Don’t Be Fooled By Your Job Cost Reports
Many construction companies utilized their own equipment in the execution of their contracts. They’ve made a determination that there is sufficient potential utilization that ownership is better than renting for a job for various economic and efficiency reasons. They use the market rental rate or an internally determined rental rate within their bids. Once the job commences, many contractors do not account within their job costing for this equipment. The effect is to overstate profit during the ongoing job review or at the end of the job, since costs within the bid are not considered on the job cost. Thus, the contractor can overrun labor hours and cost, overrun materials or subcontracted costs, and this is offset by the zero equipment cost posted.
The same situation occurs when a computed labor rate is used in the bid. More often than not, the labor rate exceeds the actual labor rate, and the effect is the same overstatement of profit. Buy out gain of materials or subcontractors post bid award, again has the same effect.
There should be posted to the job an internal rate of rental by day, week, or month as is applicable. This should be compared routinely to the expenses of repairs, parts, useful life depreciation, interest on the equipment loans, and possibly fuel and any other costs of the operation. This is a profit center, or the contractor would never have purchased the equipment in lieu of renting. It’s simply another means of profit in your business.
Buy out gains on materials, equipment, or subcontractors should be tracked and reviewed for the same reasons and the net buy out should be entered into your job costing system as the “estimate” if your system does accommodate an area for buy out gain.
Labor rate variances of bid rate to actual are often 10% or higher or more. Buy out gains can range from 1% to over 5%. Depending on how much of your own equipment makes of the bid, it can vary the results by 2% to 15% or more. When you add these up, it can create a false ongoing review of the job, then when you review your financial statements, you haven’t earned as much as you thought. Contractors lose confidence in the financials and assume it’s just errors or accountant’s tax moves, and the financial problems on the job are not identified specifically, not addressed, and they simply persist leaving tens of thousands to hundreds of thousands of dollars lost by simply not knowing what is occurring because it’s masked by these other profit centers (equipment, buy out, labor rate).
A simple analysis of your completed jobs compared to estimates, coupled with a financial statement presentation that mirrors the components of your cost of jobs estimated can be accomplished by a knowledgeable construction financial person. If they don’t understand this, change the internal or external accountant.
