This article will show you how to use job costing to dramatically improve your profits.
Every month many construction companies sit down and review their cost and look for projections on what the field thinks it will take to finish. I have seen this done a lot of different ways.
The most common one is to base the projection on the percentage to complete. Most construction accounting systems even have a form that can be printed or emailed to the field superintendents. They include all the cost codes and require the superintendents to write in a percentage they think they are currently at. The form is entered into the accounting system and will make the adjustments based on these projections showing the variances. This system is generally referred to as the 80% method. This is when the job is truly at 80% complete the actual cost to complete begins to surface and many times will show unfavorable results too late to correct.
Another popular approach is to ask the field superintendent to estimate the hours it will take him to complete the remaining work. This is a much more effective way because we now have a clearer baseline to refer back to when comparing previous month’s projections. There are still problems with under estimating and time for corrective actions can still be loss.
The most effective and factual solution to the age old problem is to add a production measuring system to not only improve the accuracy of your projections, but even more importantly to give you the ability to improve your field’s productivity . Having a unit of measure established and the quantities required on every work task that the project requires will ensure that your monthly financials are accurate. An example of how this works is as follows;
A Floor Tile Subcontractor has;
20,345 Estimated Square Feet of tile to install
365 Divide the Estimated Man Hours
55.74 Estimated Square Feet per Man Hour Production Rate
6,000 Actual Square Feet Installed and Completed
123 Divide the Actual Hours Expended to Date
48.78 Actual Square Feet per Man Hour Completed Production Rate
20,345 Total Estimated Square Feet
6,000 Minus Square Feet Completed
14,345 Balance of Square Feet to Complete
14,345 divided by 48.78 (Current Production Rate) = 294 Man Hours to Finish
123 Current Expended Hours
294 Add the Hours based on Current Production Rate from above
417 Projected Hours based on the Current Production Rate
365 Minus Estimated Hours
52 Number of Hours that the Task will Exceed the Estimate!
In the above example you can see that the production measuring system enables you to see that job is expected to go over the man hours at before 30% of it is complete. This gives you the opportunity to change this outcome with 70% of the job remaining. And yes, it takes the guess work out of your job cost projections. Imagine if the above example was only one of many cost codes on the project! Finding the units of measure can be accomplished with some effort and when you get them down the results are very satisfying. The information from a system like this will create trust in the numbers and can be used to set future goals more effectively. Having weekly meetings to discuss the current rates can allow for corrective solutions to be thought of and possibly turn the loss into a profit!
Developing an active job costing system and building a production measuring system will establish factual projections and not guesstimations. And it provides immediate feedback so that corrective action to improve the outcome can take place. Imagine having this productivity information at your fingertips on a daily basis? The results will pay you back many times the investment from the lost opportunities being missed by your current job projections. How many opportunities are you missing out on?
For questions on how to set up a production measuring system that can be customized for your company please contact us at email@example.com.
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