Momentum Software Blog
Job and Project Costing
What is job and project costing?
Job and Project Costing is an accounting technique used to work out the exact costs of materials, labour and overheads of any given job. It’s a crucial tool for managers to get a handle on their projects’ profitability, which ultimately determines their success.
Job and Project costing lets you compile your costs, compare them to budget and make adjustments while your project is still running – not afterwards, when it’s too late. For example, you can see if changes to an order are really necessary or if a supplier’s invoice has been double paid.
Which type of job and project costing system suits you?
Job and project order costing records the actual materials and labour expenses for specific jobs, and assigns overhead to jobs at a pre-determined rate.Process costing applies costs to departments based on the average number of units produced per day.Your specific situation determines which one of these job & project costing techniques is the best fit.
Job and project order costing lets you calculate the profit earned on individual jobs or projects. This helps you decide which types of jobs or projects are worth doing in the future. This method would suit you if your business does highly customised work which involves external contractors and consultants. It also gives you the ability to track the efficiency and productivity of a team. One challenge with this method is that during a job or project, your employees or contractors have to keep track of all their materials and labour, from nuts and bolts to their tea breaks - quite a task.
Process costing is ideal if you’re involved in continuous production or manufacturing, such as a factory. This type of costing is for when you need statistics and information for an individual department. It is better suited to workplaces where expenses and salaries stay fairly steady.
How can job and project costing software improve your business?
Job and project costing software helps you manage the end-to-end process of completing a job or project used to work out the exact costs of materials, labour and overheads of any given job or project. It’s a crucial tool for business owners and project managers to get a handle on their job or projects. Job and project costing software will collate and report on transactions from many areas of an ERP system including quoting, invoicing, purchasing and staff timesheets.
When configured correctly for your business, a job costing system will be able to provide answers to many common questions:
- Will this job or project return the profit I planned for?
- Which type of jobs or projects make me the most money?
- Are my costs accurately budgeted for?
- Do I need to purchase inventory to complete the planned work?
- What is the utilisation and recovery rate of my staff?
- What does my schedule look like for future work?
- What does job and project costing software do?
Job and project costing software gives you greater control and visibility of your jobs and projects. Rather than waiting for a job or project to be over to get insights into your costs, it provides you a clear and accurate view of the costs as they accrue and the income and profit that will eventuate at completion. This can then be compared to the budget so you can make informed decisions.
State-of-the-art job/project costing solutions make it much accurately track costs, plan resources, equipment or materials usage using one integrated system. Rather than having complicated spreadsheets and bits of paper all over the place, job/project costing software gives you a central source of truth.
Job and project costing software helps you:
- Keep track of your costs, invoices and billing on a job by job/project basis
- Manage and track consulting or equipment hours, inventory, consumables and subcontractors
- Plan your jobs or projects and to maximise resource utilisation
- Give your project managers an easy way to examine profit and revenue of jobs
- Access the details behind every transaction or record
- Estimate costs, quote and manage jobs to budget
- Generate reports for real-time tracking of projects
- Easily identify invoice variances and manage appropriately
- Other benefits of job and project costing software
Easier forecast revisions
A good job & project costing solution will allow you to manage this need through forecast revisions. Job and project costing software alerts you when projected labour costs have been used. Additionally, a good job costing solution will provide the ability for budget revisions (forecasted cost revisions).
More accurate and detailed reporting
Accurate and timely analytical reporting for jobs & projects is certainly important, but also important is the ability to budget and track cost in a detailed manner so this reporting has meaning and depth. While it takes more effort to define detailed cost codes for a job or project, the more detailed the cost codes, the easier it is for the project manager or construction crew leader to more quickly identify the exact area where overrun is taking place or where costs are more than expected.
Making this data available to a project manager or foreman who’s in the field is a huge benefit. Job & project costing software exposes the revenue, cost and budget detail to the project manager or construction crew leader, giving these individuals who are in charge direct access to the data while they are on a job site. From the job site, they can initiate a forecast revision or a change order.
Better picture of your actual costs
Do you know your actual costs? What about overhead costs? And indirect costs, like fringe benefits, health insurance, uniform fees and cell phone costs? Good job & project costing software allows you to define the added costs for ‘labour burden’ and combine this cost with the actual labour cost per hour of the resource.
Knowing the correct job and project costs allows contractors to accurately bid on future jobs. One of the additional items to consider here is the use of job templates. When a contractor performs similar types of jobs or projects, the ability to define a job or project template and identify common cost codes can save time and reduce the potential for inconsistency.
Less work stress
Job and project costing software can enhance the quality of your financial forecasts, and this dramatically improves your relationships with internal staff as well as the companies you deal with. Competitive tenders are more achievable as the software helps you create accurate quotes based on information gained on previous projects of similar types. It also helps with your day-to-day project management as you can check progress and efficiency on the go and communicate to staff the changes necessary.
Blog source: MYOB Newsletter - smarterbusiness