The Importance of Job Cost Reporting
By Sandi Taylor
A ll businesses are faced with unique complexities when it comes to achieving financial success. For restoration contractors to be successful, they must understand the importance of job cost reporting. In this article, let’s take a closer look at job costing and how to build your numbers. In the construction industry, it is common to use the percentage-of-completion method of revenue recognition, with the most important factors being budgeting and job costing. Job cost and work in progress (WIP) reports provide critical information about the status of a job and can help accurately estimate how the job/project will finish from a cost and revenue perspective. Effectively using these reports can drive the financial statements. When running multiple jobs at the same time, managing job costing can be difficult and much more challenging but is worth the effort. Not accounting for job costing and the WIP schedule correctly can lead to a host of financial problems, including cash flow shortfalls, lower profit margins (usually due to increased costs) and revenue accounting issues during the job cycle. Financial statements are an ongoing tool used to manage a business. In addition to potentially wreaking havoc on your finances, problems with job costing and the WIP schedule can be major red flags for lenders or investors. Therefore, it is critical to build your job costing reports and WIP schedules, considering that successful job costing can mean the difference between a profitable business and one that struggles to stay alive. In order to ensure real-time reports, a truly integrated accounting and job costing software solution such as Fusion and QuickBooks is invaluable. It’s important to map out electronic workflow processes to ensure accounts payable invoices, purchase orders and subcontractor commitments are entered in the system as quickly as possible and synced to the proper job allocation. Job costing provides information about each job so that the project manager and other accountable employees can review and breakdown for greater transparency. Most companies usually find that their costs break down into fairly small or fixed amounts. Financial exposure is largely through cost variations, when the actual costs vary from the costs defined in the estimate or budget. Job cost reporting can consist of a comparison of actual job costs versus estimated job costs for each cost account. This makes analysis simple and quick when comparing jobs through time and forecasting target margins. While setting up and executing a job cost system can seem
tedious and time consuming, if you do the right things with the results, it will be invaluable to your company’s financial performance. Regardless of specialty or company, job costing can be enormously beneficial and helpful to a company. To maintain credibility with financial lenders, third-party administrators and customers, your company must be able to successfully manage and forecast the outcome of your projects. Companies that cannot do this with confidence will find it increasingly difficult to perform effectively, especially as they increase revenues, offer additional services and perhaps increase the size and complexities of their projects. With data from job costing reports, project managers or management can better evaluate and be held accountable for both progress and efficiency. There is now opportunity to better motivate staff to reduce costs and increase output on any given project by production bonuses or other incentives. Job costing will provide support for both cost plus and unit cost estimating, as well as any contractual claims that may arise. The reports must provide details of the actual cost of identified variations and background for the claims. Cost reports provide valuable information that can help estimate or pricing out similar types of work in the future. These reports highlight and separate those variable costs that may have been overlooked in the past. There are common accounting errors that can appear in financial statements involving job costing. When reviewing the profit and loss, most contractors utilize accrual basis accounting, while costs are recorded in the period incurred. A cutoff error results by omitting costs incurred in the period being reported on. To avoid this error, it is advisable to add in as accrued costs or accounts payable/liabilities in the same period. Errors occur most often because of poor estimating/ forecasting, inaccurate entry of actual costs and even not including change orders and/or supplements. To prevent estimating errors, compare actual costs to estimated costs on a daily or weekly basis, depending on the project size and complexity. Understanding the basics of job costing and making use of the data entered to monitor and manage profitability of each project will allow you to have more control. By using the information that you review and manage within job costing you will improve not only your business, but the way of doing business.
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