In order to survive in today’s market, custom builders must monitor and control their job costs. In this month’s column, I will examine ways to control material and labor costs.
The best method for controlling material and trade contractor costs is committing them up front and using a purchase order system for cost control. Committed costs can take the form of a written purchase order or a subcontract agreement, which includes payment terms, responsibility of the subcontractor, scope of work, and other legal terminology to protect your rights.
Issue Purchase Orders for All Material Items. The P.O. should be a three-part form, with one part faxed or sent to the supplier, one part going to the job file, and one part sent to your accounting department. The accounting copy should be held in a file until the receiving ticket and invoice arrive.
Control over material variances can be strengthened by having the superintendent verify the quality and quantity of all materials ordered. For trade contractors with unit price contracts, it’s extremely important for the superintendent to verify the units put in place by field measurements.
Another way to control costs is to secure discounts and rebates from your suppliers. Many offer prompt-payment discounts and quantity purchase rebates or provide money to builders for co-op advertising. Challenge your vendors to ensure you’re getting the best price and investigate any rebate programs they have available. One custom builder I work with gets a report from his accounting system at the end of the year listing the amount of purchases by supplier for the past year. Every January he meets with his key material suppliers to renegotiate pricing and rebate terms.
Labor Costs. Many custom builders believe they have better control over quality and timeliness of work by using their own in-house labor crew to perform functions such as framing and finish carpentry. In my work with builders who use their own crew, I find that labor often goes over budget, for a number of reasons. The first scenario usually involves an owner who used to work in the field and comes up with a labor budget that measures production the way he used to do it. Often, the productivity of the in-house labor crew isn’t as efficient as was the owner’s when he swung a hammer.
Getting accurate reporting of time in the proper job cost category can also be a problem. This usually occurs because the carpenter or laborer only fills out his timecard at the end of the pay period. How accurate do you think reporting can be when your crew has to remember the time spent on work done a week ago? In order to avoid this problem, establish procedures requiring time to be reported (or at least entered on the timecard) daily. Electronic timekeeping software is available to assist in this area.
Another problem area I find occurs when a company doesn’t estimate in the same way that its accounting system is posting labor costs to the job. Many custom builders will use a billing rate to develop a labor estimate but only post actual gross payroll to the job cost, while others estimate using a rate that includes items of labor burden, which are not being posted to the job. A custom builder I recently started working with was excited to show me that most of the time, his labor was coming in under budget. After reviewing the activity on a given job, I noticed that he estimated 200 hours for framing at $50 an hour, for a total budget of $10,000. The framing on the job actually took 400 hours, but the company’s accounting system only posted the framers’ actual wages of $20 per hour, with actual labor costs of $8,000. Looking at the job cost report, it appears this builder is doing better than planned in his labor, but is he?
Custom builders who have been successful in controlling direct labor costs are not afraid to share the number of hours estimated for a given area of the job with their crew or foreman. These builders also keep their crew up-to-date on how they are doing compared with budget, and at times offer incentives when a job comes in under budget with no sacrifice of quality. Custom builders in control of their labor costs receive timely, accurate job cost reporting of labor hours and dollars, enabling them to identify and correct labor overruns before it’s too late.
In order to survive in today’s market, it’s critically important to control your job costs. In my next article, I will examine how custom builders can control their operating expenses in order to thrive during uncertain economic times.—Steve Maltzman, CPA, is president of SMA Consulting in Redlands, Calif. He can be reached at smaltzman@smaconsulting.net.
