Full-Cycle Job Costing
Posted in: Features
It starts with job costing, the process by which a contractor uses historical data from completed projects to determine their company's ability to perform installations.
Mistakes during a project are easy to make, but the silver lining to those mistakes is what we learn from them and how we use that knowledge to improve practices. Knowing exactly how your company performs against estimated labor and materials for a project is key to understanding the impact of budgeted versus actual costs. That is the very definition of job costing.
Full-Cycle Job Costing is the secret to maintaining and even increasing profits that support sustainable business growth, regardless of what the larger, macro-economic conditions may be like.
Due to the intricacies of Full-Cycle Job Costing, it is critical to have a fundamental process in place to execute projects efficiently and consistently from start to finish. A key element to that success is following a process that begins with a detailed, accurate estimate that provides critical job documentation, specifications, and correspondence to project managers, allowing them to make quick and effective decisions during the installation process.
This flow of information from the estimator to the project manager will help save the contractor valuable time by having a comprehensive estimate against which they can measure and track the actual costs of the project. However, moving information from estimating to project management isn't the only step that will give a contractor the information they need to determine true job costs. There's another key element in the process that, when missing, will cause contractors to fall short on their ability to maintain or increase profits.
Four Steps to Full-Cycle Job Costing
Full-Cycle Job Costing is a four-step process, by which the project manager provides feedback to the estimator with statistics that measure the company’s actual ability to perform the work as it was estimated. Those results and statistics are then implemented and used to improve estimating accuracy. Missing this vital step in the project’s life cycle is what causes contractors to repeat the same mistakes again and again, jeopardizing valuable profits that support sustainable business growth – in good times and bad.
STEP 1: Start with a complete and comprehensive estimating program
The estimate is at the center of Full-Cycle Job Costing. To effectively manage a project, a detailed budget is critical for measuring estimated costs versus the actual costs at any point during the project, and that's what an accurate estimate provides.
A formal estimating system will help produce more accurate and consistent estimates. This is especially critical in today’s market when allotted estimating time has become shorter while the projects have become far more detailed. Estimates can be required in almost any breakdown combination of base prices, alternate prices, itemized prices, unit prices, etc. Contractors are faced with less time to complete a detailed estimate that has accounted for cost, schedule, and risk.
Today, just getting the estimate completed is a challenge, leaving little − if any − time to properly understand the potential risks on a project. When a project starts to lose money, it is typically because the labor costs have gone over budget.
A comprehensive estimating program gives the estimator the ability to generate a more consistent, accurate estimate that includes all critical project information and documentation that can be easily and instantly accessed by any department within the contractor’s organization.
STEP 2: Handing the estimated job to project management
The next step in Full-Cycle Job Costing occurs when the estimator passes the estimate − including all job-related documents and correspondence − to the project manager. That information will give the project manager (PM) full and complete insight into the estimator’s intentions for the project. Transferring the estimate, with all of its documentation, quickly and seamlessly are the keys for successful project management.
Accomplishing this transfer has to be easy and efficient. Having an estimating program that seam- lessly integrates the estimate with a complete project management system makes this data transfer easy, efficient, and fast − a process that contractors are more likely to embrace in place of manual information exchanges. Project management software automatically tracks the percentage of completion for the project based on a schedule of values and provides accurate information that maximizes the PM’s time while quickly getting the invoice into their customers’ hands.
STEP 3: Use technology for complete project management and communication
A complete project management program lets contractors manage their projects using Gantt charts that are populated with project data based on the breakdowns in an estimate. Bill of materials are separated by project tasks, ready for the contractor to create and track purchase orders. Labor can be scheduled and project milestones, submittals, and change orders can also be easily tracked.
Project management software should include tools that are designed specifically to track and compare budgeted costs against actual costs at any point during a project's life cycle. As the project moves forward, the program should have the capability of providing valuable statistics and probabilities based on the project’s performance to date. Productivity can be measured against the budget for any installation. The PM should be able to monitor the impact that productivity is having on the overall project in terms of a projected completion date.
STEP 4: Closing the Loop and Completing the Process for Full-Cycle Job Costing
Once the project is completed, it’s on to the next one, right? When the project makes money, it's easy to move on without paying close attention to areas that could have been improved upon during the project's life cycle. Comparing the project's performance and final results against the original bid will help a contractor learn from that history and will improve their estimating accuracy.
For example, by using historical data from completed projects, Full-Cycle Job Costing can tell a contractor that they consistently beat their estimated installation time by a factor of, let's say, 15-20 percent when running large feeders; or that they might constantly fall behind by a factor of 12 percent when they run branch wiring in a commercial building. Every contractor is unique in their ability to perform an installation. Full-Cycle Job Costing is what helps a contractor know what their own ability and unique labor factor is for performing work consistently over time. Knowing their company's unique performance benchmarks is what gives contractors a significant advantage when bidding against the competition.
Understanding this detailed information is valuable to any contractor, but the time, effort, and means to compile and correct this information for each project can become time consuming and cumbersome unless there are automated tools in place to streamline the job-costing process. Without proper job-costing methods, your business will continue to make money on some jobs, but lose money on others – a classic roller coaster effect that negatively impacts the bottom line and significantly stunts consistent business growth.
Feedback from the PM to the estimator − detailing how the company is performing against their estimated costs − is the last element in the process of Full-Cycle Job Costing that is the most critical, but is often the most overlooked.
The key to generating consistent profits that result in sustainable business growth – no matter what the larger economic conditions may be – is the comprehensive and disciplined process of Full-Cycle Job Costing.
Full-Cycle Job Costing is accomplished only by closing the key communications loop between the estimator and project manager, giving them the ability to communicate performance benchmarks and to build historical project data that is used to determine their company’s unique ability to perform installation tasks.
Knowing this simple – but essential – equation will have a profound and positive impact on what matters most to an electrical contractor’s success: steady profits and the accompanying growth of their business, regardless of what’s happening economically outside their front door.
George Hague is president and CEO of ConEst Software Systems, an IEC National Platinum Partner. For more information, visit ConEst.com.