One of the most important responsibilities that an architecture firm has is job costing. It’s like planning out the expenses for your next travel destination. You have to figure out just the right amount to spend at every point without going into losses.
And just like planning the perfect vacation, if it is done correctly, job costing will bring your architecture firm immense success, ensuring that surprises are at a bare minimum, which is essential for the business's survival.
To understand what job costing is, its importance in your architecture firm and more, read on.
Job costing includes the accumulation of the costs of materials, labor, and overheads for the architecture firm. This method helps find specific costs to jobs and see if they can be reduced in subsequent projects. Another use is to see if any extra costs can be billed to the customer.
Simply put, it’s a process that helps architecture firms determine the budget and bidding for new projects. They can use the job costing formula, estimate the costs for labor, materials, and additional overhead costs required for the project, and accurately determine the amount to be charged.
Construction and manufacturing projects are traditionally priced in one of two ways.
- Process Costing: You identify the steps required to complete a job and assign an average cost to each one based on your experience. Then, you add the averages to produce an overall budget.
- Job Costing: You inspect the job and break down the specific labor and material requirements. After calculating these costs, you add a charge to cover your overheads.
Process costing works best in industries with uniform costs like some forms of manufacturing. Job costing is more rigorous, involves fewer assumptions, and gives you more certainty when done right.
It’s instrumental in the construction sector, where variables differ from one project to another. However, this process of job costing can be time-consuming and labor-intensive.
Projects in architecture firms are traditionally priced in these two ways -
- Job Processing: One identifies the steps required to complete a job or task and assign an average cost to each one, all based on one’s past experiences. The averages are then added up to produce the budget.
- Job Costing: The specific labor and material requirements are broken down after analyzing the job's needs. Overheads are charged to cover these costs.
Some consider job processing an easier task, but job costing is found to be much more accurate. It involves fewer assumptions and shows exactly where the money and resources are spent.
In the past, architecture firms and many others preferred job processing over job costing. One might also argue that job costing for architecture is a time-intensive process, especially with complex projects.
However, with the help of modern solutions, bookkeeping, and accounting tools, businesses worldwide have adopted job costing over job processing as their go-to practice. The benefits of this transition are several.
Running an architecture firm requires a complete understanding and thorough knowledge of each project in progress.
One needs to know how things are moving forward and how the business is doing financially. With architecture job costing, one gets a very detailed look at the team's daily activities, costs, and efforts. Also, their growth can be tracked, measured, and managed.
Once the firm completes projects, it must identify the profitable areas of the business and those that cost money (P&L Statement).
This information can help you figure out the micro and macro-trends, and in the future, can be used to make better bids. These practices will help increase your business' profitability in the long term.
As you can see, job costing is the best way to measure progress and keep your business moving in the right direction.
Balancing the cash flow in your architecture firm can be one of the hardest things to do. Billing and payments are unpredictable since teams can complete projects at different points.
One needs to be accurate and keep a close eye on the cash flow, and the cost of materials and labor. All of these processes will be enhanced by job costing.
Correct job costing predictions can offer a clear picture of how much cash inflow a business can expect in a given week.
In your architecture firm, you must observe micro-trends such as a project’s completion period or a team’s performance. For example, one might see that the labor costs for designing are much higher than average.
All this information will help the architecture firm utilize its time much more effectively. Also, it will enhance the team’s performance and make them much more efficient. This will result in greater employee satisfaction and increase the business' profitability.
Beginning with job costing can be a little overwhelming. You can follow the tips below to help build a solid foundation for your architecture firm’s job costing process.
- Determine your goals
- Include all job details
- Pay attention to labor
- Use software to your advantage
While running an architecture firm, one has to be talented at their craft. However, that doesn’t necessarily mean they understand all the ways in which their business finances add up. Once a person determines their goals and then starts tracking them, the process becomes much easier.
Start by defining your business' goals and talk to all the stakeholders at your architecture firm to determine their needs.
Understanding the unique challenges of your business and how they can be improved can go a long way. Spending time with different teams at your firm can also help you understand information that's otherwise difficult to determine for job costing.
The success of job costing lies in keenly observing the details of your architecture firm's processes. The idea is to be as involved as possible, rather than approaching the job costing process from a general perspective.
Investing your time in these processes will also help your bottom line. You must aim to refine the process continuously and stick to your goals.
The importance of labor in the success of your architectural practice is undeniable. It also constitutes a huge percentage of the company’s costs. As a result, it is important to measure labor costs accurately, as wrong estimates can result in major financial mishaps.
Being profitable also means keeping a good estimate of labor hours and costs. This includes both full-time employees and contractors. Try and get the most accurate details about everyone work hours, while helping them understand the importance of accurately estimating these details.
You can do job costing for your architecture firm manually, but the process can be tedious and prone to errors. Instead, utilize technology that enhances your efforts and makes this process more efficient and error-free.
You need modern-day tools to make this happen. Once you find such solutions for your firm, profitability is a no-brainer.
Manually calculating job costing requires spending hours on spreadsheets and calculations, while risking errors. Professional accounting firms take on these tedious processes and automate calculations.
They allow you to:
- Price jobs accurately: Work out the specific costs, so that you can be confident about your finished work.
- Avoid customer conflict: Any sudden spike in costs can cause problems when dealing with customers. Accurate estimates reduce the chances of that happening.
- Submit a timely estimate: Make the process of job costing much faster and efficient.
- Calculate realistic profit margins: Calculating your margin and adding it to the markup is now much easier. It can help improve your firm's profitability.
- Track progress and costs in real time: Helps with costs and previous estimations, while keeping you ahead of time in calculating future costs and communicating them to the client.
Professionally-managed job costing helps you manage your architecture firm without any hassle and gets rid of your tedious tasks, which lets you focus on running a more successful business.