Job Costing -

An Execution Guide for

Operations
Brad Dempsey/Solutions360 Inc.
 What gets measured …
Gets done.
The purpose of this
seminar is to introduce
financial concepts that will
help operations staff better
understand and manage
projects.
 Overview
• Job costing is typically thought of
as an accounting function
• Margins are only getting tighter
• Every point possible must be
achieved in execution
• The project team’s understanding
of the financial aspects can make
the difference
 Overview
• This course assumes that you
are not an accountant
 What we will cover
• What is job costing?
• Why do we need it?
• The sales handoff
• Project / Job creation
• The budget
• Resources
• Managing material
• Managing labor
• On-going financial analysis
 What we will cover
• Project KPI’s (Key Performance
Indicators)
• Invoicing
• Sub Contracting
• Labor burden
• Material burden
• Over/Under billing
• Change Orders
• Sample jobs for analysis
 Glossary
• GM = Gross Margin
– Dollar value of revenue minus cost of goods
• GP = Gross Percentage
– Percentage of GM / revenue
• Price – what we charge the customer
• Cost – what we pay our vendors
• Brokerage – or box sales, simple sale of product
without labor
• T&M – Time and Material
• Progress Billing – A job that we earn revenue on
based upon our estimate and a fixed price
 Alternate Course Names

The 7 Habits of Effective

Job Costing
Alternate Course Names

How to Job Cost and

Influence People
Alternate Course Names

Game of Job Costing

Alternate Course Names

50 Shades Of Job
Costing
Alternate Course Names

Job Costing “r” Us

Alternate Course Names

The One Minute Job

Coster
Discussion - What Challenges
Are You Currently Facing?
 What we see happening
• Margins are slimmer than ever
• PM’s that watch job costing
closely are achieving greater
results
• Jobs that are well managed and
measured lead to better
proposals
 What we see happening
• There is frequently a gap
between sales / operations /
accounting with respect to
information sharing
• Many operations teams have
no interest and or visibility into
the financial aspects of the job
 What is a project/job?
A project is essentially a unit of
work that allows us to manage,
measure and execute the delivery
of products and/or services to our
customer.
 Why a project and why is
the financial aspect so
important?
Sales are made based upon an estimate of
the cost to deliver the goods and services.
The accurate measurement and control of
those costs are critical to the survival of the
company.

Project accounting (job costing) is a tool to

help us manage those costs, and make
adjustments if required as early as possible
in the process.
 Goals For This Seminar
• Understand and appreciate the
4 GP’s
• Introduce tools to help you
improve your financial project
management
• Help bridge the gap between
operations and finance
Do we really need to learn
some accounting?
 What is job costing?
From Wikipedia, the free encyclopedia
Job Costing involves the calculation of
costs involved in a construction "job" or
the manufacturing of goods done in
discrete batches. These costs are
recorded in ledger accounts throughout
the life of the job or batch and are then
summarized in the final trial balance
before the preparing of the job cost or
batch manufacturing statement.
 Why
Without a method of job costing,
we don’t know which projects
were profitable and why.
 The Business Why
Without job costing, we lack
valuable knowledge to bid and
manage the next job.
 The Accounting Why
Accounting standards (GAAP) dictate that
revenue and costs should be in sync
(Matching principle).

The revenues and costs that hit our income

statement are used to report to the bank
and bonding companies. It is important to
maintain consistent profitability to sustain
our bank covenants and our ability to obtain
performance bonds.
 Accounting Concepts
Assets
Liabilities
Equity
Revenue
Expense
 Assets
• A spy working in his or her own country
and controlled by the enemy.

• The entries on a balance sheet showing

all properties, both tangible and
intangible, and claims against others that
may be applied to cover the liabilities of
a person or business. Assets can include
cash, stock, inventories, property rights,
and goodwill.
 Liabilities
• A company's legal debts or
obligations that arise during the
course of business operations.
 Equity
• Funds contributed by the
owners (the stockholders) plus
the retained earnings (or
losses). Also referred to as
"shareholders' equity".
 Revenue
• Funds received during a
specific period, for products and
services.
 Expense
• Costs incurred through
operations to earn revenue.
 Cash Accounting
• An accounting method where
receipts are recorded during the
period they are received, and
the expenses in the period in
which they are actually paid.
 Accrual Accounting
• An accounting method that
measures the performance and
position of a company by
recognizing economic events
regardless of when cash
transactions occur.
 Company Level Reports

• Income Statement
• Balance Sheet
 Income Statement

• The income statement shows

the revenues and expenses
accrued over a period of time
Income Statement – Above / Below
The Line
• The “line” is the division
between Gross Profit and
Sales/General/Admin expenses
Income Statement Example
Income Statement Example
 Balance Sheet
• The balance sheets shows a
snapshot, or a point-in-time
• Includes assets, liabilities, equity
• Assets = Liabilities + Equity
Balance Sheet Example
Project Level Reporting
 The 4 GP’s
1. Budget
2. Current projection
3. Invoicing position (Actuals)
4. Earned
Project Snapshot
The Sales Hand Off
 1. Budget
• The original contracted amounts
 2. Current Projection
• Current budget inclusive of
– Internal change orders
– Customer change orders
• Internal change orders may be cost-
only changes to the budget so that
estimated cost at completion is
correct
3. Invoicing Position (Actuals)
• Invoiced amounts and expenses
incurred
• This is an “accrued position”
• Assumes customer collections and
vendor payments are about the same
period of time
• Analysis of unpaid amounts should also
be viewed
 4. Earned
• This is what has hit our income
statement
 Simple Budget
Item Budget Amount
Contracted Price $100,000
COGS – Material -$50,000
COGS – Direct Labor -$20,000
COGS – Sub-Contract Labor -$5,000
COGS – Miscellaneous -$,1000
Gross Margin $24,000
Gross Percentage 24%
 Cash vs. Revenue
• An invoice billed is not always revenue, and
a check cut is not always an expense
– When a pre-paid service is invoiced, it
becomes a liability on your balance sheet
– When the service or product is actually
delivered, and the cost is incurred, the
revenue can be recognized
– Deferred revenues and prepaid expenses are
proper accounting, but they complicate
discerning your actual cash position
 Invoicing vs. Rev. Example 1
16
14
12
10
8
Cash
6 Revenue
4
2
0
Project Month 1 Month 2 Month 3 Month 4 End
Start
 Invoicing vs. Rev. Example 2
16
14
12
10
8
Cash
6 Revenue
4
2
0
Project Month 1 Month 2 Month 3 Month 4 End
Start
 Invoicing vs. Rev. Example 3
16
14
12
10
8
Cash
6 Revenue
4
2
0
Project Month 1 Month 2 Month 3 Month 4 End
Start
Invoicing vs. Rev. Key Points
• The gap between invoicing and revenue is
critical to the sustainability of the business
• A clear understanding of the contract terms
is key for the operations team to help
manage this gap
• Payment for stored materials, draw
schedule, and retention terms are all
elements of the contract that impact cash
flow
 Breaking Down Costs
Four major categories
1. Material
2. Labor
3. Sub-Contract
4. Miscellaneous
How much detail should we use?
 Breaking Down Costs
Only justify more detailed information if
such data would impact your decision
criteria.
 Cost Categories vs. WBS
Work breakdown structure
From Wikipedia, the free encyclopedia

A work breakdown structure (WBS), in project management

and systems engineering, is a deliverable oriented
decomposition of a project into smaller components.

A work breakdown structure element may be a product, data,

service, or any combination thereof. A WBS also provides the
necessary framework for detailed cost estimating and control
along with providing guidance for schedule development and
control.
WBS – See Example
Current Projection vs. Budget
Item Budget Amount Projected Change
Amount
Contracted Price $100,000 $100,000 $0
COGS – Material -$50,000 -$55,000 -$5,000
COGS – Direct Labor -$20,000 -$20,000 $0
COGS – Sub-Contract -$5,000 -$5,000 $0
Labor
COGS – -$,1000 -$,1000 $0
Miscellaneous
Gross Margin $24,000 $19,000 -$,5000
Gross Percentage 24% 19% -5%
Revenue Recognition Methods
1. Time and Material
2. Cost to Cost
3. Hours to Hours
4. Complete Contract
T&M – Time and Material
• Charge based upon delivered
labor and material
• Recognize expense of labor
and material at time of invoicing
 T&M – Example
• Ship 2 displays on Jan 20
• Install the displays on Jan 22
• Invoice customer on Jan 31
• Jan 31 entry
• Revenue $1200 material and labor
• COGS – Material $800
• COGS – Install Labor $200
• GM = $200
 Hours to Hours Revenue
Recognition
To do this, we compare actual hours against
estimated hours. This ratio is expressed as a
percentage

Actual Hours
------------------------
Estimated Hours

This percentage represents the completion of the

project.
 Hours to Hours Revenue
Recognition
e.g. If we estimate that a project will
take us 500 hours labor to complete,
and we have expended 200 hours of
actual labor:

200
------------ = .40 = 40%
500
 Hours to Hours Revenue
Recognition

This job was contracted for

$50,000.
So we have now earned:
• 40% x $50,000 = $20,000
Cost to Cost Revenue Recognition
To accomplish this on a project, we use the cost to cost
method of job costing. To do this, we compare actual
expenses against estimated expenses. This ratio is
expressed as a percentage

Actual Cost
------------------------
Estimated Cost

This percentage represents the completion of the

project.
 Revenue Recognition
e.g. If we estimate that a project will
cost us $500,000 in material and
labor to complete, and we have
expended $200,000 of actual cost:

$200,000
---------------- = .40 = 40%
$500,000
 Revenue Recognition
This means our project is 40%
complete, which also means we can
recognize 40% of the revenue.
So in this case, if our contract was
for $1,000,000

Revenue earned = 40% x

$1,000,000 = $400,000
 Revenue Recognition
Cash flow on a project is out of sync with the
performance of the work. The relationship
between revenue recognition and cash flow is
very important as well.

This represents our over / under billing.

If we are over billed, we are using the customer’s

money, and are in a positive cash position.

If we are under billed, we are using our own

resources, and in a negative cash position.
 Revenue Recognition
Managing the revenue recognition process is
critical to strong financial statements on a monthly
basis. The statements are critical to maintaining
our bank relationship and covenants, and bonding
relationships for performance bonds.

Match revenue to costs – GAAP

Revenue does not follow cash flow – important to
understand the relationship
Even out revenue recognition – Bank covenants,
performance bonds
 Retention
• Common practice for withholding a
portion of the contract amount until
final acceptance
• This dollar amount should not
show up as a receivable and be
aged
• It must be included on the balance
sheet as an asset
Retention Invoice
 Retention Posting
• $12,614 posts to project deferred
revenue
• $11,352.60 posts to AR
• $1,261.40 posts to Retention
 Backlog
• The contract amount is what we have sold,
and have a customer commitment for
• Earned revenue is what we have delivered
• Backlog is the difference
• It represents essentially “guaranteed work”
• It is important to compare closed job GP
against Backlog GP. If jobs aren’t finishing
on budget…then the backlog GP may be
overstated
 Backlog
• See backlog example spread
sheet
 Labor and Burden
Burden is the actual cost to a company
to have an employee, aside from the
salary the employee earns. Other than
salary, costs include benefits.
e.g.
• health insurance
• payroll taxes
• pension contributions
• technology and tools
 Burden
• Labor burden is usually a
percentage
• J. Smith earns $20 / hr
• Burden is 40%
• Each hour of project time posts
$28
 Material and Burden
Material may also be subject to a
burden. This could cover the internal
handling costs for purchasing,
warehousing etc.
 Material Costing Methods
Direct – Serialized
Direct – Drop ship
Inventory – Avg Cost, FIFO, FISH
 Material Costing - Serialized
• Generally items over a threshold
value
• Each item has a unique number
• Cost is captured at time of
acquisition
 Material Costing - Identified
• Generally drop shipped or job
allocated upon receipt
• Commonly done on a P.O. basis
Material Costing – Avg or FIFO
• Most commonly weighted average
• Risk of costs not matching budget
• Can be especially problematic
when negotiating special purchase
prices
Material Costing – Avg Example
• Part # AB1234
• 5 in warehouse worth $500
• Average cost is $100 each
• Purchase 5 more at $250
• 10 in warehouse worth $750
• Average cost is now $75 each
 Material Costing – Burden
Example

• Part # AB1234 with a 3% burden

• 5 shipped at $500 cost
• Project costs allocated:
• $500 debit to material expense
• 3% x $500 = $15 debit to material
expense
 Material Costing – PPV

• Purchase Price Variance

• Difference of PO price and invoiced
price
• Can affect the job in a positive or
negative way
 Material Costing – PPV

• We cut a P.O. for a display at $500

• On receipt we increase inventory
value by $500
• On shipment to customer we DB
the job $500 COGS material
• Vendor now charges us $475
• $25 PPV must be applied
somewhere
 Allocation of In-Direct Costs
Allocation of in-direct cost should be
done using logical “cost drivers”.
E.g., allocating superintendent time
based on direct labor dollars to each
job
 Allocation of In-Direct Costs
See example spread sheet
 PM Allocation
PM time should be direct cost to a
job or allocated using a cost driver
 PM Allocation – Cost Driver
See example spread sheet
Change Orders
 Change Orders - ICO
• Internal Change Order
• Changes the cost budget only
• Possible reasons:
• Equipment no longer available
• Labor over budget
• Unexpected installation challenges
 Change Orders - CCO
• Customer Change Order
• Changes price and possibly cost
budget
• Possible Reasons:
• Increased scope
• Equipment models no longer available
 Finance Costs
There is an expense to financing
receivables. In some cases,
companies will allocate a cost to
overdue invoices.
 Minimum KPI’s and Reports
• WIP
• Gross Profit per Period
• Labor Budget vs. Actual
• Revenue Backlog
• GP Backlog
 WIP – Work In Process

• Point in Time report, much like a

balance sheet
• See example spread sheet WIP
 WIP – Analysis Tips

• Sort by projected GP and look for

the highest and lowest numbers
• You will have a good idea of what
is “normal” for you business (25-
35% possibly)
• Analyze the outliers first
 WIP – Analysis Tips

• Use the same process as used for

projected GP on earned GP
• Hide columns and put projected
GP next to earned GP and look for
differences
 Gross Profit per Period

• Change over a period of time,

much like an income statement
• See example spread sheet
Monthly GP
Labor – Budget vs Actual
Revenue Backlog
GP Backlog
 Project Forecast
See example spread sheet
 Closing the Project
Check list:
• Invoicing complete
• All material accounted for (shipped,
cancelled etc.)
• Material cost posted
• All time bill entries logged and
posted
• All PO’s received or cancelled
• All vendor invoices received (PPV)
 Closing the Project
• Misc expenses posted (expense
reports, credit cards etc.)
• All revenue posted
• Lien and bonding documentation
completed
 Summary
1. Monitor the 4 GP’s frequently
2. Focus on budget changes
3. Break the budget down to a detail
level you can manage, and one
that will assist in making decisions
4. Gather job cost information early
enough to take corrective actions
 When will you start
monitoring the 4 GP’s