Stop trying to get the perfect job costing.
You don’t need perfect accuracy to get useful, actionable insights. In fact, I believe aiming for 100% accuracy will get you the exact opposite.
How many times have you wasted hours trying to allocate overhead costs to specific projects in a way that makes sense? If you’re like some of the business owners I work with, probably quite a few.
I have to ask:
Does knowing $48.23 of insurance went to Job #358 help you price the next bid?
Do office rent allocations help you manage projects in real-time?
Is this worth your time to agonize over the pennies?
Your biggest cost driver in construction is labor.
For overhead, you need something simple that you can keep up with. If not, you’ll give up on it and end up with no data when you really need it. Try to catch every penny and you’ll drop them all. Your estimates will be off, and you’ll never know if some projects or services are overhead-heavy and hurting your bottom line.
Simple Allocation Method
So, here’s my suggestion.
Tie overhead allocations to a reliable metric that you already track well. Some businesses like to tie it to a % of revenue, personally, I think you’ll get better results using a % of labor hours (if you track time well). Pick a cadence that works for you, be it weekly, monthly or quarterly. The goal is not to get overwhelmed.
Here’s an example:
Overhead for April was $100,000.
1,000 hours of labor were tracked that month.
Job #358 clock in 250 hours for April.
So, to get a reasonably accurate picture, we can allocate 25%, or $25,000 of overhead, to project #358 for April.
It is not perfect, but it is fast, repeatable, and something you can stick to.
Deeper Analysis
While this system gives you a good picture of your profitability and method for better estimating and project bidding, it doesn’t catch the anomalies. The projects that are eating up way more overhead than should compared to the revenue earned.
This is why I suggest to our clients that they make time for a deeper analysis every quarter or every year.
Look for patterns in the data. What do the overhead-heavy projects have in common? Which service types or project phases have consistently heavier overhead loads?
These answers will show you where to focus your efforts.
Sometimes, you can improve your process to reduce overhead. Other times it is unavoidable and perhaps you should raise your prices or stay away from those types of projects completely.
Accuracy vs. Feasibility
Chasing perfect accuracy holds you back. A simple, elegant allocation method will do the trick most of the time. Once in a while a deeper analysis is needed to spot the problem areas.
I hope this saves you time and frustration!
