Whatever your reason for getting into the construction business, a love for job costing and puzzling out profitability likely wasn’t a contributing factor. Yet having at least some understanding of cost analysis isn’t just desirable—it’s necessary.
In a recent study of self-identified business owners, accountants, bookkeepers, estimators, and finance managers within the construction industry, 1 in 4 respondents said two to three bad estimates could put them out of business. Another 18% said just one bad estimate could do the same.
It’s no wonder then that so many industry experts, working independently or with a team, recognize the need for accurate job costing. But what are some of the challenges and priorities such individuals need to account for in their estimates? And what resources are available for those looking to make the work easier?
1 in 5 in the construction industry struggles with cost estimation
Nothing hurts more than lacking confidence in a skill you know is essential to your success. It’s like being a farmer who isn’t actually sure how to plant. Or a veterinarian who doesn’t know how to operate.
In fact, when asked which part of the financial process was hardest for them, 1 in 5 survey respondents said “estimating project costs.” That’s more than the number of respondents who answered things like “payroll” and “managing cash flow.”
One reason for this is that unlike fairly routine tasks (e.g., running payroll), cost estimation is far more unpredictable. Take one small part of that estimate, for example, the behavior of the client.
When asked what part of the job carried the most financial risk, the most popular answer among respondents was “new clients.” Even large clients, who presumably would hold more cards with a larger payout on the line, didn’t pose nearly the same amount of risk.
There are several reasons for this. One is that new clients don’t always know how your business operates. They might miss a payment or have unrealistic expectations for project completion. They also don’t have a prior relationship with you to temper their reactions if something doesn’t go as planned. As a result, they’re also the most likely to make outrageous demands, sever a contract, or take up your time.
A recent article by the Harvard Business Review stipulated that retaining a new customer could be “five to 25 times more expensive” than an existing customer.
1 in 3 struggles to estimate labor costs
38% of survey respondents said labor was the toughest cost to estimate. This was followed by the length of time a project might take and the cost of materials.
Unfortunately, estimating labor costs isn’t just challenging. It’s also one of the most expensive project costs, according to survey takers who were asked to rank project costs from most expensive to least expensive. It’s a double whammy for construction companies.
What’s interesting about that is labor wasn’t always the first thing looked at to determine a project’s profitability. Slightly more respondents looked at materials first, perhaps because they are seen as easier to estimate. But is that actually the case?
When asked how they keep track of labor costs, 1 in 5 respondents said they rely on a foreman or manager to record employee hours. Slightly fewer said employees use mobile time tracking app to record their own hours. In other words, those folks who relied on an app where employees were in control of logging their hours were more inclined to look at labor costs first to see if a project would be profitable. It’s possible such individuals found it easier to access past labor data when it was stored on an app than those who might need to go through a third party to understand how workers logged time in the past.
1 in 4 still tracks project costs using paper and pen
It’s no secret the construction industry is behind the curve when it comes to adopting the latest technology. In a 2018 article by Fortune, construction companies were applauded for making the switch from paper to digital, which some experts say may help them close the current cost savings gap, estimated around $1.6 trillion.
It’s thought that construction projects today lose up to a third of their value as a result of waste—something job costing and profitability tech could help reduce. With more modern and accurate systems in place for estimating materials and labor needed, companies might be better prepared for the projects at hand…and less likely to stock up on things they don’t need.
Fortunately, when asked how they currently keep track of project costs, most survey respondents seemed to be on the side of technology, with 46% stating they use accounting software with a job costing system or a designated job costing app. That was followed by 27% who still use paper and do their calculations by hand, and 19% who said they use a spreadsheet. A startling 7.5% said they keep track of product costs in their head, which sounds very impressive (and possibly a recipe for disaster).
Any way you do it, data shows it pays to estimate costs
Regardless of how those in the construction industry conduct their estimates and job costing, most said they try to do a cost estimate for every project they take on. What’s more, their preparation pays off.
More respondents (73%) who said they prepare a cost estimate for every project called their estimates “very close or exact” to final project costs. That’s compared to the 51% who prepare a cost estimate for most of their projects and report estimates to be close or exact.
What’s more, when asked about how often their profits turned out to be less than expected, respondents who prepare a cost estimate for most projects were far more likely to say their profits were “usually less than expected.”
Maybe practice makes perfect, or maybe there’s just something to be said for doing an estimate every time, on every project, to get a more accurate outcome. Either way, while job costing is a pain, and certainly wasn’t the reason you got into construction in the first place, it’s one of those things no construction business owner should go without.
About the author: Danielle Higley is a copywriter for TSheets by QuickBooks, a time tracking and scheduling solution. She has a BA in English literature and has spent her career writing and editing marketing materials for small businesses. She recently started an editorial consulting company.