Business Advisory Blog

Don’t Be Fooled By Your Job Cost Reports

Construction companies that use their own equipment have determined that ownership is better than renting for a job for a variety of reasons.  They use the market rental rate or an internally determined rental rate within their bids.  Once the job begins, many contractors do not account within their job costing for this equipment.  The effect is that the profit is overstated since costs within the bid are not considered on the job cost.  Thus, the contractor can overrun labor hours and cost, overrun materials and overrun subcontracted costs, offset by the zero equipment cost posted.

When a computed labor rate is used in the bid, more often than not, the labor rate exceeds the actual job posted labor rate. The affect is to understate job cost profit and potentially move project managers to subcontract labor services you can provide when there is profit in using your own labor.

The buy out or value engineering gain on materials and subcontractors can mask labor overruns, stolen materials, or estimating errors when not isolated in your job cost, so post an internal rate to the job of rental by day, week, or month, as applicable. This should be compared routinely to the expenses of repairs, parts, useful life depreciation, interest on the equipment loans, and fuel or any other costs of the operation.  This is a profit center, or the contractor should never have purchased the equipment in lieu of renting.

Buy out gains on materials, equipment, or subcontractors should be tracked and reviewed for the same reasons and the net buy out should be entered into your job costing system as the “estimate” if your system does accommodate an area for buy out gain.

Labor rate variances of bid rate to actual are often 10% or higher or more.  Buy out gains can range from 1% to over 5%.  Depending on how much of your own equipment makes of the bid, it can vary the results by 2% to 15% or more.  Contractors lose confidence in the financials when the job profit appears lower than the job cost reports, and assume it’s just errors or accountant’s tax moves, and the financial problems on the job are not identified specifically or addressed and result in a loss of  thousands of dollars as a result of not knowing what is occurring because it’s masked by these other profit centers (equipment, buy out, labor rate) and therefore not timely mitigated in the field or office.

A simple analysis of your completed jobs compared to estimates, an ongoing “estimated cost to complete” process of job reviews with the Super or PM, coupled with a financial statement presentation that mirrors the components of your cost of jobs estimated, can be accomplished by a knowledgeable construction financial person.  If they don’t understand that, you need to change the internal or external accountant to become more profitable.