Construction contractors that work on large projects can run into trouble with job costing. Accurate cost allocations are vital to figuring out whether a company is making money on each project. Some companies incorrectly add indirect job costs into their overhead or fail to use accurate cost assessments, thereby skewing their profit reports. We answer below some of the questions we receive related to job costing that can help you avoid this trap and gain a clearer picture of your company’s profitability.
Indirect job costs vs. overhead costs?
The Financial Accounting Standards Board defines job costs as “the sum of the applicable expenditures and charges directly or indirectly incurred in bringing [a job] to its existing condition and location.” These may include direct costs, such as labor and materials, and indirect costs. These indirect costs are often separated into two groups:
- Costs applied to multiple jobs. These costs usually include benefits for workers’ compensation insurance, as well as insurance that will lessen liability risks. This category also may consist of vehicle and machinery costs, such as gasoline, maintenance, repair, and equipment depreciation.
- Indirect costs related to jobs. Common examples of indirect costs may include salaries and benefits for employees like the project manager, cell phones, payroll service fees, and vehicle tracking systems.
It is essential to realize that overhead is often confused with indirect costs. The term “overhead” refers to costs you can’t link directly or indirectly to a project. Overhead costs are also reasonably stable over time. Overhead costs, such as office rent, should not be confused when identifying indirect costs.
Why should you use a cost driver?
Allocating indirect job costs can be done systematically by using a “cost driver.” Two standard cost drivers are labor hours and dollars.
For example, suppose liability insurance for a construction firm costs $200,000 every year. Dividing that amount by 12 months is $16,666. Separating those costs is only the first step. It is also necessary to tabulate the billable hours for each project every month. Next, it is essential to divide that $16,666 each month and allocate those dollars onto that month’s active jobs pro-rata. JLK Rosenberger can help you with the process, but that $200,000 is no longer overhead — those dollars are now indirect job costs.
Once indirect costs are allocated and included in the reports, this creates several benefits. First, managers are better able to track the progress of cash outflows to their jobs. Second, your management team can discuss how to avert future cash flow problems. These practices can provide you with some critical time to make necessary corrections.
Monitoring the bottom line
JLK Rosenberger can help you find meaningful methods of allocating job costs to help evaluate your construction company’s profitability. For additional information, please call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.