Barba CFO can provide the financial management that is necessary to run your small or medium-sized business. Our wide variety of services range from personalized projects to bookkeeping and CFO for hire services. For a FREE CONSULTATION, or any questions, please leave your contact information here to receive a quick response.
Every type of business is faced with unique complexities when it comes to achieving financial success. Construction companies are no different. Yet construction companies typically lack a sophisticated accounting and reporting system to help deal with the challenges.
Imagine hiring a construction company to build you a house. If the company tells you it will bill you at the end of the job for whatever cost it incurs, plus 10%, you would have no idea whether you had bought a $50,000 home or a $1 million home. Therefore, construction companies typically quote a fixed fee, or at the very least an estimate that they are accountable for. They realize that no one wants a surprise bill at the end of the project because of unanticipated cost overruns.
But the construction company is faced with a challenge in trying to estimate how much cost it will incur in labor and materials…a difficult task considering projects typically amount to tens or hundreds of thousands of dollars. A pervasive small margin of error on large job estimates can eliminate profits quickly and threaten the financial stability of the company.
Another challenge, once work is started, is tracking and controlling actual job costs. That would not be so difficult if construction companies did one job at a time. But when you are running multiple jobs at the same time, it’s much more challenging, BUT worth the effort. How is it done? By implementing a job costing system.
Below is an illustration of an ideal job costing system cycle for a construction company along with some helpful process tips.
Bid – make sure your bid comfortably exceeds your estimate by both your standard markup % as well as a buffer of say 5 – 10%. Jobs run over budget much more frequently than under budget. It is better to not take on a job than it is to take on a job and lose money.
Track – assign every accounting transaction to a construction job. This includes subcontractors, materials, and employee labor, including taxes and benefits. You must know how much each job has cost you at any given time.
Evaluate – at periodical intervals, determine if there has been any spending or will be any spending over the original estimate. Will there be a need to re-estimate?
Re-estimate –If costs reflect that work has grown beyond the original job specs, issuing a change order(s) should be considered to obtain the customer’s acknowledgement and authorization for increasing the contract price to reflect expanding job requirements.
Learn – now that the job is complete, compare the final cost of the job to the original estimate. What did you learn that you can incorporate into future jobs and future estimates?
While setting up and executing on a job cost system can seem tedious and worthless, if you do the right things with the results, it will be invaluable to your company’s financial performance.
If you want help or advice setting up your construction company’s accounting system, please contact Barba CFO.
To learn more about why a CFO for Hire is helpful for you and your business check out the link below.