Job Costing for a Plumbing Business
Demonstrating Job Cost Accounting
To illustrate the concepts of job cost accounting, here we present some specific examples. The example business is a plumbing contractor.
Lion Bank is building a new headquarters in the city. The general contractor is looking to subcontract the plumbing.
Edmund's Plumbing would like the opportunity to work on the large commercial building, so they first need to give a bid. This requires that they estimate how much money will be spent on the project, which will be significant. The costs include the materials and labor. It can also include other expenses related to the job, like travel, gas, or any special equipment that needs to be used.
The estimator must determine how many employees will be needed and how many hours of work they will each do. Edmund's can estimate labor by using the hourly rate of each employee. This step is important, because if the job requires a specialist, that worker will likely have a different pay rate than the other workers. This must be accounted for in the cost.
Material costs can be estimated using the current market price for materials. The amount of materials can be estimated based on past jobs. Estimating software can be an invaluable asset in this process. A spreadsheet is also useful, but not nearly as powerful as a full estimating package.
Once the estimate is prepared, the bid can be submitted to the general contractors. The general contractor accepts the bid and Edmund's is granted the contract.
Now that the bid has been accepted, the estimated job costs are be converted into a budget. This is a snap for a seasoned accounting program like A-Systems JobView.
Now that the budget is setup in their accounting software, it gives the company a guide as the accrue expenses. Three weeks into the project, they find it's more complicated than they had anticipated. They are going to need more employees on the job. This will cut into their profit, but by how much? The accountant can now check the budget inside their accounting software. It looks like they can afford to send two more workers for a couple days next week.
With the added complications, it looks like they'll need some more materials. After analyzing the budget, taking into account how much work has already been done, management knows whether or not they can afford to buy more material. Fortunately, they've built enough profit into their estimate to make the changes.
Lion Bank's CEO has decided he wants a private bathroom in his office. This wasn't included in the original request for a bid, and Edmund's isn't going to throw it in for free. Edmund's prepares a new quote to account for the added expense. This new bid is called a change order.
The change order is sent to the general contractor, who discusses it with the project owner. The CEO agrees to the new cost and the work continues. The change order is stored in the accounting software and is now incorporated into the budget.
As the job nears completion it's easier to see if the job is still profitable. Material costs and labor costs have been adding up in the system, and these costs can be compared to the budget. Edmund's is a little bit over budget on the main portion of the job. Fortunately, with there's enough profit on the additional work to offset the added cost. The job is profitable overall.
Without job costing, this job would have likely overrun the budget. When the job turned out to be more complicated, extra materials would have been added, but not compared to the budget. Job costing software does this automatically as expenses are added. It helps you see when project expenses are running away.
Using a proper accounting tool also helped this plumber to make a change order. This ensured they were properly paid for added work. Project owner's change their minds all the times, and change orders protect the contractors.
Job costing software is an indispensible tool to help a business stay profitable.
Plumbers have a crucial job, and we want them to succeed. The IAPMO provides a Uniform Plumbing Code to help ensure safe water and high quality installations.