With job-cost accounting, estimators now have the tools to make intelligent adjustments and get an A+ on every bid.
Job-cost accounting provides contractors with the ability to track actual costs versus estimated costs. The process is simple: Divide the project into tasks for ease of implementation and interim analysis of actual costs against budgets. You can start by having field personnel report labor and material expenditures by task codes. We commonly refer to the process of assigning task codes as job costing, and the account numbers assigned to each item as the job-cost codes.
Cost-code accounting is typically a function of management; therefore, the process of collecting the data in the field should be the foreman’s responsibility. Contractors who instruct their foremen to keep cost records should provide them with cost-code numbers that are distinct for various portions of the job.
Before beginning this procedure, however, you should be prepared to accept the fact that cost-code accounting involves the expense of obtaining data and maintaining records. Everyone on your team must believe this process is cost effective and be committed to use the data you collect. Otherwise, the practice is a waste of time.
So what exactly is a cost code, and how do you develop one? It’s important not to overcomplicate this task. If you create a long and complicated list, you’ll find yourself spending way too much time collecting data—running the risk of inaccurate results. Just keep it simple. Typically, contractors can keep their cost-code list under 10 coded items.
The wealth of information generated by job costing is invaluable to a project manager and estimator. This knowledge takes the mystery out of labor units or material buying levels, and enables the estimator to adjust the units on future estimates. In other words, job costing is similar to an estimator’s report card. It tells how close an estimate came to the actual costs on the job.
For many estimators, determining labor costs for a project is much more difficult than estimating material costs. If you know the quantity of material for a project, you can easily extend the material costs. On the other hand, the labor is subject to many variables. Since labor is typically where most estimates go wrong, job costing is critical to this phase of estimating.
There are two methods of estimating labor: unit pricing and labor units. Unit pricing is only as good as your experience, whereas a labor unit is more scientific. We reference time studies and labor-unit tables in hours. Costs of labor are listed in man-hours or man-days. Therefore, changes in labor rates do not require revisions of tables, which we base on time units.
The development of labor units is so involved that contractors are sometimes at a loss as to where to begin. In an effort to save on expenses, contractors have foremen keep records of installations. The foremen segregate the costs on sections of an installation, which will serve in checking the estimated labor or material units. Then, contractors compare actual results to the company units or published labor tables. Estimators who have no data of their own and who are not familiar with the methods used to prepare labor units can’t interpret the data without cost-code accounting.
Labor units act as a benchmark or starting point. To properly implement them, you must use job-costing records to compare your company’s productivity to the estimated labor-unit values. Then, you must establish calculated variances, which you use to adjust the labor unit on future jobs.
When using the NECA Tables, use the levels as the comparing factor. But remember to compare similar jobs. The percent variance is the factor you need to correct the labor unit. This customization will set you apart from your competitors every time.