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The Importance Of Job Costing With A Capital “I”

The Importance Of Job Costing With A Capital “I”

by Steve Brahney, Brahney Pavement Solutions

    

Job costing, which is the single most important task in an estimating systems process flow, is something that is often neglected by so many start-up, small and mid-sized pavement maintenance companies.  Failing to job cost effectively or failing to execute it altogether, would be similar to a pilot attempting to fly a plane through thick cloud cover without being instrument rated.  I can relate this example to two real life incidents that I can recall.  When the United States successfully invaded Afghanistan in October 2001, I can recall a story I read about where a pilot on a bombing detail was assigned to hit “soft” targets that were perceived to be controlled by Al Qaeda.  The pilot was telling a story about how he had just finished his last run and had one bomb left and hit a target which he believed may have housed Al Qaeda insurgents.  It was a good move on the pilot’s part because the warehouse he happened to hit was being used to manufacture weapons of mass destruction.  The second story is about the United States Air Force eliminating Al-Zarqawi.  It was executed with precision, accuracy and left no room for error.  If you watch the video clip, you will see as the pilot locks onto his target and the laser guided bomb over-corrects for wind velocity and as you watch the radar blink twice it becomes apparent the pilot struck his target with precise accuracy.  Understanding how important the outcome of this particular mission was, without hesitation the pilot drops the second GPS guided 500 lb bomb onto his target with precise accuracy again.

Did the first pilot in Afghanistan achieve his goal?  Yes he did, however, by sheer luck and coincidence.  Did the second pilot achieve his goal?  Absolutely 100%; and then some.  With the United States understanding how important this particular mission was going to be, they pre-planned for six weeks watching every one of Al Zarqawi’s moves to be able to get him to the precise location at which point he would pay with his life for his crimes to humanity.

Could you imagine if the United States Air Force ever attempted to bomb their target with only knowing “maybe” where Al-Zarqawi was and the F-16 left with only one bomb and a half a tank of fuel?  You would have chaos and disorder.  They would have most likely hit the wrong target and if they spent too much time attempting to acquire their target they may have had to turn back to refuel. 

Estimating paving and pavement maintenance projects is no different than the examples I gave above.  If the first pilot continually left on missions, only knowing his true targets 50% of the time, how much longer do you think he will be a pilot for? 

In this business contractors constantly complain about the competition,  “That guy low-balls everything”, “I just stopped bidding against that company”, and “These guys are (Explanative)”

My personal favorite which I usually hear guys say about companies that have been in business less than 2 years:  “I don’t know how that guy makes any money?”  Here is a news flash; he is most likely not making any money.  Those same companies usually have a shelf life of less than 2 years.  This trade probably has a higher turnover for companies in business than most business’s have for employees in a company.  It is the sad fact of the matter; however, with the low barrier to entry in our trade, you will always find someone who thinks this business is a get rich quick opportunity.  Usually by the 2 year mark, if the contractor is paying taxes, their CPA sits down with them and lets them know the hard truth: “Their Broke.”  Their employees, who probably do less work than the owner, have made more money than the owner himself.  At this point, they attempt to sell everything they own, which is usually very little, with an advertisement such as “Money Maker”, “Get Rich Quick”, “Turn Key” etc.  The question I always ask just for pure entertainment is, “If you can make so much money with this equipment, why are you selling it?”  I seldom get an answer.

When I started my business in 2001, I immediately realized how important job costing was.  I was fortunate enough to have a mentor in business as I was growing up sealing driveways on the weekends through high school and college.  When I made the transition to a “full time” entrepreneur in 2001, I knew what the vision was for my company I had started and more importantly realized that most of my competition was not making any real money with the prices they were charging.  I did what most contractors would consider career suicide; I moved to a different part of the state into a new market and immediately priced my services at 20% - 30% higher than the competition.  I did this because it was the only way I could make a profit that I considered to be worth the risk of being in business.  It took time, but after about 2 years people stopped telling me that I was 20% higher than the competition. 

We still get start ups in our regional market that enter the trade every year, determined to be the low price provider, and like clockwork the following year you can call their telephone number and hear, “Bing Bong, the telephone number you dialed, (111) 555-1212 has been disconnected.”  That contractor probably visited with his CPA 30 days earlier and realized the sad truth that he did not know the true costs of running his business.

How To Job Cost Effectively:

I could write a 30 page manual on job costing; with this article I am going to give you a review of the highlights of the system we use to give you a brief overview.  Job costing is a very detailed process that I would recommend you read to learn about as much as possible.

Before entering any business you need to determine what your overhead factor is going to be.  I could write an entire article on overhead alone, but I will give you some insight on how we handle it.

Equipment is a make or break component of any overhead structure.  Equipment is great when you need it, but when it sits, you might as well just put vinyl $$$ signs on it.  You have to determine your hourly cost, daily cost or monthly cost of your equipment to include lease payment, fuel, insurance, office, operator, maintenance etc.  In determining these factors it would be best to enlist the help of your CPA.  In addition, there are also companies that are online that sell software to help you determine these raw costs.  If equipment only works 1 – 2 days a week, however, and you determine that you truly need it to complete your projects, consider leasing it to other companies for a secondary revenue stream.  Many contractors are on the look for companies with reliable dump trucks with drivers to deliver asphalt.  A spare “experienced” paving crew is also in demand.  When working on smaller projects for our National Accounts, when it is not feasible for us to mobilize to another state for a small project, we often “lease” a paving crew and dump trucks for the project paying them per day while we supply the asphalt. These are areas that could contribute revenue to lessen your overhead burden. 

After you arrive at your total for your equipment expense, trucks, leases, advertising, telephones etc. (This list differs by each contractor) you have to then estimate the amount of days or hours you will work (ON AVERAGE) per season.  Your total overhead for the year, divided by the amount of hours or days you work per year will give you your overhead burden or percentage.  I prefer to overestimate on my overhead cost and under estimate the days worked per year.  I find by doing this I always come out ahead and cover any overruns such as a new equipment purchase or compensate for extra rainy days.

You will then estimate your labor and production values.  Keeping in mind that a $12.00 hour worker’s true cost is usually around $17.00 hour +.  You have to determine your hourly rate per worker in addition to taxes, benefits and my favorite: workman’s comp insurance. You need to develop average production rates as well for each employee.  The other aspect to this is developing “crew rates” per crew.  A crew is comprised of people, equipment, materials and overhead.  For example:  I know that one of my seal coating crews can complete 10,000 sq ft per hour of sealer application by hand, 16,000 sq ft per hour by squeegee machine, 50,000 sq ft per hour by spray bar truck.  These are averages we use in “crew templates”.  Determining production is as important as having accurate financials at your finger tips when determining these numbers. 

To determine your material costs take the total for the materials including all components, taxes, and delivery and divide that number by their coverage rate. 

This is my favorite part, the mark-up.  The mark-up is the reason we wake up every morning to deal with the one favorite employee you have who is determined to test your limits every day.  The mark up is your profit, the reason you have become an Entrepreneur.  This is where the balancing act comes into play.  By using different forecasting models, you have to determine how much money you want to make this year. For example: let’s say you want to make $125,000.00 profit for 7 months of work.  By looking at the jobs you are estimating and your raw costs, you have to determine price wise in your market where you are pricing your jobs, your average closing ratio and the average size job you can complete more efficiently than your competition and how that correlates to your closing ratio.  If you are working 7 months a year which equates to 28 weeks and you determine that you can work 5 days out of 7 days a week, you will be working 140 days a season.  If you want to earn $125,000.00 you have to be able to make a profit of $892.86 a day after all of your costs.  This is where the balancing act and historical information comes into play.  To me personally, this is the fun part.  You have to consider that these variables can change from day to day and that is why I call it an “average”.  Let’s assume you are a seal coating entrepreneur who has one pick-up truck with a 550 gallon trailer unit and 5 employees.  You have one employee who helps you perform estimate take offs and sales, three employees who actually work on the seal coating team with one supervisor and you act in the capacity as the production / quality control foreman while also helping your estimator when he / she gets busy. You are very confident in your team’s production levels; this is where the average comes in.  One day you seal coat a $20,000.00 job, which relates to a profit of $9,000.00.  In effect you have just credited your profit account with a profit of $8,107.14.  However, what you have to remember is that your overhead burden which you have costed out for 140 days a year is still “running” the remaining 4 days a week.  GMAC doesn’t care that your truck is down for two days, they still want their money at the beginning of the month for your truck payment.  The flip side is, if your truck goes down for 2 days, that $8,107.14 helps mitigate the loss to a degree.  This is why it is all an “average”.  By using an Excel Spread Sheet or an Accounting Software set up with budgets for each income and expense account, you can keep a running total and review it weekly to benchmark yourself.

Don’t confuse profit with your salary.  Profit is the money that is retained after all of your bills, including your own salary that is paid for the year.

Some contractor’s mistake profit for salary and if you do, depending on the size of your operation, you may find yourself in a financial bind when you get ready to kick start the next season.  If you made a $125,000.00 profit, but your season start up costs are $75,000.00, then in effect you are “lending” the business $75,000.00 to get started for the year. 

With that being said, don’t forget to budget your “Start-Up Costs” to kick start operations for the season if you are in a seasonal market.  These include your advertising, initial purchase of raw materials, equipment maintenance, operating capital, initial fuel purchases, etc. 

In today’s age of technology it is more important than ever to have a computer based estimating “system” to help you accurately job cost.  Doing things the old fashioned way by paper and pencil leaves too much of a margin for error.  A margin that no one can afford to find out the hard way doesn’t work.  When I started my business I formatted a simple Excel Spreadsheet to job cost with and it has proven effective until 2007 when our business grew to a point where we outgrew the system.  In 2007, we switched to Bid2Win by Niche Software and have watched our job costing be refined to a level I never conceived possible.  In November I had bid on a paving project with a separate pay item for removal and replacement of 32,000 sq ft of alligator cracked asphalt.  My raw costs on the project were approximately $225,000.00.  I put a mark-up into the project of $52,000.00 which brought my total bid up to $277,000.00.  I lost the bid to a competitor who had nowhere near the amount of resources we had to complete the project who had won the project for $197,000.00.  I happen to run into him ironically at a vendor’s office about 10 days after he completed the project.  I remarked to him about how low his bid was on the project and I figured the raw costs to be around $225,000.00.  I told him we derived our raw costs from a new “Paving specific” software program we were using for estimating. He said without hesitation, “I don’t need no software program or computer to tell me how much money I’m makin’”   

I would strongly recommend that before you start bidding work this season that you sit down with your CPA to look at your “Historical” costs and production rates to help develop an accurate job costing system.  As I stated before, there are very inexpensive (Under $400.00) accounting software programs on the market or you can use something as simple as a formatted Excel spreadsheet.  Programming formulas into Excel is easier than most people think.  I would never recommend doing this with “pencil & paper”, it is too hard to track / update and leaves too much margin for error.  In today’s marketplace you have to be computer literate to succeed.

Bidding work without knowing your “true costs” is like sailing a ship without a compass.  You never know where you will end up, maybe you will find your port, and maybe you won’t.  In today’s economy, you can’t “afford” to miss your target!     

Steven Brahney is the CEO / Managing Director of Brahney Pavement Solutions.  Brahney Pavement Solutions is a National Pavement Maintenance And Management Firm located in Hillsborough NJ.  If you have any questions, he can be reached via email:  steve@fixasphalt.com or visit www.fixasphalt.com.