Job costing versus process costing
Construction and manufacturing projects are traditionally priced in one of two ways.
Process costing works best in industries with uniform costs like some forms of manufacturing. Job costing is
more rigorous, involves fewer assumptions and – when done right – gives you more certainty. It’s particularly useful in construction,
where there are so many variables from one job to the next. But it can be time-consuming and labour-intensive.
You identify the steps required to complete a job and assign an average cost to each one, based on past experience. Then you add the
averages to produce an overall budget.
You look at the job in detail and break down the specific labour and materials requirements. After calculating these costs, you add a charge
to cover your overheads.
Breaking down job costing
Job costing only gives you a precise estimate if you’re precise with your inputs. You need to think the
project through, double-check the drawings, and visit the worksite to figure out how the job will unfold. Then you separate the project
into major cost centres:
Start by working out how much it costs per day (or hour) to have your direct employees on the job. Multiply
that rate by the time you expect the job to take. Identify where you’ll need subcontractors, then confirm their availability – you don’t
want to be waiting on them. Have the contractors estimate the job but be aware they may not be as precise as you. It pays to do your own
calculations based on their hourly rate. You might want to build in some contingency to cover the tricky tasks that always seem to come up.
Calculate a cost for direct materials like wood, steel and electrical wiring, then add indirect materials like
fasteners and caulking. Make sure equipment hire is covered here too. You might also charge a margin on these materials to cover things
like delivery and wastage.
You’ll need to charge an overhead to account for depreciation of equipment, and for other business expenses
like office rental and administration. These costs don’t directly relate to the job so this step is an approximation rather than a
calculation. Many builders work out the overhead by adding a percentage to each job – but each business is different. It’s best to have an
accountant help you find out how you should treat overheads, we can help.
Job costing software
Doing job-costing calculations used to require hours on spreadsheets and there was a lot of room for error.
Job costing software streamlines the process and automates the calculations to make everything easier and faster. It allows you to:
Price jobs accurately
By working out the specific costs for each job, you’ll have far more confidence in the final estimate.
Avoid customer conflict
An accurate upfront estimate reduces the risk of a nasty surprise when your customer gets the final bill. And the happier the customer, the
greater your chance of getting repeat work and referrals.
Submit a timely estimate
Job costing used to take a lot longer than process costing. With job costing software, however, you just punch in the numbers – let the
software do the maths – and your estimate is ready.
Calculate realistic profit margins
Job costing software makes it easy to add your markup and calculate your margin – so you stay competitive but profitable.
Track progress and costs in real time
As you work through the job, you can enter actual costs against estimated costs to see how the budget is looking. This will allow you to
keep ahead of escalating costs and communicate with the client.
Get the security of accurate job costing
Avoiding cost overruns in construction isn’t easy. Job costing software gives you the best chance at
estimating the right price upfront. It’ll also help you track budget as the project unfolds, so you can address issues quickly. Packages
like WorkflowMax will
help you avoid risky assumptions and stay in control of your business’s profitability. If you’re a Xero customer, you can: