Soren McAdam Christenson LLP
Certified Public Accountants and Business Advisors
Contact: Roger Wadell, Partner
PR Contact: Ron Burgess
FOR IMMEDIATE RELEASE
March 10, 2008
Job Costing for Tough Times
Construction Research Corporation states that 75% of contractors indicated job costing was among their top business concerns. This may not be surprising as proper cost control on jobs can mean the difference between making money—or going out of business.
Job costing is a management control process of categorizing and tracking costs against a job or project, and allocating other indirect costs such as administration – to the job. Understanding these costs provides direction in planning, tracking job progress as it occurs, instead of after-the-fact, when no adjustments can be made and controlling purchases and labor allocations through trend analysis.
Understanding job cost and profit contributes to an understanding of what jobs, activities, and functions are most profitable. Contractors with multiple simultaneous jobs can use the aggregate information to gain an understanding of when fixed costs are covered by the jobs, and when contribution margin becomes pure profit. In tough times, scaling down too much can actually lose more money than taking that low margin project. Based on your fixed costs (yard, warehouse, minimum office help, etc.), taking a job that marginally covers this cost may be appropriate, rather than passing, and still having to pay for these fixed (often uncontrollable) costs.
Cash is always king in the construction business, and it can be extremely complicated, due to the need to properly supply materials and pay for labor. Understanding cash and credit liquidity is largely influenced by the scope and sequence of each project. Accurate cash forecasts cannot be done without a careful purchase plan, payment schedule, and known labor needs adjusted against your cash/credit position. These numbers must come from a carefully executed job costing system.
Liquidity management (which includes your available cash and credit) also depends on your creditors’ understanding of your balance sheet. They need appropriate information and a familiar format, which outside credit providers rely upon, when making credit decisions. Job costing provides many of these numbers to determine future liabilities. Symptoms of improper cash planning may be taking cash from a current job to pay off debts from the last job.
This can have a snowball effect that can creep up on the business. Sureties respond to the inevitable slip in liquidity ratios by tightening credit, which further restricts a contractor’s ability to bid new work. In an uncertain credit environment such as we have right now, this can be a critical issue. General practice firms rarely have the depth of understanding to know what your banking or bonding firm looks for when granting credit. Therefore, CPA’s with a special interest in construction and real estate can be worth their fees in additional profit. Soren McAdam Christenson LLP is the leading regional firm in the construction accounting sector.
Soren McAdam Christenson has deep experience in job costing for construction and real estate development. Using its expertise, the firm can assist contractors, subs and developers, using special tools designed for the differences in these industries. By bringing clients best practices, benchmarking against other businesses, and special relationships with bond underwriters and bankers, along with the cost management systems of job costing, Soren McAdam Christenson becomes a critical partner to clients. Their sole purpose is to watch your bottom line.
Construction and real estate have cycles and risks unique to their particular industries. Know your profit drivers, understand your profit gain and fade, and take advantage of the current cycle, while anticipating the next.
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