What Your Controller Needs to Understand About Job Cost
Tom Stimson
Helping Business Owners Achieve Intentional Success? | The #1 Executive Coach and Advisor in the AV Production Industry
When I wrote this blog post back in 2022, I was trying to be kind.
Many of you have invested a ton of resources into job costing. Perhaps you’ve even hired an expert financier. You think it’s essential.
But I’m tired of pulling punches. Here’s my blatant, unfiltered take: Job costing is dumb. In fact, it’s the worst tool we’ve ever created to help run our businesses.
I’d only recommend it for analysis purposes. Other than that, job costing will only help you if you use it correctly.
Your team needs to close deals. When you use job costing to determine the value of a deal or a target gross profit, you remove one of your most important tools: negotiating price by adjusting your expected margin.
The marketplace is changing. New buyers are coming in, and we need to price dynamically. That means we need dynamic margins, and job cost doesn’t help with that.
Instead, look at your business holistically. Ask, “At any given time, how much money do I need to make from each job?”
Job costing doesn’t help you answer that question — not for future work, at least. And job cost that looks backward is just regret. All job cost tells us is that no job is perfect — which we already know.
If you know what your costs are, you can quote any job and choose what margin you want to make on that job depending on:
Your real job is to fill your calendar with business that generates gross profit. But gross profit doesn’t have to be the same year-round.
Like I said, job costing will only help you if you use it correctly. Keep reading to learn about alternatives to job costing — and what to do if you’re not ready to let go of your job costing system.
What Your Controller Needs to Understand About Job Cost
When the financial controller of a business tells me, “We need to get better at job costing and we want to continue to use our accounting system QuickBooks to do it,” I know we’re in for an uncomfortable conversation.
Using an accounting system to track job cost is extremely impractical. Financial accounting systems like QuickBooks are used for tax purposes. Job cost has to do with managerial accounting. The two accounting modes look at different numbers, and they don’t track the same way.
Financial accountants think of job cost as a miniature profit and loss statement. Nothing could be further from the truth. In managerial accounting, you use blended numbers to assign costs to the things that don’t line up with your financial numbers. These are two different concepts.
With this in mind, it’s simply not practical to do job costing inside a system like QuickBooks, because you’re not capturing the information in a way that truly applies to job cost.
Even if you’re careful about entering data, all you can get out of your accounting system is an accounting of all the inside and outside direct costs assigned to a particular job. That alone is a monumental task.
However, if you’re good at generating and processing purchase orders when you plan and procure a show, event, or project, all that information lives in your rental management system. That’s the place to do job costing. It doesn’t need to be duplicated in your financial accounting system.
If your rental management system doesn’t have a good job cost saving mechanism, or you’re not using it effectively, you can extract the needed information and put it in a spreadsheet or something similar.
When it comes to job costing, it’s important to ask yourself, “What problem am I trying to solve with job costing?” Job costing looks backward. It uncovers mistakes you can’t fix because they’ve already happened. (And like I said, that’s just regret.)
With this in mind, I often wonder why so many people mistakenly use job cost to:
Job costing won’t help with any of these.
Job Cost Mistakes
Job cost can’t determine sales commission based on gross profit.
At the end of a job, you look at revenue and direct cost. The money left over is the gross profit. From that, you issue a sales commission.
The problem is that the job cost doesn’t accurately reflect all the costs. It only reflects the direct costs. It doesn’t reflect the indirect costs, and it doesn’t take into account the selling price.
You can sell a job for half of what it’s worth and still generate a gross profit, which would earn the salesperson a commission. But job costing doesn’t show that. It shows the revenue. It doesn’t show what the revenue should have been. That’s a big problem with job costing systems.
Job cost doesn’t identify which customers are more profitable.
This is because job cost doesn’t account for discounts. There’s an easy solution for this: Count discounts as job costs.
There are ways salespeople can generate discounts without those discounts actually appearing in your system. For example, they don’t charge the customer for something by throwing it in for free, or they leave out something they know is going to get sent anyway. There are a lot of ways salespeople artificially discount a job but don’t actually reduce the cost.
Job costing systems don’t reveal how profitable you could have been from an operational standpoint.
When you’re busy, you’re going to need sub-rentals and outsourced labor. That’s not the salesperson’s fault — they have no control over it.
You can make any job look really profitable by putting all the sub-rentals and outsourced labor on another job. This basic inequity is probably the biggest complaint in all commission packages: Salespeople have no real control over whether their job is profitable.
But operational decisions have a huge impact on the company’s bottom line. And traditional job costing systems can’t tell you whether the right decisions were made.
The Real Value of Job Costing
Job costing can be a valuable tool when used correctly. Here’s what a job cost review will really tell you.
Whether your costs are correct.
Most business owners sell from price and not cost. You don’t actually see the cost in your proposals and therefore can’t determine whether your job cost is correct. However, when you know you need to outsource, do you apply the correct markup and therefore yield the required margin?
Whether the job was quoted correctly.
Did you include all the parts and pieces in the job so it was sold as an accurate reflection of the costs to be incurred? Did you add an appropriate margin to it? Did the quote meet the needs of the customer? Was the scope allowed to creep? Was there non-billable time or materials? Those are still job costs, you know.
Whether your processes are working.
If your processes are working, your costs will be correct and the job will be quoted correctly. Depending on what’s amiss, the job cost review will identify which processes to go back and fix. Did you assign crew who were on overtime already? Was travel quoted correctly? Did you capture all the change orders?
The crux of the problem is that job costing is imperfect, especially when used for the wrong things.
Should Job Cost be Replaced?
In most cases, job cost is a Band-Aid. There are much better ways to determine sales commission and to determine which customers/jobs/salespeople are more profitable. There are also better ways to test sales for pricing compliance.
Take, for instance, blended key performance indicators (KPIs). If you run a sub-rental report for all jobs over a given period, then match the equipment revenue and the amount of gear that was outsourced during that time period, you end up with a helpful KPI.
Alternatively, if you look at the gross profit of all jobs over a given period, you end up with a better indication of operational efficiency than from individual job cost reports (where operational efficiency is applied unequally). Some jobs will look operationally efficient; others won’t.
A blended KPI report for all jobs for a particular customer over a period of time will tell you how profitable that customer is in the long run.
One of the most impactful things I ask my clients to do is run the job cost reports for a single client over one year. Often, it turns out that the customer they love most is the least profitable. My client doesn’t see it because their client represents a lot of revenue, but all the jobs together don’t generate adequate gross profit.
Blended KPI reports solve a lot of the problems you’re trying to remedy through job costing.
The biggest problem with individual job costing is that pricing is made up and too many businesspeople don’t truly understand cost. They don’t emphasize operational efficiency over micro-decisions about individual projects.
There are a lot of things we all could do better. Job cost reports won’t get us there.
Discounts Are a Job Cost
If you’re not ready to give up your current job costing system, you can still amend one thing in your job cost report. Rather than have the job cost reference total revenue (the net revenue number that’s the revenue after a discount), make the job cost report reflect the retail value of the job.
This means customer discounts are a job cost. Discounts could be a discount on equipment — these often show as a percentage. A discount could be reducing the number of days you’re charging the client for a week-long show because you’re trying to get the price down. Reducing the cost of labor to massage the price is a discount.
Anything that reduces what should be the true price of the job, without reducing the project scope, is a discount.
Accounting for discounts makes a job cost report more accurate because it reflects what the retail price of the job should have been before you made pricing compromises. Now all your jobs can be compared equally.
Your job cost report still won’t be perfect, but it’ll be a lot more useful.
Senior Account Executive @ The Park West Group | CSAM (Certified Senior Account Manager)
2 个月You point out a number of items that companies have a tendency to overlook when they try to determine profitability of not only projects, but more importantly key clients. Revenue is important, but profit is the key to survival.