Introduction to the Power of Job Costing
Introduction to the Power of
Job Costing
NPE
Jeff Stokes
jeffstokes@gmail.com
913-206-7700
1
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
REVIEWING THE BASICS
Job Costing links five critical construction management tasks:
Estimating
Employee
Motivation
Scheduling
Cost
Control
Staffing
This means estimators; schedulers, field supervisors, project managers and owners rely on job costing data to
perform their job successfully. Choosing the right data to collect, a system to collect the data, analyze the
data, and then utilize the data is critical to any firm. Proper use of job costing data will dramatically increase
the profitability of any company and be the most powerful competitive advantage.
The term “job costing” can be misleading. It may imply that all job cost data is financial in nature. The truth is
that much of the data needed is non- financial in nature: man-hours, equipment operating hours, and material
quantities. Limiting yourself to tracking and allocating payroll dollars will prevent you from knowing labor
productivity.
Unfortunately, many accountants often take the lead in setting up cost codes and often use the codes that
match the general ledger codes of the income statement. In other words, the cost coding system which is
meant to serve operations is actually serving the financial person. This results in job cost data that is not
sufficiently categorized to determine the actual costs of field activities.
The goal of any job costing system is to acquire sufficient information to predict the labor, material and
equipment needed to complete a job on schedule and in budget.
2
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
COST ESTIMATING
When you establish any job costing system, focus on your estimators information needs. They require the
most detailed job costing data of anyone in your company. By providing them the information they need,
everyone else will have the information they need to perform scheduling and other tasks in the company.
TYPICAL ESTIMATING PROCESS
1.
2.
3.
4.
5.
6.
7.
8.
9.
Take off material quantities from drawings and specifications.
Obtain quotes from suppliers and vendors for material and equipment.
Predict the time required to install the material quantities ( in man-hours).
Multiply the installation time by an average hourly cost ( including overtime and burden costs)
Identify equipment needs and time needed on project.
Multiply the equipment time by equipment rates ($/hours of operation).
Calculate miscellaneous field office costs (e.g. project manager).
Total up all direct costs (#1 through # 7).
Multiply the direct costs by an Profit and Overhead markup.
EXERCISE:
On a scale of 1 to 5, with 1 representing “no confidence” and 5 representing “complete confidence”, score
your confidence level on the following estimating functions (place X somewhere between 1 and 5).
Estimating Function
No Confidence (1) ------------
--------------- Confidence( 5)
Material Takeoffs
Labor Requirements
Equipment Usage and Costs
Project Management Costs
Other:
DISCUSSION:
1.
Which area in your company needs the most work?
2.
What will be required to collect the data needed to improve this area?
3
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
LABOR PRODUCTIVITY
Labor productivity is the key to successful job costing. Labor productivity refers to the efficiency in which your
crews install the construction materials and represents the type of data you should be collecting with your job
costing system. Collection of accurate job cost data for activities (sealcoating) and tasks (cleaning time) will
take several years of data collection, analysis and refinement.
EXERCISE:
List the five most important labor productivity measurements you currently track or would like to track (i.e. sq.
ft. of sealing/hour, tons per man hour, lineal feet per m/h, etc.)
1.
2.
3.
4.
5.
Far too often, contractors discover they didn’t collect the labor productivity data they need to correctly price
and schedule. In other words, the data does not show the amount of time it takes to perform project tasks.
For example, does it take 24 man hours to clean and seal a 30,000 square foot parking lot?
Labor productivity is a ratio of the number of man-hours it takes to remove or install a unit of material: feet of
sealer, tons of asphalt, lineal ft of striping, cubic yards of dirt, etc. This ratio is usually presented as material
quantity per man-hour (e.g. 20 square feet of 4 inch patching per man hour).
Man hours and material quantities are far more relevant than purely tracking dollars of labor and dollars of
material. It boils down to getting material placed efficiently. That is the source of cost advantage in the
construction industry and where the game is won from a pricing and profit perspective.
DISCUSSION:
1.
Do you currently have a pricing advantage on certain activities because of your company
productivity?
2.
How have you capitalized on this competitive advantage?
4
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
GETTING STARTED WITH LABOR PRODUCTIVITY
Identifying your labor productivity rates for each type of job and activity will take time. You will need several
seasons of data collection, analysis and refinement before you reach a comfort level with your rates.
Heed this piece of advice: Start small in year one of job costing data collection.
HERE IS SIMPLE APPROACH TO BEGIN:
1.
2.
Identify the 5 most critical labor tasks your company performs for each major service.
Assign unique identification numbers to each of those tasks. These are commonly referred to as
Work Codes.
Modify your timesheets so labor time can be recorded per work code.
Leave a section on the timesheets, or use a separate form to record the amount of material per work
code installed each day by the crews.
On all estimates, record the length, width, or volume of any service being performed (e.g. 1000 lineal
feet of cracksealing).
3.
4.
5.
EXAMPLE:
Daily Timesheet
Week Ending
Circle
Job #
20101
Job Name
Morgan
Employee # Class
1203
201
Employee # Class
1204
201
Employee # Class
Start Time
Employee Name (Last, First)
Edwards, John
7:00
AM PM
ST
101
3.75
ST
102
1.75
ST
Code
Hours
ST
100
2.5
ST
100
2.5
ST
101
3.75
ST
102
1.75
ST
Code
Hours
ST
ST
ST
ST
Employee Name (Last, First)
Smith, Tim
#####
M T W TH F S S
Employee Name (Last, First)
Circle OT or DT
OT DT
100
ST
1.5
OT
DT
OT DT
100
1.5
OT
DT
Code
Hours
Crew Benchmarked Quantities Today
ST
OT
DT
Daily Hours
8
1.5
Daily Hours
8
1.5
Daily Hours
ST
OT
DT
Code
Qty
Recommendation: Collect no more than 5 to 7 benchmark codes for each project.
5
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
WORK CODES
Work codes allow labor productivity and direct job costs to be allocated to specific construction tasks.
Without work codes, all job costing data would be lumped into a single place, the project number. If this
happens, you would be unable to isolate labor productivity rates for individual construction tasks and your job
cost data becomes useless.
Selecting work codes wisely requires teamwork between operations, estimating and scheduling personnel.
Ultimately, you are looking to collect data on the following:
1.
Man hours used per work activity
2.
Equipment usage per work activity
3.
Material quantities installed per work activity
SAMPLE CODES FOR PAVING AND PATCHING
Work Code
Task Description
201
Parking Lot Cleaning
202
Removal
203
Paving Installation
204
Downtime
205
Clean Up
KEY POINTS TO REMEMBER:
1.
Start simple in year one. Add more codes as you have the need for greater estimating accuracy.
2.
Involve estimators in the design of the work code system.
3.
Some codes can and should be lumped together.
6
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
BUILDING LABOR PRODUCTIVITY CHARTS
The power of a job costing system is known by your cost and labor productivity per work activity. This
information allows you to prepare estimates more accurately with less risk of labor over-runs and equipment
under charges. The following is a sample productivity chart for a crew (data and activities are fictitious). This
chart (with all work codes) will become one of your most important and confidential documents.
3 MAN INSTALLATION CREW (SAMPLE ONLY)
Activity
Sealcoating
Remove and Replace (no
mill) – 4 inch
Cleaning
Grade/Prep
Productivity Rate
1250 square feet per man hour for A type lots
1100 square feet per man hour for B type lots
37 square feet per man hour
4500 square feet per man hour for clean lots
2900 square feet per man for dirty lots
10 cubic yards per man hour
EXERCISE:
Write in three activities below where you know the productivity rates for a particular crew. If you do not
know this, put your best estimate.
Activity
Productivity Rate
DISCUSSION:
1.
How does knowing this data assist you in the 5 critical management areas we discussed earlier
(estimating, scheduling, employee motivation, cost control, staffing)?
2.
Which type activities will be the hardest in your mind to determine labor productivity?
3.
How will you handle variances?
7
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
A FEW TIPS TO REMEMBER REGARDING LABOR COSTS
No two jobs are the same. Variables are present and must be considered when calculating labor costs. When
you develop your productivity tables, you should also be ready to adjust rates considering these items as well.
A few common areas that often trip up contractors are as follows:
1.
Overtime: While unavoidable for most contractors, don’t forget that excessive overtime can
dramatically decrease productivity. Most studies show a decline of 15% or more after 4-6 weeks of
over 60+ hours.
2.
Weather: In many parts of the country, spring and fall weather can be unpredictable and cause big
interruptions in productivity as well as shorter times to work. While summer can bring long days,
excessive heat can reduce productivity.
3.
Travel Time: Trucks are slower. You should factor longer drive times for work trucks. Traffic also
impacts hours significantly and must be factored into estimates.
4.
Estimated vs. Actual: You should be double checking your actual data versus estimated on a regular
basis. If you are performing better than estimated time, you should make the adjustments in your
estimates. If you don’t, you could be losing jobs which affects profit significantly especially when you
have capacity.
There are also a couple of ideas you should consider to improve labor productivity and profitability. They are
as follows:
1.
Performance Goals: Never underestimate the value of a goal to motivate a team.
2.
Production/Gain Sharing Bonuses: Combining monetary bonuses with performance goals is a win win
for both the crews and the owner. It is really simple. Set reasonable targets, pay out for hitting the
targets or a % of gains. This is a great way to avoid the annual increase only method.
3.
Non-monetary rewards: Get creative. Offer trips to conferences and seminars or a special trip for
someone.
4.
Rightsizing: The reality is that many crews are over staffed in some cases. Determine what the best
size crews for certain activities and stick to this staffing.
8
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
REALITY CHECKING YOUR JOB COSTING DATA
For contractors with a limited amount of activities, your payroll records have enough data to check your labor
productivity assumptions. Labor hours will come from payroll. Installed material quantities will come from
your estimates and your material purchase inventories.
To double check your assumptions, compare material quantities estimated for the job, including change
orders against material charged to the job. This will tell you whether you can rely on your estimated
quantities or use the purchased quantities. Don’t forget to allow for scrap.
EXAMPLE (CONCRETE PATIO POURS)
Divide the material installed for year by the number of man-hours you believe were used on this activity. Use
your estimates as your guide. Let’s assume your average estimate has 30% of labor going to demo and prep,
10% of labor going to forming, 50% of labor going to pour and finish, and 10% to clean up and back fill. If you
had 10,000 man hours of direct payroll, the breakout may look as follows:
Activity
Payroll Hrs.
% of Hrs.
Total Hours
Demo Hours
Forming Hours
Pour and Finish Hours
Clean up/ Backfill Hours
10000
10000
10000
10000
30.0%
10.0%
50.0%
10.0%
3000
1000
5000
1000
In this example, if you typically use 10% more labor hours than the estimator planned, you should assume that
labor productivity is about 90% of your current assumption.
If you have not been allocating time to specific work codes, then you must compare total project man hours
versus original projection.
You will need to review jobs of differing types and sizes to make adjustments as necessary to estimator’s
current assumptions for labor productivity. (e.g. front pours vs. back pours, etc.)
DISCUSSION:
1.
How do you currently test your productivity assumptions?
2.
What has been the cause of largest variances based on type of job conditions?
3.
What have you done to bring daily/weekly awareness to productivity targets ?
9
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
OVERCOMING RESISTANCE
The most difficult task you face in implementing a job costing system is convincing field personnel of the value
of any job cost system and to record the data accurately. The mentality of most workers is that if it isn’t
physical construction it isn’t productive.
Writing down labor hours is easy for them. It’s how they get paid. Asking them to add several work codes
documenting the breakdown of their daily hours and a few benchmarking codes will strike most as just a big
annoyance and waste of time.
OBSTACLES TO OVERCOME:
1.
Convincing the entire company that job costing will improve the competitiveness of your company.
2.
Setting up the job costing system.
3.
Learning how to properly record data correctly.
Buy in takes time and appreciation of a job costing system will grow slowly. With more accurate costing, their
jobs will be more secure especially in tough market times. The crews will have clearer performance targets,
more trust in the schedule, and increased motivation and teamwork.
It will be your job as owner/manager to properly develop and implement the vision for your job costing
system. Don’t underestimate how much “vetting” will need to occur at the foreman and field worker level.
You will need time to understand concerns and personally coach on how to use the system and its importance.
DISCUSSION:
1.
How would you go about implementation of a job cost system in your company?
2.
Who will be your champions?
3.
Who will be your challenges?
4.
What will be required for you to believe in the value of the system?
5.
What other questions do you have about a job costing system?
10
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
EQUIPMENT COSTING
Equipment costs should be reflected in estimates based on an hourly rate. You should avoid costing
equipment within an overhead number, as a percentage of labor or not charging for equipment even if it is
paid for. Smaller equipment (pumps, generators, etc.) can be lumped into one category of small equipment
and should also be charged by the hour. Here is the proper way to cost equipment to achieve an hourly rate:
Purchase Price
$ 28,000.00
Plus Interest Expense1
$ 4,200.002
Minus Salvage Value
<$ 5,000.00>
$ 27,200.00
If equipment is used on average 1200 hours per year, then cost per hour based on value of machine only is $
27,200.00/6000 hours (1200 x 5 years) = $ 4.53 per equipment hour or $ 36.26 per 8 hour day.
To this number you must add costs for maintenance, insurance, licensing and fuel.
Maintenance
$ 20,000.00
Insurance
$ 5,000.00
Licensing
$
500.00
$ 25,500.00
Fuel
$ 4.00 per equip hour
Additional cost per hour for this equipment would be $25,500.00/6000 hours (1200 hours x 5 yrs.) =$ 4.25 per
equipment hour or $ 34.00 per 8 hour day.
The total cost per hour for this piece of equipment would be:
$ 4.53 +4.25 + 4.00 = $12.78 per equipment hour or $ 102.24 per 8 hour day
Note:
1.
2.
1
2
This approach is average cost approach; many factors should be taken into accounts that affect
operating costs (e.g. Load, operator temperament, environment, soils, grade, etc).
Rental rates are often a very good reflection of what your costs should be. If yours are higher,
perhaps you should consider leasing/renting as needed.
Easy formula is ½ Purchase Price X current interest rate X length of ownership
$14,000 X.06 =$ 840.00 X 5 years = $ 4200.00
11
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
LABOR COSTS
Calculation of time and the cost of that time are critical to any contractor. Labor costs must reflect all costs
paid to employee including burdened costs (employee contributions, benefits, and bonuses). Burden can be
20-45% of base pay depending on burden. The following is a sample calculation assuming you pay for some
health insurance, retirement and holiday benefits.
Note: Numbers are sample only and do not reflect your exact costs.
Laborer Base Rate
$ 15.00
Health Insurance
1.80
Retirement
.75
FICA (company share)
.93
FUTA (Fed Unemployment)
.15
SUTA (State Unemployment)
.78
Workers Compensation/Liability
.60
Holiday Pay
.58
Totals:
$ 20.59
The following table represents a weekly wage cost with the following assumptions: 20 hours of overtime, 48
hours of holiday pay and 80 hours of paid vacation time and employee pays $ 46.00 weekly for insurance.
Note: Numbers are sample only and will not reflect your true costs.
Payroll Cost Per Employee
Empl Hours Rate OT
Eric
40
15
John
40 17.5
Rate Reg. Pay OT Pay Wage Total FICA (7.65) U/C
Health
W/C
Vacation Holiday
22.5 $600.00 $337.50
$937.50
$71.72 $30.00
$46.00
1.538462 0.923077
$11.00
$23.08
$13.85
15 26.25 $700.00 $393.75
$1,093.75
$83.67 $30.00
$46.00
$11.00
15
$26.92
$16.15
Total Weekly
$1,133.14
$1,307.50
Vacation Amount = 80hours/52weeks x hourly pay
Holiday Amout = 48 hours/52 weeks x hourly pay
In this scenario, the hourly cost to be used in estimating and costing would be:
Eric = $ 1133.14/55 hours =$ 20.24 per hour
John = $ 1533.65/55 hours = $ 27.88 per hour
12
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
SUBCONTRACTOR AND MISCELLANEOUS COSTS
Inclusion of subcontractor and miscellaneous costs should always be done at cost in the estimate. Ideally, you
want to avoid attaching separate mark ups to these areas prior to determining total direct costs for any job.
This makes negotiation much easier since we don’t have to back into our costs by separating mark ups on
subcontractors. Don’t be bashful to shop for the best prices from suppliers and subcontractors but beware.
Just as you get frustrated with a customer looking for the lowest estimate, the least expensive can prove to be
the most expensive in the long run.
Develop partnerships with your subcontractors to achieve the best pricing. Here are some proven ways to get
better pricing and performance.
1.
Train them to job cost and develop productivity charts
2.
Agree upon fair margins for jobs
3.
Involve them early in the estimating process for value engineering ideas
4.
Communicate clearly the job expectations/goals
5.
Include them in daily/weekly planning for the job tasks
6.
Pay them as you agreed to in your contract
CALCULATING PROFIT
Once you know your direct costs for a particular job, you are ready to add your profit for a project and arrive
at a selling price. This is done by applying a mark-up on direct costs or percentage of gross margin. Once you
have a selling price, you then analyze whether the profit is sufficient for you to complete the work and to be
competitive to win the work. In terms of a formula, it would look as follows:
Direct Costs (Labor, Equipment, Material, Subcontractor, Miscellaneous) + Overhead Costs+
Profit = Selling Price.
Or put another way: DC (Direct Cost) + POH (Profit and Overhead) = SP (Selling Price)
To understand how much to charge for POH (Profit and Overhead), then we must back up to understand our
budget for the year and also our sales projections for the year. A budget will help you understand your
overhead (fixed and variable); how to allocate the overhead, and recognize gross and net profit.
13
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
Operating Income
Sample
COCO
Budget
SampleSPA
PAVE
Budget
Total Revenue - Pool/Spa
Division
Pave Division
1,200,000.00
100.00%
Direct Project Expenses
Labor Wages and Benefits
Materials and Supplies
Equipment
Subcontracts
Project Management
Miscellaneous/Other
Cost of Goods Sold
Gross Operating Profit (GP)
132,000.00
420,000.00
120,000.00
60,000.00
50,000.00
18,000.00
800,000.00
66.67%
400,000.00
33.33%
1.5
Overhead Expense
Wages and Benefits
Utilities
Rent
Taxes
Insurance
Telephone
180,000.00
12,000.00
38,000.00
12,000.00
12,000.00
4,800.00
Marketing and Advertising
25,000.00
Professional Services
5,000.00
Sales Commissions
6,000.00
Uniforms/Clothing
1,000.00
Total Overhead Expense
Net Income Before Taxes (NIBT)
295,800.00
24.65%
104,200.00
8.68%
DISCUSSION:
1.
Based on the proposed budget, what is the total dollar amount I must add to estimates?
2.
What is the average mark-up I must achieve on all jobs?
3.
What are fixed overhead costs?
4.
What are variable overhead costs?
5.
What are some alternative ways to handle sales and marketing costs?
14
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
SALES BUDGET
To accurately determine sales for each year, you should develop a sales budget that represents expected
number of sales by size of job. This type of sales budgets can be done for each type of service and also a
combined table reflecting all types of services. A sales budget is compiled from both historical data and
desired results for the year. The longer you collect the data and the closer you align your marketing and sales
efforts toward the desired targets, the more success you will have.
The real value of this work is to help you see what the average mark-up is per type of job, service, and size of
job. In the following example, this sales budget is a combined budget for the year. The raw data comes from
historical data that provides verification of market pricing for size of job, type, etc. (next page).
Note: Numbers are sample only and will not reflect your true costs or mark up.
PAVE CO
Budgeted
Sales
PATIO
CO Budgeted
Sales
Size of Jobs ($)
Proposals
Sold
Win %
Average Size ($)
8000-12000
12001-20000
20001-30000
30001-40000
40001-50000
50001-75000
75001-100000
100001-125000
125001-150000
30
20
20
10
7
12
6
8
3
12
6
4
3
2
3
2
2
1
40.00%
30.00%
20.00%
30.00%
28.57%
25.00%
33.33%
25.00%
33.33%
$
$
$
$
$
$
$
$
$
9,800.00
14,050.00
24,852.00
36,105.00
43,850.00
63,825.00
83,970.00
107,300.00
128,780.00
Total $
$
$
$
$
$
$
$
$
$
$
117,600.00
84,300.00
99,408.00
108,315.00
87,700.00
191,475.00
167,940.00
214,600.00
128,780.00
1,200,118.00
Gross Profit $
$
$
$
$
$
$
$
$
$
$
48,216.00
31,191.00
35,786.88
37,910.25
30,695.00
63,186.75
53,740.80
64,380.00
36,058.40
401,165.08
GP %
Mark Up
0.41
0.37
0.36
0.35
0.35
0.33
0.32
0.3
0.28
1.69
1.59
1.56
1.54
1.54
1.49
1.47
1.43
1.39
Job Costs
$
$
$
$
$
$
$
$
$
69,384.00
53,109.00
63,621.12
70,404.75
57,005.00
128,288.25
114,199.20
150,220.00
92,721.60
DISCUSSION:
1.
Why not use an average mark up across all jobs?
2.
What data is needed to arrive at the mark up per category? Where will it come from?
3.
There are a few abnormalities in this sales budget? What are they and what adjustments would you
make? Why?
4.
If you have others making sales for you, what is best method to motivate them to sell at these
margins?
15
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
GETTING TOP DOLLAR
Every contractor wants top dollar but forget many factors affect the mark up or gross margin that you can
achieve. These factors include the economy in your area, competition, sales and marketing strategies and
much more.
What we do know is that data will guide you to see what mark ups are required at size and type of job to win
the work. To gather this data, develop a list of key data and then enter all information in a spreadsheet
(easiest method is to use a pivot chart function). Once data is collected, it will begin to tell you the story of
where you are winning and where you are losing based on size and type of job.
The following table is an example of how to determine what the proper mark -up is by size of job and type of
job. Once again, the more data you collect, the more accurate it will become and pricing decisions (what the
right mark-up should be) will become easier.
Note: Numbers are sample only and will not reflect your true costs or mark up.
Referred By:
Status
Existing Cust.
Customer Referral
Customer Referral
Existing Cust.
Customer Referral
Personal Network
Commercial Flyer
Direct/Letter
Big YP
Customer Referral
WEB
Existing Cust.
Existing Cust.
WEB
Existing Cust.
Existing Cust.
Lost
Lost
Sold
Lost
Sold
Lost
Lost
Lost
Lost
Sold
Lost
Lost
Sold
Lost
Sold
Lost
Direct Costs
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
8,769
7,684
5,691
4,691
828
16,418
12,342
11,550
14,042
3,785
33,664
15,209
45,101
13,631
2,740
18,461
Proposal DC Mark
Price
Up
$ 14,260
1.63
$ 12,500
1.63
$ 9,275
1.63
$ 7,650
1.63
$ 1,350
1.63
$ 26,800
1.63
$ 20,155
1.63
$ 18,915
1.64
$ 23,000
1.64
$ 6,200
1.64
$ 55,200
1.64
$ 24,955
1.64
$ 74,055
1.64
$ 22,400
1.64
$ 4,505
1.64
$ 30,350
1.64
Estimated
Margin
$
5,491
$
4,816
$
3,584
$
2,959
$
522
$
10,382
$
7,813
$
7,366
$
8,958
$
2,415
$
21,536
$
9,746
$
28,954
$
8,769
$
1,765
$
11,889
Gross
Price
Margin Category
39%
3
39%
3
39%
2
39%
2
39%
1
39%
4
39%
4
39%
3
39%
4
39%
2
39%
6
39%
4
39%
6
39%
4
39%
1
39%
5
DISCUSSION:
1.
What categories of jobs would be useful to track (i.e. spa install only, standard pools, etc.)?
2.
What size jobs should yield highest mark up?
3.
What is highest mark-up that I should expect to achieve?
16
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
MARK UP AND GROSS MARGIN
As you learn to price a project, be aware that a common mis-understanding can occur within your company
with two terms. Specifically, the terms Gross Margin (GM) and Mark Up (MU). The confusion often comes
because estimators tend to talk in terms of marking up costs and owners tend to want to know gross margin
dollars or percentage. Let take a minute and define these to ensure your understanding.
Gross Margin (GM)
Gross margin is the portion of the sale that contributes to both your overhead and your profit. It is calculated
by subtracting the direct job costs (DC) from the job price (P), then dividing that number by the job price (P),
and then multiplying by 100 to turn into a percentage (%).
Therefore Gross Margin (GM) equals Gross Profit (GP) divided by Job Price (P) or GM= GP/P
Selling Price
$20,000.00
- Direct Costs
$12,000.00
=Gross Profit
$ 8000.00
GM % in this example = $8000.00 divided by $20,000.00 = .4 x 100 = 40%
Mark Up (MU)
Mark up is the multiplier you use with your direct field costs to arrive at your job selling price. The formula for
mark-up is as follows:
Mark Up(MU) equals Job Price (P) divided by Direct Field Costs (DC) or MU = P/DC
Selling Price
$20,000.00
- Direct Costs
$12,000.00
=Gross Profit
$ 8000.00
Mark Up in this example = $20,000.00 divided by $12,000.00= 1.67
So why does this matter? Many contractors price things incorrectly by assuming the two terms mean the
same thing. They want to make 40% on a project but don’t realize that a 40% mark up on costs (1.4) is
significantly different than a 40% gross margin (1.67) on a job.
The following table will help you and be a handy reference tool. In this example, the gross margin numbers
have been rounded to closest percentage.
17
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
DC Markup Up
Gross Margin
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
9
17
23
29
33
38
41
44
47
50
52
55
57
58
60
62
63
64
66
67
Converting MU and GM
MU= 1/(1-GM)/100 GM=100 x (MU-1)/MU
EXAMPLE:
Selling Price
$20,000.00
- Direct Costs
$12,000.00
=Gross Profit
$ 8000.00
Using the scenario above, consider the difference:
$12,000.00 (DC) x 1.67 = $20,000 Selling Price (40% GM)
$12,000.00 (DC) x 1.4 MU =$4800.00 or a selling price of $16,800.00
Difference: $20,000.00-16,800.00 = $3200.00
Alternate Method:
If you want 40% Gross Margin (GM), divide Direct Costs (DC) by divisor of margin you want.
$12,000.00(DC) ÷.60=$ 20,000.00 Selling Price (P)
18
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
PUTTING IT ALL TOGETHER
So far, we have learned the importance of labor productivity, correct costing for labor and equipment, and
methods for determination of proper mark-up /margin. Putting the estimate together now becomes much
easier. The simplest method of course is to use a spreadsheet and list separate work activities using a
combination of material, labor and equipment rates then apply the mark up to direct costs. Using a simple
concrete pour, it might look as follows:
Smith Project
Materials
982.80
Labor
684.80
Equipment Costs
144.00
Direct Costs:
$ 1811.20
Gross Margin Dollars
$ 1630.08 (mark up of 1.9 or GM of 47%)3
Selling Price
$ 3441.28
If you are using a computer estimating software, your assembly for this activity would look as follows. In this
scenario, the information came from your job cost collection system to arrive at productivity levels.
Smith Project
Description
CONCRETE SLAB
Concrete (3500 psi)
Excavation
4 inch edge forms
Welded wire
Labor - place
Labor - finish
Labor - stamp
Clean Up
Qty Unit Meas
8
18
112
648
8
648
648
648
Cu yds
Cu yds
Lin. Ft
Sq Ft
Cu yds
Sq Ft
Sq Ft
Sq Ft
Labor Man Hours
Unit
Total
Labor Dollars
Unit
Total
0.08
0.04
0.0052
0.8
0.0095
0.008
0.005
22.61
22.61
22.61
22.61
22.61
22.61
22.61
Material Dollars
Unit
Total
90
1.44
4.48
3.37
6.40
6.16
5.18
3.24
32.56
101.29
76.19
144.70
139.19
117.21
73.26
Equipment Dollars Subcontract Dollars
Unit
Total
Unit
Total
Total Dollars
720.00
8
0.9
0.25
720.00
176.56
202.09
238.19
144.70
139.19
117.21
73.26
144
100.80
162.00
CONCRETE SLAB ESTIMATED COST
1,811.20
DISCUSSION:
3
1.
What type of software do you use for estimating?
2.
Are you using assemblies and templates in your estimating?
Mark up of 1.9would reflect win rates from your past data, market or other criteria.
19
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
KEEPING SCORE
Perhaps one of the most important functions of proper job costing is the ability to review costs after each job
and make projections based on the year. In our example of PATIO CO, our goal is $400K in gross margin. It is
important to track this amount and know where you stand for the year (see chart below and graph on next
page) so that adjustments in pricing and selling can be made.
Note: Numbers are sample only and will not reflect your true costs or mark up.
Direct
Costs
Proposal DC Mark
Price
Up
Estimated
Margin
Actual
Direct Costs
Actual
Margin
Est.
Gross
Margin
Date
Job
1-Apr
8-Apr
12-Apr
19-Apr
24-Apr
28-Apr
1-May
3-May
8-May
12-May
14-May
22-May
2-Jun
8-Jun
15-Jun
22-Jun
16-Sep
30-Jun
10125 $ 8,769 $ 14,260
1.63
$
5,491 $
8,439 $
5,821
38.50%
10350 $ 7,684 $ 12,500
1.63
$
4,816 $
8,250 $
4,250
38.53%
10554 $ 24,512 $ 43,521
1.78
$
19,009 $
24,870 $
18,651
43.68%
10778 $ 62,450 $ 87,212
1.40
$
24,762 $
61,587 $
25,625
28.39%
12247 $ 5,691 $ 9,275
1.63
$
3,584 $
5,294 $
3,981
38.64%
13540 $ 4,691 $ 7,650
1.63
$
2,959 $
4,636 $
3,014
38.68%
12514 $
828 $ 1,350
1.63
$
522 $
950 $
400
38.68%
11103 $ 16,418 $ 26,800
1.63
$
10,382 $
15,475 $
11,325
38.74%
15902 $ 12,342 $ 20,155
1.63
$
7,813 $
12,334 $
7,821
38.77%
11241 $ 11,550 $ 18,915
1.64
$
7,366 $
11,465 $
7,450
38.94%
11268 $ 14,042 $ 23,000
1.64
$
8,958 $
14,303 $
8,697
38.95%
11541 $ 3,785 $ 6,200
1.64
$
2,415 $
3,885 $
2,315
38.95%
12358 $ 33,664 $ 55,200
1.64
$
21,536 $
35,308 $
19,892
39.01%
11125 $ 15,209 $ 24,955
1.64
$
9,746 $
15,134 $
9,821
39.05%
14395 $ 45,101 $ 74,055
1.64
$
28,954 $
43,515 $
30,540
39.10%
14455 $ 13,631 $ 22,400
1.64
$
8,769 $
13,858 $
8,542
39.15%
12297 $ 2,740 $ 4,505
1.64
$
1,765 $
2,575 $
1,930
39.17%
12845 $ 18,461 $ 30,350
1.64
$
11,889 $
18,465 $
11,885
39.17%
$
181,960
Actual
Actual
Gross
Mark Up
Margin
40.82%
1.69
34.00%
1.52
42.86%
1.75
29.38%
1.42
42.92%
1.75
39.40%
1.65
29.63%
1.42
42.26%
1.73
38.80%
1.63
39.39%
1.65
37.81%
1.61
37.34%
1.60
36.04%
1.56
39.35%
1.65
41.24%
1.70
38.13%
1.62
42.84%
1.75
39.16%
1.64
DISCUSSION:
Based on PATIO CO’s budget presented earlier, we need $ 400K in Gross Margin Dollars to make our projected
profit of 104K. Assume this company works an average of 150 days a year and further that they have worked
60 days through the end of June.
1.
What is the average daily gross margin dollars needed for year? What is the amount thus far?
2.
Based on another 90 days available, what is the projected gross margin if they stay at same pace?
Will the company make its goal of 400K in gross margin dollars?
3.
What does the chart reveal in terms of productivity and changes they could make in estimating,
operations, or pricing?
20
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com
Introduction to the Power of Job Costing
PAVE CO Margin
Note: Numbers are sample only
SUMMARY AND TAKE-AWAYS
1.
What are three things you learned today you can implement immediately? What impact do you
believe they will have?
2.
Who will be your champion of these changes?
3.
Go back to the first page. How will you deliver the speech to everyone in your company about
importance of job costing?
4.
What data do you need to begin tracking and why?
5.
What new software/learning/personnel do you need to implement these changes?
21
© Jeff Stokes
Next Level Contractor System
jeffstokes@gmail.com