Job cost analysis can be a painstaking chore. Is it worth it? Why bother?

The main reason you should make the effort to job cost is to get better at estimating. Job costing can make you better at change orders, cost control, pricing, and buying. It gives you information to help improve your systems and processes and your overall results.

Job costing can also help you with forecasting and cash flow because you’re capturing data and recording expenses, which you can extrapolate into the future. For example, a good job cost analysis might tell you to expect about 55% cost of goods sold (COGS) from a $1 million month, but 30% COGS from a $500,000 month.

Some companies also use job costing to calculate commissions. While I don’t personally love this usage since salespeople have no control over job costs, it happens.

Regardless of what you use job costing for, it requires a lot of effort — so you have to make it worth the trouble. This is no place to dabble.

The Cost of Job Costing

While job costing CAN be extremely useful, you have to make sure the cost of job costing doesn’t outweigh the benefit.

For instance, job costing can lure you into over-collecting microdata on a job because it seems like more data = more benefit. But do you really need to drill down to every $6 parking garage charge or measure precisely how many hours the warehouse crew took to prep an order? You know the value of this minutiae isn’t going to pay for itself.

On the other side, maybe you’re gathering supremely useful information, but nothing happens with it. That’s just wasted effort.

Job costing gives you data you can use to run your business better. It’s the very definition of actionable data. But to make it worthwhile, you have to commit to taking action on what you learn.

How to Job Cost Effectively

The main principle when it comes to job costing is that nothing is free. Everything you use in a job costs something — yes, even if it’s an internal resource.

Job costing requires you to know what things cost both internally and externally, and then to track those costs. How? Keep reading.

Capture All Planned Purchases

To start with, you’ll need to track everything you buy before a job, and you’ll need 100% purchase order compliance. This means capturing all advance costs related to the job in the PO, whether there’s an outside vendor or not.

So, you charge a job for internal AND external equipment. You charge for internal AND external labor — travel, subcontractors, project manager time. All these things can be charged to the job. That’s what job costing actually is.

Capture All Unplanned Purchases

Of course, there are some costs you won’t know until the job is done. These costs have to be added back into the job.

For this reason, capturing change orders is essential to job costing. You have to get show reports from people on-site, whether that’s the project manager or lead technician, and your internal team has to track their time on projects. Who was on what event? Who went into overtime? It’s all critical for effective job costing.

Review Job Cost and Learn From It

If this sounds arduous, it is. But you’re doing it to be better at estimating change orders, costs, pricing, and buying.

Job costing is less about the information and more about the action that comes from that information. If you want to start job costing, make sure you have the capacity to apply what the information tells you. If you’re not improving sales, systems and processes, or your ability to recognize when things are getting better or worse, then what’s the point of all that effort?

Sure, you can use job costs to calculate commissions, but you’re not going to learn anything. Instead, you just end up teaching your salespeople how to game the system.

To keep job costing on track, just remember that nothing is free and everything must be actionable.

Conclusion

Done right, job costing is actionable knowledge.

If you just dabble in job costing, you end up undermining your own efforts. You don’t get enough benefit to make it worth the trouble. So if you’re going to the trouble of job costing, make sure you do it right.

Once you apply what you learn to improve your business, job costing becomes much easier. The goal is to become so effective that you no longer need job costing — but practically, you’ll probably want to continue so you keep reaping the benefits.

It’s like a person who wants to reach a certain level of fitness. They start exercising, and months later they’re in really good shape. They did it! Do they need to exercise anymore? Well, they reached their goal, so not technically. But they will. And it’s a lot easier going forward because they just have to maintain their body, not overhaul it.

Get your business in shape and keep it there with job costing done right.