When it comes to job costing, if you don't have that mechanism, then you're constantly bidding jobs and you're costing, right? You're doing job costing and therefore you're not realizing the true upside to what can be. Let's talk about job costing for contractors in the construction space and why you're always off and how to fix it. So you look at your actuals versus estimates report and you're off again. Job costing isn't broken. Your system is. So let's get into this.

I just met with a contractor the other week and we looked at their estimating process. And what we did is we looked at all their cost codes and we compared the estimated amount by cost code to their actual amounts. And guess what? There's a big variance. The variance wasn't necessarily in materials. The variance was in labor, which means their production rates were off. So this is very common.

A lot of the contractors that we work with, when we look at their job costing, most of the time, and I'll say most of the time, their material estimates are pretty close when it comes to estimates versus actuals. In other words, they're able to do takeoffs, right? Measure a plan correctly, do take off the materials, account for waste and put a fudge factor in there and other contingencies. And they're pretty good. But when it comes to labor, they're typically off because their production rates are wrong. And I'll talk about that here in just a little bit, or the amount that they're marking up for overhead and pricing is completely off.

So I just created an estimating series for the construction industry. So be sure to check that out on my YouTube channel, which is building profit. And there you'll find the estimating series and it's super helpful. And I walk through all the nuances of that. So if you find that interesting, be sure to check that out. Okay. So let's go back to job costing here and this company that I was just talking about.

Their labor rates were off because there was no feedback system, feedback loop between the office and the field. So you may feel this pain in your business because I see it all the time. The estimating department, they're feeling these pricing pressures typically from customers. They're like, we can't raise our prices. We're already getting pushback. We're not winning these jobs. The market is tightening. There's a recession. The market's slowing, blah, blah, blah, right? That's what I hear oftentimes.

So they feel this pressure where they can't add a lot more to the job out in the field. They get these budgets and they get these production rates and they're like estimating is wacky, right? They don't even know what they're doing. They're totally unrealistic or disconnected from reality. And this clash happens, this friction occurs. And what happens is when there's no feedback mechanism to estimating, building, measuring, learning, and adjusting, and then estimating, building, measuring, learning, and adjusting, there's no loop there. Then companies are just left guessing in their estimating system and their job costing system is not effective.

So when I was a CFO of a large construction company, what we'd do is we'd meet on a monthly basis and we'd do project reviews. And we'd look at the jobs that were completed and the jobs that were in progress. And we'd always look at, for the jobs that were completed, how much do we estimate? How much did it actually cost? Then we'd drill down into the cost codes and see where we were off, where the discrepancies were. And then we'd provide that information back to the pre-con team, the estimating team, and explain, okay, we are constantly being short on this type of material. Rebar, we're always off, or concrete, we're always off, whatever it may be. And then they would make adjustments in the estimating software, tighten up some of their numbers and their calculations. And then they'd send off new bids. We'd go out and do more work. And then we'd come back and measure the same thing with our production rates.

We'd hypothesize because of our experience, we could do a hundred square feet an hour or 250 lineal feet an hour, whatever it would be. And then we would look once again at the estimate versus actual, and we would compare where we were off. And then we would fix those production rates and give that information back to estimating. They'd make adjustments, we'd go do more work. And then for the projects that were not complete, we'd always look at the estimated cost to complete, and then understand which jobs were going south, right? And that we're going to be underwater. And we would go out there and support those project managers and the supers, right? To make sure those jobs didn't lose much money.

So we had this mechanism, this system to ensure that everything was working. Now, when it comes to job costing, if you don't have that mechanism, then you're constantly bidding jobs and you're costing, right? You're doing job costing and therefore you're not realizing the true upside to what can The next thing with job costing is that your system may be delayed. In other words, you're going out there, you're buying materials, you have people on different jobs, you have time that you're tracking, you're making payroll, but you're not correctly classifying expenses to certain jobs.

And sometimes the unclassified category with job costing can grow quite large. The unassigned jobs. In other words, some companies, they do a pretty good job assigning cost to jobs, but then they have this unassigned bucket and it can be pretty large. So I was working with another company and they track all their labor, right? Based on their app, right? They have an app to track time and they have this one category, which is just called overhead, which is another way of saying it's unassigned labor. And it may be unassigned because they're going to the office to fill out their paperwork. They may be doing mobilization. They may be walking different job sites, right? So they're like, I don't know which job site to classify it to. So I'm just going to put it to unassigned. And the amount of money in labor that they spent on unassigned work was $800,000, right? So it was about 20% of their payroll cost for the year was unassigned.

So that's not being assigned to a job, which is fine, right? That that's going to with companies. But if you're looking at your job costing reports and you're not factoring in the unassigned cost, you may be tricking yourself because you look at your job profitability report. You're like, yeah, we're making 40% margin. But what about all the unassigned costs have been sold that aren't being attributed to the project? So that's another problem that I see.

So if your estimates versus actuals report is incorrect again, and you're like, wow, job costing doesn't work for us. It does work, right? Job costing does work. You can't just abandon it because if you're in the construction industry, you have to do job costing. Otherwise you're going to be out of business because you don't have that mechanism. And you're just going to be guessing at your estimating and you're not even going to know if you're profitable on the field.

So you can't abandon it. It just means you need a better system behind the scenes. And that starts with estimating when you're estimating your projects at what level are you estimating materials or labor? And then do you have codes in your accounting system so you can appropriately track what you're estimating?

So for example, if you're estimating a job and you're estimating a group, but in that group, you have all these different products, right? So let's just say like a toilet, you're a plumber and you go and estimate a toilet and it's in a group, it's in an assembly, whatever you call it. Well, in that toilet price, you may have the wax ring, you may have the flange, you may have the bolts, you may have the shutoff valve, the flex line up to the toilet, you may have some silicone, you may have some Teflon tape, whatever it is, right? And therefore like the estimators, they're pricing it at an assembly level way up here. And then from a job costing standpoint, you're tracking all those individual components. So then when you look at a job costing report, you see toilet one price, and then you have all these components and they don't match up. So it's like apples to oranges, and nuts and everything else. And it's a mess.

So you have to align your costing, right? Your accounting costing to your estimating. So they line up line by line, right? So that's a huge recommendation. So that's what I see in companies, but if you don't have a good job costing system, like I said, you are running a super risky business. And I highly recommend you do job costing. I see so many companies struggling with this and it definitely hurts their bottom line and their cashflow.

If you ever want to talk about your job costing system or your approach to estimating, you can always book a free 20 minute strategy call with us by going to coltivar.com. And like I said, be sure to check out that estimating series that we just created and published to our YouTube channel called building profit, because that'll be really helpful for your team, especially knowing that estimating and pricing is the number one lever of profit.

All right. That's what I have. I'll see you in the next episode. Cheers.