Job costing is an important part of running any business and can be crucial in a surveying business. Job costing has been described as one of the most critical functions of managing a surveying company. To run your surveying company profitably and successfully you must accurately project the costs involved for each project. Not only is it a federal requirement to do it accurately for any government project, but the ability to estimate costs accurately is how a surveying company chooses jobs that will generate a profit.
What is job costing though? For those who are unfamiliar with the term, Job Costing is all of the direct costs of a project, the appropriate share of overhead costs, and any other applicable indirect costs that can be legally billed to the client along with a small margin of profit. It is the process used to create a quote for the customer. This is a long way of saying that Job Costing is what the client is responsible for, and what it actually costs to do the job, and a bit added on for profit.
One of the major things to take into account as you begin to build the job cost for any project is deciding how many workers you need. This determination is based on the scope of services that are within the bid itself. There is a huge difference between a simple survey of one plot of flat land, and a job that includes hundreds of acres on difficult terrain. Knowing what the scope of work is will let a company determine how many people are needed to accomplish it in the given time frame.
Once you have figured out the number of people needed, and the level of certifications they must hold, you can then make your staff hour estimate to be included in the cost of the job. This will be compared at the end of the contract to the actual ledger time that you record with an accounting system. There should not be any radical difference between these two numbers, and the more accurate the projection is, the more reliable your company will seem to be.
With the number of workers required being determined the job costing can begin. Begin by calculating the direct costs involved. This is going to be a fairly simple calculation of the total of all of the wages for the personnel necessary to complete the task, multiplied by how many hours that the job is estimated to take.
The rest of the direct costs to consider are things such as travel expenses, and any materials or supplies that must be purchased to complete the project. Direct costs should not be equipment that is basic to surveying however. The cost of new equipment is not something that you can generally pass along to the client without additional negotiation. Much the same as a mechanic can’t pass along the cost of his tools to you just to fix your vehicle.
With the direct costs determined you then consider and add up the indirect costs of the project. Indirect costs are those expenses that are only in part determined by the project. This is comprised of things such as management wages, marketing costs, and office rental fees. A better way to say this is that you are allowed to bill a certain amount for Overhead.
Normally the overhead is determined by looking at the operating costs of your business for the same period in previous years. The usual calculation is to divide the total of indirect costs for that period by the direct costs. This will give you a percentage. Once this is calculated the direct labor costs are multiplied by this number, with the result being the overhead to be added to the overall cost.
There are some costs that you are not allowed to include in your overhead. These things include costs such as interest on loans, entertainment, country club fees. For more information you are highly encouraged to seek expert help. While some costs may appear to be actual business costs.
With the actual cost of the job now known, you get to add an amount for profit. This profit margin is normally allowed to be between 6% to 15% of the total fee. Your profit margin must be within this range to be allowed for most government contracts, and as such sets the norm for others.
To calculate your job cost correctly you need some sort of accounting system to give you actual historical information. The system could be extremely informal if your company is small and easily managed. Or it could be a complex software management system. Whichever system is decided upon it must be useable by the company, and accurate with the information it is tasked to retain. It is very rare in today’s high tech world to continue doing this using general accounting methods or pen and paper.
There are few requirements for any sort of cost accounting system. One is that it must ensure you keep direct costs separated from indirect costs. The accounting system must also separate costs by each job. For the system to be of any good in job costing, the accounting system must provide the ability to generate reports based on the information that is recorded and maintained.
Those most successful at job costing remember that everything included is a variable and rarely set in stone. Job costing is equal parts science and art. There are certain mathematical formulae that are used, but you must also be able to look at past jobs, and have the ability to project the work force needed to accomplish future jobs. All these things must be done well in order to create an accurate job cost.
When you are performing a job costing you must always keep in mind what your ultimate goal is. It is not enough to just plug numbers in to a formula. You must do your best to create the most accurate job cost to ensure maximum profit and to give the client with the impression that you are simply out for more money.
When performing job costing the accounting system is often of prime importance. The system must be something that supports your endeavors. To be supportive the system should be something that is useable by everyone involved. A system that is overly complex can result in the data not being recorded correctly, as workers just go through the motions.
Technology can be an incredible asset, but only if it is doing what you intend. Carefully select the system that best fits how your company functions. Remember that if you are going to begin using any new system to take the time to know it and to fully explain it to others who may use it.
In the end profit is dependent on this job costing endeavor. If you don’t take the time to record accurately, calculate accurately, and include all the necessary information, your proposal may end up costing your company money. Job costing is a vital component of surveying and something that can be helped with the right accounting system