Courtesy of Fred Ode, CEO/Chairman – Foundation Software, Inc.
According to the United States Census Bureau, there are over two-and-a-half million firms involved in the construction industry in the U.S. That’s a lot of competition.
The good news is, just like you, they started their business and grew it from the ground up. They made mistakes, learned from them, and gradually improved not only the work they do but also how they do it. The even-better news is that, by expressing an interest in implementing a job costing system, you’ve made an important step for improving your business.
In a recent survey by Construction Research Corporation, 75% of contractors indicated that job costing was among their top concerns for their business. That’s not surprising, considering that successful job costing can mean the difference between a profitable business and one that struggles to stay alive.
Take Rocko Excavating*, for example, a fictitious company that represents the typical construction firm started by a former operator who saw the potential of working for himself. When Rocko* first started his business, he knew a great deal about construction and excavating, but very little about financial statements, labor laws and job costing. The business of his business was something Rocko had to learn through trial and error.
In the early days of Rocko Excavating, Rocko did all the estimating himself and ran an off-the-shelf accounting software that a friend recommended. Instead of formal estimating, he “guesstimated” based on his experience as a laborer and bid as many jobs as he could possibly handle. Sometimes he made money; sometimes he didn’t. While Rocko’s instincts told him that he was more
profitable on those jobs that ran smoothly and didn’t have a lot of change orders, he had no solid proof of that.
The market was good and Rocko did great work. As he gained a solid reputation, his jobs picked up, and Rocko soon found himself frantically busy. It wasn’t long before he was overwhelmed – but even then, Rocko really hadn’t become much more profitable. The margins just weren’t growing, and cash was tight. What’s more, there was just too much work for him to be able to do all the estimating, project management and accounting himself. Rocko Excavating had reached a crucial make-or-break point. Either Rocko figured out a way to make the company grow beyond the mom-and-pop shop where he was involved in every element of the business … or it would stagnate and die.
Rocko contacted a construction-specific CPA, and, on his advice, began shopping for a construction-specific accounting package. Eventually, he settled on one that offered a strong job costing element with powerful, customizable reports. He hired an estimator who was familiar with production reporting and could work with his bookkeeper to leverage the power of the job costing system. Slowly, they implemented production reporting that could prove just how accurate Rocko’s off-the-cuff estimating was. They carefully analyzed job costing reports for completed jobs and jobs in-progress. They put into action a billing system that was tied carefully to actual and committed costs to keep the cash flow stable. With time and effort, Rocko Excavating flourished into a company that was profitable on almost every job. Rocko became much more hands-off, freeing up his time to run the business from a much more visionary position, further increasing its potential for growth.
It’s a happy story, isn’t it? And while you may think it sounds like a fairy tale, the fact of the matter is that it is all-too-true. Those companies who don’t look carefully at the hard facts – especially carefully tracked job profitability – simply cannot grow. The first rule of success is to know where and why you have failed. If you haven’t implemented a job costing system yet, what would doing so tell you about your business? What are your bread-and-butter jobs? What margins are you sacrificing because you don’t have production reports telling you exactly what your estimates should be?