Blueprint for Success, Chapter 5: Job Costing
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|Communications are kept open at Sutton Siding and Remodeling through weekly meetings of representatives of every aspect of construction (top, clockwise from left): Mike Sutton (white shirt), vice president of construction; Carl Johnson and Rick Hickman, superintendents; Ed Green, contract coordinator; and lead carpenters Jimmy Pruitt, Don Dennis, Dustin Vanover and Mike Fowler. Sutton and Green (above) work closely to establish job costs and protect profits before any contract is approved.
Photos: James Visser Photography
Making a profit on a project depends on pricing it right. Remodelers have to know exactly how much it will cost to complete jobs in order to figure out their markups. Therein lies the rub.
Mike Sutton, vice president of construction for Sutton Siding and Remodeling (Springfield, Ill.), is in charge of job costing for almost two-thirds of the 3,500 jobs the company handles every year — the portion that is restoration-related. Although he attributes the company’s present systems to the strong accounting backgrounds of his father, Doug, and brother, Doug Jr., he says other remodelers can use similar steps to control job costing.
At Sutton, job costing requires knowing the costs of each individual job before it is started. Each job sold is examined and job costs are verified as part of the contract-approval process.
Contract coordinator Ed Green double-checks all the numbers, watching especially for any unusual costs that could wreak havoc with the net profit on the job. "Every project, no matter how large or small, goes through that check within three days after the sale," Sutton says. "Ed breaks everything down by labor, materials, subcontractors, equipment and other. Everything has to be taken care of before we start the project or order any products." If the costs are too high on a particular job, the contract is not approved.
The net is in the details
Once a project is under way, the crews working on it must detail every phase of construction in a written report. Sutton devised a checklist with 60 job-phase categories, such as finish carpentry and roofing, to track each one accurately.
At the end of every day, workers at each site log what percentage of each phase is complete, giving everyone involved — the homeowner, the workers and Sutton management — a clear picture of what was accomplished. "We even ask for the weather," Sutton says. "If we ever have to account for a two-day gap in work, we need to know if it was due to rain or snow. We have to be very detailed."
Sutton is adamant that having all the information and the job costing keeps projects on track. Part of planning a project is knowing what its margin will be; part of completing it is making sure that target is met and finding out what happened if it’s not.
"If the contract coordinator estimated that it would take eight hours to put in crown molding but it really took 12, the field staff have to write an explanation of what went wrong. If the margin isn’t met, it comes out of the people’s raises. If they keep our bottom line healthy, they’re keeping their own paychecks healthy."
There are other incentives to controlling job costs. For example, Sutton’s two division superintendents now get 0.5% of any profit above the agreed-upon margin for their jobs. "That’s a lot of money to them," Sutton says.
In addition, everyone working on jobs attends weekly Friday meetings. Part of these meetings involves more paperwork: job-labor summaries of all the activities on every project, which are provided by the lead carpenters and checked by the superintendents. Sutton posts them for all to see. "That helps everyone track the progress," Sutton says.
Another weekly meeting — this one on Thursdays — allows the sales and production departments and the administrative staff to go through each job scheduled for start-up. The purpose is to make sure the schedules will be met and discuss any particular concerns the client might have. It is also the time to determine whether the company’s costs are in line with the billing.
All the record keeping and meetings might seem excessive to outsiders, but Sutton says they promote communication throughout the company and out into the field. And he sees communication as the key to effective job costing.
"It has to be a companywide effort," he says. "You can’t just say someone isn’t doing their job if a problem crops up. Everything has to be written down so everyone can understand it. The farther out into the field you can drive the effort, the better off you are."
Ultimately, however, the purpose of all this information is to keep cash flowing. That is a persistent problem in insurance work in particular. While some insurance companies pay quickly, others drag their feet. Sutton expects a lag time of about 90 days from completion of the project to final payment.
"If we have a $65,000 job and we’ve already put $30,000 into it, things can get very tight," he explains. "My job is to make sure all the workers get what they need to do their jobs. That’s why communication is so important. The guy making deliveries has to understand how it affects the job if the delivery isn’t on time. And the guys on the job site have to know that we need 24 hours’ notice for material delivery. If they don’t give us enough notice, they may not get the stuff on time, and they might as well go home."
The high cost of labor
Labor burden is a key element to job costing. Sutton Siding and Remodeling has a relatively high labor burden compared with that of a one- or two-person operation or specialty trade contractor. The company includes a comprehensive list of costs in labor burden besides the actual wages paid to employees: federal taxes, workers’ compensation insurance, health insurance, life and disability insurance, retirement, profit sharing, vacations and holidays, sick days, and paid days off.
Last year these combined expenses constituted more than half of the company’s labor costs. During annual reviews with employees, Sutton management explains labor burden to them. "An employee may be paid $15 an hour, but he’s really getting the equivalent of $26.50," Sutton says. "You have to offer that kind of compensation to keep good people. We’re competing with the unions. Our wage rate is about the same, so we have to offer other benefits."Sutton does not count direct labor, materials, trade contractors, equipment and fees for permits as part of the firm’s labor burden.
Sutton is just as exacting about materials used in a job. The company uses a tight verification system. All materials must be bought through a purchase order, with copies going to the lead carpenter, the superintendent for the project, the vendor and Sutton’s accounts payable person, Kathy Augustine.
Keeping track of materials has also helped Sutton keep a rein on how much the company spends on them. "Our materials costs haven’t varied more than 10% over the last five years, which is pretty good," Sutton says. "But we can do better."
All of the information for every job is kept in a master notebook, which Sutton calls his bible, in his office. Every job has a number, and everything associated with that job — from purchase orders to daily logs — must have that number on it. The system provides an effective way to identify each piece of paper as it crosses Sutton’s desk. "You have to write everything down," Sutton says. "If it’s not written down, around here it doesn’t exist. Having everything in writing gives you control over the job."
The Sutton Siding Bible
Job-Cost Tracking Worksheet