We have all heard the expression that as business owners, we need to spend time working “on the business” instead of “in the business.” There is no exception to this for real estate developers and contractors. In fact, given how a single project’s performance can make or break a year, it is even more vital for business owners to spend some time understanding their performance, the market and other key performance indicators that shape the present and future of the business. A great place to start is by implementing a job costing system.
For too many developers and contractors, financial success or failure is not known until all the dust has settled and the job has been completed for several months. And even then, many haven’t created a process or system to track individual job performance, so much is inferred, with lots of assumptions thrown into the analysis.
With some thoughtful upfront accounting system design and related processes to capture and classify information, any developer and contractor can report on individual job performance. Not only can this information assist with future estimating, but if designed right, this information can be utilized to identify issues while the project is still in process. So how does one go about setting up a manageable job costing system? Follow these three initial steps to get on your way to improved job performance.
Identify what costs to track and only tracks those costs: When embarking on the implementation of job costing, most tend to go from crawling to a full-on sprint. They go from not tracking any costs to a particular job to trying to track the most granular details of a job. For example, if you were building a house and had never done job costing in the past, you might want to create job costing categories such as land costs, excavation, structural and carrying costs. Control your desire to track electrical, plumbing, lumber, windows, roofing, etc. if this is the first time you are tracking job costs, as this will become overwhelming and will most like lead to abandoning job costing.
Create an estimating process that mimics your job cost tracking: It’s easier to understand where things have gone awry if you can compare results to an upfront expectation. By ensuring that your estimating cost categories are aligned with your cost tracking on the accounting side, it will make focusing in on variances and the related reasons far less burdensome. And as what costs you track evolve, so too should your estimating, and who knows, you may even change which costs you track based on your estimating process.
Ensure data is captured timely: The primary reason to perform job costing is to provide opportunities to improve on or change things that are causing undesired outcomes. The timelier that this information is available, the quicker you can react and reign things in. Timeliness requires a commitment from all parties, from the owner to the accountant or bookkeeper, so an engaged team who understand the benefits of job costing is essential to its success.
For every company that thrives in the absence of timely financial information, there are another dozen that fail. While it may seem like a distraction to spend time working on and not in the business, those that spend time working on it tend to make more money over time. While capturing, reporting on and interpreting timely financial information is just one form of working on the business, it can serve as a foundation from which you can build upon as you continue to grow your business in the pursuit of long-term business and personal goals.