Learning from job costing: 3 project-sinking scenarios to avoid

At Breakthrough Academy, we work alongside the experts… the best in the biz, you may say. In this article, our Partners at Knowify, who are best-in-class at following the $$$ from project start to project close, share some job costing wisdom.

Trying to run a contracting business without a job costing process is like trying to plan a road trip without a map. You might end up in the right place — in this case, consistently profitable projects — but it’ll probably take you a lot longer to get there.

In our experience (which comes from working with thousands of contractors over the last eight years), job costing doesn't come naturally to most construction businesses. But when it’s built into your project management process, it delivers clear, measurable benefits.

In this article, we’ll explain what job costing is for those who don’t already know, and explore three common scenarios that job costing can help you spot and correct.

What is job costing?

Job costing is a method used by contractors to track the expenses associated with a specific job or project. It involves recording and analyzing all costs — including labor, materials, equipment, etc. — directly tied to a job.

Job costing helps contractors understand why their business and their projects perform the way they do. With this information, contractors are better equipped to accurately estimate project expenses, submit more competitive bids, and generally ensure projects stay on budget.

With that in mind, let’s look at three different situations that job costing can help you spot, analyze, and correct.

Scenario 1: Labor costs exceed budget 

Regardless of the trade, labor makes up a substantial part of the cost required to complete a construction project. In some cases, up to 40% or more if you’re including labor burden. 

Because of this, miscalculating labor costs, or under budgeting for labor, can seriously hurt the profitability of a project.

How job costing can help

With a job costing process in place, you’ll be tracking the labor cost of each employee for each active project. This detailed labor cost information is one of the first places to investigate if you notice a project is exceeding its budget.

Solving for excessive labor costs

Whether due to inaccurate estimating on your part, flawed labor cost tracking, or crew productivity issues, exceeding budgeted labor costs is all too common. With that in mind, let’s look at how you can debug your labor cost problems and solve them for good.

Crew productivity issues 

To address productivity issues within your crew, begin by analyzing time card data from previous jobs. Investigate how time was allocated — look for any instances of downtime, rework, or unapproved changes in project scope. This is made easier if you divide your projects into smaller distinct phases. This lets you assess whether time was spent efficiently on each specific task.

For instance, you may discover that some phases were overstaffed while others lacked sufficient manpower. Use this insight to optimize crew deployment for future projects, ensuring that each phase has the right number of workers — enough hands for labor-intensive tasks and fewer where less staff is needed.

🛠️ Breakthrough Academy Pro Tip upwards of $30 billion (yes, BILLION 🤯) dollars were lost in 2023 due to poor productivity (aka, poor project management), according to a Labor Productivity Report released by FMI. Project management shouldn’t be taken lightly. At Breakthrough Academy, we know all too well that in contractor businesses, particularly, it is fundamental to your bottom line and the success of your company. Step 1 is holding your team accountable.

Estimating issues 

The value of job costing becomes clear when you see how it can shine a light on inconsistencies between actual labor productivity and your estimated budget. This is another area where using project phases comes into play.

By dividing projects into phases, you can see which tasks are ahead or behind your planned timeline. If you see that actual work hours exceed your estimates, allocate more hours to that type of phase (ex. site prep) for future projects. On the flip side, if you see that fewer hours are needed than planned, reduce the hours allocated in subsequent projects.

Management’s role 

While employee performance significantly impacts labor efficiency, the responsibility doesn't just fall on them. It’s crucial for managers and owners to provide all the necessary resources, tools, and opportunities their teams need to thrive. This includes creating clear employee handbooks, offering performance-based pay incentives, and establishing standard operating procedures. It's important for every team member to understand exactly what is expected of them.

Further supporting your team with comprehensive training programs for both new and current employees, and regularly reviewing their performance, is essential. Spend time mentoring and positioning your team for success. As a leader, you not only set your business's values but also have the responsibility to live by and reinforce them. Investing in your team is vital, and doing so will yield significant returns.

🛠️ Breakthrough Academy Pro Tip: When you’re building your Standard Operating Procedures (SOPs), remember to put the answer where the question is. Any friction between the worker and the SOP makes them less efficient. It should be in hand within 30 seconds. Technology is so good now there is no excuse. Learn more about how SOPs can help tame the chaos in your business in Breakthrough Academy’s on-demand web class. 

Challenge 2: Inaccurate estimating and project budgeting

Accurately estimating project costs is crucial for setting competitive and profitable bids. And having a consistent estimation process is the key to getting consistently accurate results. Many contractors, especially at the start of their business journey, make the mistake of starting from scratch with each estimate. With job costing, you have a better path to follow.

How job costing can help

Consistent job costing gives you a historical library of project data you can look back on when you’re estimating new projects. This is especially useful if you do the same type of project repeatedly. For example, installing and maintaining mini splits or home standby generators.

You won’t need to start over with each estimate. You can look at how you priced past projects and use that as a starting point. This eliminates guesswork and ensures consistent pricing that’s fair for both you and the client. If you do the same type of project often enough, you might even consider setting up a project template you can clone for faster estimating and bidding.

For a job you’ve never done before, you’ll need to build in some buffer in your numbers to take into account the uncertainty of a new project type. The good news is that getting one project under your belt gives you a starting point for consistent estimates and bids in the future.

Solving estimating problems

Outside of diligent cost tracking post-job analysis, the biggest thing you can do to ensure your estimating is on target is monitor your bid-hit ratio. This metric is the key to understanding how successful you are at winning new jobs.

For instance, imagine an electrical contractor with a bid-hit ratio of 6:1, which means they win one job for every six they bid on. This ratio serves as a key performance indicator, helping to evaluate the effectiveness of their bidding strategy. It also helps them understand the types of jobs they’re more likely to win so they can go after them and ignore others.

The ideal bid-hit ratio varies based on industry specifics. A contractor who works a high number of smaller contract value jobs, might have a lower bid-hit ratio. Conversely, a contractor focusing on high-ticket public sector work might see a higher ratio.

Your goal should be to complete as many jobs as you can to maintain healthy cash flow, without compromising the quality of your work or the well-being of your team.

Pairing this approach with a regular process for reviewing past projects, will give you the insights into project costs that you need to consistently create accurate and achievable estimates and bids.

🛠️ Breakthrough Academy Pro Tip: Take the guesswork out of it and start with a budget template specifically designed for contractors. Time to quit holding your breath and waiting for your bookkeeper to tell you if you made money. You can’t manage what you don’t measure, so get your numbers down.

Challenge 3: Material cost overruns

Rising material costs, paired with job site waste, are a dangerous recipe for exceeding your budgeted material costs. If that sounds familiar, let’s take a look at how job costing can help you understand and correct issues related to materials.

How job costing can help 

It’s important to track material costs just as diligently as you track costs related to labor, equipment, subcontractors, and so on. Doing so gives you a wealth of information you can look back on to spot and correct materials issues on future projects.

There are three prongs to material cost tracking: systematically creating vendor POs for materials and tracking fulfillment, logging ad hoc materials expenses from the field, and maintaining a parts inventory.

A parts inventory in particular supports detailed tracking for commonly used parts and materials. For example, you can allocate parts to a job and track the phases where they’re used and which employees used them.

Solving materials cost issues 

Unfortunately, materials costs are often outside of your control. Market forces like inflation and supply chain issues often have an outsized impact.

As a business owner, your best bet is to focus on the bigger picture and understand why material costs might be fluctuating. With your ‘why’ understood, you can focus on mitigating the impact on your projects.

Potential avenues to explore include simply adjusting your markup to better cover unpredictable material costs. You could also look to set up bulk orders with other contractors to get better pricing through volume. Similarly, you can look for new vendors that might offer more favorable pricing. You may need to do a combination of the three.

You’ll also want to look into how your team is using materials. If you’re exceeding your materials budget, but material costs are flat, then waste could be your issue. Fortunately, it’s well within your power to instill your team with some much needed discipline and operational rigor.

Summing it up

As you see, job costing is a powerful tool that you can use to understand your project costs, identify profit-killing issues, and correct them going forward. The key is to be consistent. Job costing is most beneficial when you follow the process day-in and day-out.

We know you have a lot going on, and detailed cost tracking probably isn’t at the top of your list. Project management and job costing software like Knowify can simplify and automate most of the cost tracking for you. You get the insights you need without spending time updating spreadsheets after hours.

If that sounds interesting to you, and you’re a member of Breakthrough Academy, you can get started here.