Build Your Numbers: Importance of Job Cost Reporting
The majority of the companies within these industries use the percentage-of-completion method of revenue recognition, the most important factors being job costing and estimated job costs. Job cost reports and the work in progress (WIP) reports provide critical information about the current status of a job and can help accurately estimate how the job/project will finish from a cost and revenue perspective. These reports drive the financial statements of these companies. When you are running multiple jobs at the same time, managing job costing can be difficult and is much more challenging but worth the effort. Not accounting for job costing and the WIP schedule correctly can lead to a host of financial problems for owners, including cash flow shortfalls, profit fade and revenue recognition issues during the job cycle.
Financial statements are an ongoing tool used to manage a business and are typically a required deliverable for a lender or bonding company. In addition to potentially wreaking havoc on your finances, problems with job costing and the WIP schedule can be major red flags for these sureties and lenders. Therefore, it is critical to build your job costing reports and WIP schedules considering that successful job costing can mean the difference between a profitable business and one that struggles to stay alive.
In order to ensure real-time reports, companies require a truly integrated accounting and job costing software solution. It’s important to map out electronic workflow processes to ensure accounts payable invoices, purchase orders and subcontractor commitments are entered in as quickly as possible and distributed to the proper job allocation. Job costing provides information about each job so that management and the accountant can review and break down for greater transparency. Most companies usually find that their costs break down into fairly small or fixed amounts. Financial exposure is largely through cost variations. Job cost reporting can consist of a comparison of actual job costs versus estimated job costs for each cost code and/or job. This makes analysis simple and quick when comparing jobs over time.
The lack of detailed job cost reporting is ultimately why companies end up moving away from smaller accounting focus programs. While setting up and executing a job cost system can seem tedious and worthless, if you do the right things with the results, it will be invaluable to your company’s financial performance.
Regardless of specialty or company, job costing is enormously beneficial and helpful to the company in the following areas:
| Financial Confidence: To maintain credibility with financial lenders, bonding agents and customers the company must be able to successfully manage and forecast the outcome of their projects. Companies that cannot do this with confidence are going to find it increasingly difficult to perform effectively. |
| Job Management: With data from job costing reports, project managers or management can better evaluate progress and efficiency as well as better motivate staff to reduce costs and increase output on any given project. |
| Claims Support: Job costing can provide support for contractual claims. The reports must provide details of the actual cost of identified variations and background for the claims. |
| Future Work: Cost reports can provide valuable information that helps estimators in bidding or pricing out similar types of work. These reports highlight and separate those variable costs that require special discretion. |
The following are common accounting errors that can appear in a company’s financial statements involving job costing:
| Improper Job Costing Cutoff: Most contractors, construction companies and engineers utilize the accrual basis of accounting and its costs are recorded in the period earned or incurred. The cutoff error arises as a result of omitting costs incurred in the period being reported on. To avoid this error, a process should be implemented in which costs incurred are recorded as liabilities in the period incurred or as accrued costs. |
| Misstatement of Estimated Job Costs: Errors occur most often as a result of poor estimating/forecasting, inaccurate actual costs accumulation or improper exclusion of revisions on change orders. To prevent estimating errors, compare actual costs to estimated costs on a monthly basis. |
| Overhead Allocation Inaccuracy: Most contractors, construction companies and engineers use an overhead rate to allocate indirect costs (rent, utilities, depreciation, etc.) to individual jobs using a percentage multiplied by either direct labor costs or material costs. When the rate used is not monitored to assess whether it is an accurate representation of the company’s current overhead costs, costs can be misallocated. |
| Joint Venture Activity Incorrectly Posted: Joint ventures are popular in the contractors, construction companies and engineers world, and proper accounting of job costs for the activity is often misunderstood or posted incorrectly. Because of varying methods of recording joint ventures (consolidation, equity or costs), it is critical to assess the job costing at the beginning of the activity. |
| Loss Contracts in the Period: Generally accepted accounting principles require that a loss contract be fully recognized at the time a loss is determined. The error can be avoided by monitoring the detailed job cost schedule. |
Understanding job costing and using the information that you gather from job costing reports improves not only your business but the way of doing business. WithumSmith+Brown, PC (Withum), continues to assist customers in understanding job costing and maintaining WIP schedules. If you have any questions in regards to job costing, please contact any member of Withum’s Construction Service Team at (973) 898 9494 or (732) 842 3113 or email us at [email protected].
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
