Do You Know How Much Each Job Is Costing You?
As I have mentioned before (A Penny Saved) one ironic part of this job is that I often find myself serving as the world’s least qualified financial planner.
I…made an A in 11th grade Intro to Business? And I somehow passed algebra. As far as qualifications go, that’s about all I’ve got.
Then again, my advice is free, so I suppose you’re all getting what you pay for on this one.
Anyway, one issue that I run into again and again is that too many contractors don’t know how much they’re making on each job. They know that the contract was for $400k. They know that at some point, they eventually received $400k from the GC. But, they have no idea how much they spent doing that $400k job. Did the job cost them $100k to complete? $200k? $410k? No idea. They just know how much the contract was for, and that they definitely don’t have $400k in their account right now.
The reason?
Sloppy accounting and job costing.
Look, accounting sucks. If ever get moved over to the accounting department, everybody will be in trouble, because I don’t know how much is in my own bank account right now, much less how to manage the books of multiple $5M+ companies.
What I do know, however, is that accounting and job costing are both important.
On each job, you need to keep track of what you’re spending. How much did you pay out in labor to complete that $400k job? How much did you spend on materials? What does your overhead look like? How much did you spend on finance fees?
I can’t count the number of times where, after finally sitting down with our accounting department to look at the numbers, our clients have realized that only 1/4 of their jobs are actually profitable. Those profits, in turn, have been covering the losses on the other 3/4 of their work.
If you really don’t want to have to mess with accountants, at the very least, do yourself a simple favor: Keep a running tally of every cost on a job. Write down every box of screws. Every quart of paint. Every pack of cigarettes you’re picking up at the gas station to keep an employee happy. Then, when the job is over, look over all of that. Add up the numbers. How much of that $400k job was leftover in profit?
On top of telling you how much you’ve actually made on each job, this will also give you a good idea of where you’re leaving money on the table. Are materials always running 20-30% higher than initially budgeted? Start giving yourself more of a cushion on material costs when submitting your bids. Does XYZ Construction Corp. always seem to be hitting you with an extra $20k in work they won’t approve change orders for? Don’t even consider working for XYZ again unless you tack an extra $20k onto your bid. Are you making 35% profit on service work, and 2% profit on AIA contracts? Focus on trying land more time and materials work, rather than bidding on those $650k projects that sound great but leave you broke every time.
Often, spending a total of five hours on job costing for each job doing this will help you see ways that you could be doing half the work for twice the pay.
Also, remember this: It’s not worth doing work that doesn’t make you any money.
Would you accept a job as a foreman where the company owner tells you that you’ll be working for free, but that in return, he’ll let you work for free next month, too? Worse, would you take that job if he told you you’ll have to pay him $20 a day for the privilege of working out in the hot sun from sun up to sun down?
Continuing to place low bids for bad GCs is doing exactly that–you are paying for the privilege of working hard. If you wouldn’t pay to work at Taco Bell, and you wouldn’t pay to go work for that big construction company across town, why would you pay to do this?
