10 job costing contractors and you’ll see that eight of them make this mistake. A time clock (or some timekeeping system) is used for payroll, while the foreman fills out daily sheets for job costing. In my experience, this leads to a lot of missing hours and a whole lot of overhead time invested in trying to reconcile the two systems.

Payroll and job costing should be the same system, not different. Otherwise, the information coming back is rarely the same. You’ll have 10 hours in the payroll system, but only 8.5 logged to job costing. Who’s paying for the 1.5 “missing” hours and where did they go?  Here’s how the scenario always plays out.

The crew punches in first thing in the morning and works all day. They always remember to clock in the moment they start work but they ignore their paperwork throughout the day, because it doesn’t affect them or their payroll. At the end of the day, before punching out, the foreman sits down and fills out the daily log or job costing sheet to the best of his or her memory. If they spent more time than anticipated on one site, they’ll shave time off another, to make the sheet look good. Everyone wants to show that they’re bringing in jobs on time, yet they don’t want to look too good and have their expectations increased. When they’re done the paperwork, they clock out.

There are a few things wrong with this picture. First, you, the owner, have no idea whether these hours are actual job times or just times made to look like actuals. Second, what gets written on the job costing sheets isn’t the same as payroll. All kinds of hours are showing up on the punch clocks that are missing from timesheets. Time throughout the day and between jobs vanishes from your job costing, but not from your payroll. If you want accurate data, you need to pay someone to sort through these differences and correct them. This is not an efficient use of overhead resources.

Employees are fantastic at tracking their time correctly, just look at how well they track their hours for payroll purposes. Make payroll and job costing the same system/form and make sure every hour gets allocated to something (it doesn’t have to be a customer job – it can be shop time or deliveries, etc.) and your job costing information will be far more accurate and complete.

Deadly mistake #5: Too many systems
Most companies already have everything they need to use for better job costing – their accounting software. All your costs need to be entered into accounting for proper bookkeeping. To reduce errors and time, the most efficient way to jobcost your projects is to use the accounting software you already own. Quickbooks and Sage 50 (formerly Simply Accounting or Peachtree) both do job costing, but most businesses don’t use it.  Why not? It’s not because it doesn’t work – it’s because the company doesn’t have systems or processes in place to record accurate job costing data.

Keep it lean and keep it simple. You don’t need information entered two and three times in different systems. You only need it entered once, correctly.

Deadly mistake #6: No feedback to crews
If you’re going to do job costing, share the results with your people. Without feedback, your good staff will complain, “We never know how we’re doing.” Your bad staff won’t care. Without feedback, you’re driving out your good performers and giving your weak, unmotivated people a nice comfortable place to pick up a pay cheque every other week.

Share job costing information with your staff. Give a status update on each job at least once a week, more often if your jobs are smaller. This way, you’re not only keeping your staff in the loop, you’re showing them that being profitable is important. For the sake of everyone’s job, and everyone’s standard of living, it is.
Mark Bradley is the president of TBG Landscape (The Beach Gardener) and the Landscape Management Network (LMN).