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How to use Job Cost Accounting Software to Determine Which Projects Are Really Profitable

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If you're so busy worrying about how many bids for contracts you win and not stopping to think about the actual cost going into that labor, then you're probably spending much more money than necessary. In most cases, obviously the most profitable job will be the bigger one, but sometimes there are some smaller maintenance jobs that can be very profitable. Certainly, you might spend more time looking over the bookkeeping, but there are so many programs and job cost accounting software that tracks payroll, hourly rates, revenue, and accounts receivable that going through the process of figuring up job cost will become more profitable than aggravating if done correctly. You'll be armed with knowledge that can make your business more profitable AND easier to manage!

Jobs that involve intense labor might seem to generate more money, but you need to answer a few questions before you decide that all simple maintenance jobs are not as profitable as bigger jobs and therefore worth skipping:

1. How many laborers do I have, and how many hours per week do they work?

2. How many weeks per year do we actually work? (Not everyone works come fire or flood, so definitely take this into consideration!)

3. What is the company making now profit-wise, and what would I like for it to make?

For example: With 10 laborers working 40 hours per week at $12.00 per hour, your total expenditure, just in payroll, is $4800.00; this does not include health benefits or any extras like sponsored lunch. If your employees are working 38 weeks out of the year, then your yearly payroll expense will be $182,400. If you've never thought of it in such macro terms before, perhaps now is the time!

If the job is only going to be paying $600,000, then payroll is taking up almost 1/3 of your potential profit! At the end of the year, after all the costs are tallied, you might find out that you could have done with job with just seven guys and put an extra $54,720 in the bank. Hindsight is 20/20, but this obviously would be the worst time to find out. On a big job like this, you're probably going to spend EVEN MORE on materials but also miscalculate how much you need because of the breadth of the project. Therefore, you should be sure to take a look at doing smaller maintenance jobs. There is a better chance that you'll overpay in labor instead of materials.

Maintenance jobs are more structured and predictable in their needs for materials and laborers. The pool your one guy cleaned last month is not likely to have grown 20 feet in diameter by this month, so you know exactly how much equipment to send with this one guy to the job. With such routine, maintenance jobs can become very profitable--IF you track the man-hour rate for each job.

Working out this rate will help you achieve your desired profit margin. If you have this information before bidding, you can bid more accurate proposals. Remember though: this rate WILL NOT tell you which jobs make more money; rather, it is a tool to guide you towards bidding more accurately and preventing waste of labor and material.

A simple formula can get you started: Amount of man-hours to date divided by Gross Revenue from the job to date. This will equal the Actual Man-Hour Rate Per Job. Knowing this allows you to see the exact areas when the job becomes more profitable. For example, if one of your employees spends six hours landscaping and his Man-Hour Rate is $24.40, and another spends three hours planting and his Man-Hour Rate is $23.30, then you can see a marked difference. Even though Employee Two is only slightly cheaper than Man One, he is working less hours. Scheduling two planting jobs instead of one landscaping gig is obviously the more profitable route here.

Also, note that the phrase "to date" is included in the formula. In order to job cost effectively, you must do it continuously! This may seem tedious, but keeping up with these numbers allows you the surety that comes with knowing exactly how much materials and labor you will need for a job. If your spouse is making dinner and there's a heap of leftovers and yet he or she STILL makes a big dinner again the next day, is this really a good thing to watch all that food go to waste? Poor planning ruins even the best events; your business is no different and deserves to be treated better than that.

In conclusion, take the guesswork out of your options. Sometimes big jobs will be more profitable, and sometimes small maintenance jobs will provide quick and easy money, but it's up to you to figure up the job cost each and every time so that you don't appropriate too much or too little of materials and time. Maintenance contracts often provide stability and even an expanded clientele base when word gets around that you're doing such a great job keeping up the property or equipment. In most instances, the profit will be higher because you can accurately predict just how much labor and material to allocate to the property. In this case, hindsight does not have to be the only thing that is 20/20. Armed with good practices like job costing, project accounting and bookkeeping, you can have pretty decent foresight, too. Bigger is not always better.

by Jovaco, Microsoft Dynamics GP Partner serving Quebec, Canada

2 Responses to “How to use Job Cost Accounting Software to Determine Which Projects Are Really Profitable”

  1. ProjectAccountingNerd says:

    Good find Joe. That’s a great entry level solution. Any companies that need enterprise capabilities, like multi-company/multi-currency or decent billing functions should look at this:

  2. JobCost says:

    Sounds great. Thanks

    By the way, is this somehow the same or related with JobCost by Sage software like this –