February 2020: Job Cost Accounting – What it is & why it matters

Author: Mike Kelly

All businesses, regardless of size and industry, have one thing in common — the need for accurate financial reporting.  However, a one-size-fits-all approach to keeping your books will not work. In particular, certain businesses need to be very proficient with Job Cost Accounting as they accumulate costs of materials, labor and overhead. These types of companies include manufacturers as well as real estate and related industries like developers, architects, and contractors.

Job Costing is the method to track revenues and expenses on a job by job basis. Here are key steps to take to ensure accurate job costing for your business.

STEP 1. TRACK BILLING & COSTS BY JOB

First and foremost, your accounting system must be set up to track billings and costs on a job by job basis. Most accounting systems have job costing capabilities built-in, so it is just a matter of setting the system up to fit your needs. Each job should have a unique identifier, the job number. Job numbers can be numeric or alphanumeric, whatever works for your business.  For management reporting purposes, it is helpful to begin each job number with the last two digits of the year the project begins.  It may also be helpful to distinguish by job type with project codes (such as S for single-family construction or MF for multi-family construction).

STEP 2. ESTABLISH PROCEDURES FOR ENTRIES INTO THE PURCHASE ORDER (PO) SYSTEM

Develop internal procedures to easily and accurately determine which billings and invoices go to each job.  A detailed PO system will remove the guesswork. To make this happen smoothly, project managers and accounting staff must communicate regularly.  In addition to this, establish a clearly defined change order system to track changes as they occur (unforeseen or initiated by the client). This will allow additional costs and time to be planned for and approved by the client.

STEP 3. PRECISE TIME TRACKING

Aside from materials, labor will most likely be your second largest expense.  It is critical to track employees’ time so your payroll department knows the job(s) each employee worked on during the pay period.

STEP 4. ACCURATE BUDGETING

This process begins in the estimating stage by setting the parameters for the cost of each component and the overall expected revenue of the job.  The budgeting process can then be somewhat fluid. Be certain change order costs are updated in the budget.

Once accurate job costing procedures are established, you will have access to data points that will allow you to better understand your business. Here are ways you can leverage this resource:

RESOURCE #1IDENTIFY POORLY MANAGED JOBS.  One bad job can make the entire entity seem unprofitable. Pinpointing the problem allows you to not only correct what went wrong but also to avoid a similar issue in the future.

RESOURCE #2CONDUCT A POST MORTEM. Once a job is complete, review and debrief. This will allow you to understand the job’s profitability and learn what worked and what did not. Share these lessons learned with your project managers and estimators.  Post mortem reports are a learning opportunity for the entire organization.

RESOURCE #3RUN ACCURATE REPORTS.  Many contractors rely on credit facilities from banks. Banks require financial reports that are GAAP compliant (Generally Accepted Accounting Principles is the accounting standard adopted by the SEC). A strong job costing system will provide the tools to produce your profit and loss statement for an accurate representation of GAAP.  Job costing along with accurate job budgeting is essential for accurate revenue recognition.

RESOURCE #4ABILITY TO MEASURE EMPLOYEE PERFORMANCE. Being able to accurately measure the performance of each job is also an excellent way to measure the performance of your project managers and their staff.  This will enable you to create an incentive program for your staff to encourage them to watch costs and adhere to budgets and timelines. This will improve the profitability of each job and therefore the company.

The benefits of job costing are endless. It supports cost control, improved profitability, and tighter project management, to name a few. The first critical step is properly setting up your accounting system and developing procedures that fit your needs.  This can be a complex and daunting task that may require a professional to guide you through the process.  Mike Kelly and the team at Warren Whitney can be a valuable resource. We offer value-added tailored solutions for your accounting needs. To learn more about how we can help, contact Stephanie Ford at sford@warrenwhitney.com or directly at 804.282.9566.