Taking on unprofitable jobs undermines your business and sets poor customer expectations as clients will expect you to continue to take on unprofitable work. Whether you’re a painter or an electrician, if you’re in the home improvement industry, you need to make sure that every job is profitable.
That’s where job costing comes in. Accurate job costing is an essential part of running a business in the home improvement or home services industry because all jobs require different amounts of material and labour. Job costing helps calculate the total cost of each job, which will be unique for each customer.
A good job costing system like QuickBooks Online, together with Knowify, will track direct costs (the total costs of materials used for the job), direct labour (how much each employee earns per hour and how many hours they worked on the job) and overhead costs (general costs of doing business that you can’t attribute to one specific job – like training, certification and insurance). With this information, the program will tell you how much you’ve made from any given job. Once you’ve completed the work, compare the end profit to your estimation. If the numbers are off, then you can talk with your bookkeeper about how to make adjustments for greater accuracy.
Accurate job costing means that you’ll be able to predict more precisely exactly how much you’ll make from a project. Accurate estimates result in happy clients and profitable jobs that will keep your business financially healthy. Anyone operating a business in the home improvement industry –painters, plumbers, landscapers, etc., can use this guide to make sure every job is profitable.
Rely on Data Over Experience
Many of the home improvement contractors that we work with rely on experience to tell them how long it will take to complete a job. Instead, use data from past jobs to make a more reliable and precise estimate and then use your experience to judge if your calculations make sense.
One problem that home improvement contractors run into is that their estimates are based on general data that doesn’t consider variables and allow for unique variations. Let’s take a look at professional painters as an example. Many will estimate based on square footage. However, some rooms need more or less prep time, so it’s much better to determine labour costs by room type. If you use QuickBooks Online and integrate Knowify, you can keep track of how much you typically charge for each room type, making costing faster and more accurate.
Calculate a Predetermined Overhead Rate
How do you accurately work overhead rates into your estimates? Your company must pay for the cost of supplies that you use for each and every job, such as brushes, rollers, ladders, and drop sheets. Plus, there’s costs like your phone bill, gas, vehicle insurance, mileage, taxes, employee benefits, and much more.
Some home improvement businesses will add a general 15-20% on top of their costs for overhead. However, it is far better to calculate overhead precisely. If you know your yearly cost for these overhead items, you can divide that total by how much you generate in sales before the overhead. Then determine the percentage your overhead is of your current revenue. Then, use the following formula to calculate your predetermined overhead rate, which is the overhead rate you should charge on each job.
Predetermined overhead rate = (Estimated Overhead/Estimated Revenue) x 100
You can get easy access to the information you need to make this calculation if you use QuickBooks Online, which has all the data for every single job you’ve done as well as your total business expenses.
Set a Realistic Profit Margin
Remember to leave room for profits when estimating. Experiment with the amount to see what is competitive and what you need to make running the business worth it.
Draw Inferences About Costing
Once you’ve fine-tuned your job costing system, you may realize that certain jobs (or jobs that are too small) are not worth your time. As you grow in confidence with your pricing, you may also be able to better negotiate with customers who want to work with you, but at a reduced price. When you know which jobs are profitable you can save time by rejecting unprofitable work over the phone, or at least before you start the job.
Having the right knowledge is power. Making decisions by looking at accurate data means you can grow your business, and make it more profitable and eliminate those money-losing jobs.
Get better information by using tools like QuickBooks Online and Knowify and working with a team of bookkeeping professionals who can help you maximize the benefit of working with them.
Contact AIS Solutions to get started! We specialize in working with clients in the Home Services field.