“How did we wind up making so much less on that job than we expected?” If you’ve ever asked that question, it could be because you lack the right insights
The construction industry is both massive — accounting for $8.9 trillion in spending in 2023 and projected to reach $14.4 by 2030 — and fragmented. There are at least 10.2 million construction workers in the United States, many of them part of small firms that do specialized or regional work.
One commonality? They all need to accurately price jobs to ensure the desired profit margin. And they can’t delay, because demand for construction services is poised to skyrocket: 13,000 buildings per day are needed globally to accommodate expected population growth through 2050, according to the G20 Global Infrastructure Outlook.
When profitability is elusive for builders and general contractors, one remedy is job costing. The ability to stay on top of the costs of materials, labor, and overhead for each build is the backbone of construction project management, and doing it right is key to realizing expected margins.
Job Costing and Profitability
Job costing is a key part of financial management for construction firms of all sizes. Managers, at any time during a project, should be able to access details on the budget, change orders that need to be applied, and how much vendors are being paid. This integration of budget, change order commitment, and actual costs provides a snapshot of the project’s likely profitability.
3 Pillars of Job Costing
1. Budget: At the outset of a job, the project manager (PM) sets a budget to execute the work.
2. Commitment: The value of contracts with a vendor to provide materials or services. As the project commences, changes in scope require change orders. These impact the budget. The PM should always know how much is left that can be spent, called the “remaining.”
3. Actual cost: The actual cost to complete a set unit of work, including materials, labor, and overhead.
Key to job costing is the ability to keep an eye in real time on how profitability is affected by changes, like a jump in the cost of materials, more overtime required because of worker shortages, or a customer asking for a few additional windows. But such data is extremely difficult to compile manually. A pile of paper bills from suppliers and subcontractors plus a few spreadsheets don’t add up to insightful financial management, no matter how experienced your PMs may be.
The answer is technology that maximizes operational efficiencies. A financial management system tailored to the construction industry, such as the combination of NetSuite ERP, lets companies easily track the financial KPIs of a project, groups of projects, or an entire portfolio.
Construction in particular is an industry that stands to gain a great deal from implementing modern, cloud-based technology. Your people aren’t in an office, so you need to have data available on job and vendor sites, 24/7.
The productivity levels of construction firms could increase 50% to 60% if the right digital technology, ERP systems, automation, improved procurement, and similar technology improvements are brought to bear, according to analysis from McKinsey & Co. But construction firms typically spend only 2% of their budgets on IT, with analysts seeing trouble ahead as experienced managers retire, leaving a mish-mash of disconnected spreadsheets, whiteboards, and paper-based processes.
Firms need to get ahead of the curve by introducing efficiencies and productivity through technology that provides real-time insights, predictability, and productivity gains.
How NetSuite ERP and Appficiency MJC Manage Job Costing
With a growing demand for more, and more complex, construction, project management requirements are also growing. It’s easy to see how handling job costing manually using Excel spreadsheets has become unsustainable. It’s time consuming, inefficient, and error-prone.
A better bet is a cloud-based ERP technology system like NetSuite ERP with Appficiency’s construction solution, which brings together the NetSuite platform and industry-specific applications like job costing, change order management, retainage, and progress billing. The combined solution enables firms to track profitability by period, across projects, and roll up projects by customer, region, and type. By giving your PMs powerful tools and access to financials, reporting, progress billing, inventory and materials management, reporting and compliance, and payroll and field data, they can keep jobs on track, customers happy, and profits robust.
“Although it may be surprising, the construction industry has no solid, SaaS option for enterprise-grade software,” said John Than, founder and CEO of Appficiency. “The Oracle/Appficiency combination provides one of the most diverse, customizable, and complete capabilities, even only a few years into our development curve. It can track significantly more cost profiles and details than most solutions that have been the prior market stalwarts, and with our promise to improve it every year on the best ERP platform available, it is the winning pick.”
3 Job Costing Best Practices
1. Have a consistent process that is applied across all projects so you can understand profit or loss for each job. Then, you can compare apples to apples.
2. Use standardized codes and categories to estimate and track actual costs and compare them with estimates. By analyzing and improving the accuracy of estimates, you can better price future jobs and know exactly the profit or loss made on each project.
3. Do a “hot wash” and use results to uncover inefficiencies, waste, and overages. Did your employees make multiple orders that could have been combined to save on delivery costs? Did you pay overtime unnecessarily? Continuous improvements are key, but you need to have data and set aside time to analyze it.
Why NetSuite AND the Appficiency Construction Solution?
The construction industry calls for job costing metrics that go well beyond labor to include materials, equipment, subcontractors, overhead, and more, aggregated and tracked against each project.
A construction business needs to be able to drill down by project, cost codes, and cost types and run granular reports on all variables.
It’s nearly impossible to pull the data needed to capture, configure, and see the full job costing picture from a profitability perspective when that data is spread around numerous spreadsheets or databases. NetSuite ERP provides real-time, centralized insights into the business.
The Appficiency Material Job Costing solution fills gaps for construction firms. An example is costs beyond labor that allow for drilling into cost codes, for a true, accurate, and real-time project profitability snapshot. This includes the ability to create custom or contingency cost types as a category.
Think of it as the construction version of NetSuite. Every transaction lives in NetSuite for one operational view, with Appficiency creating the construction “wrapper” that incorporates various construction cost types.
After pulling relevant data and dissecting the various job costing elements, reports are easy to compile and can be done on multiple levels. For example, the ability to pull project-level, portfolio-level, and rollups based on development phases are particularly useful. Any situation where a child project needs to be rolled up to a parent project, the NetSuite/Appficiency solution allows for that.
3 Job Costing Technology Benefits
1. Coverage: ERP systems empower multiple aspects of a business, from accounting to inventory management to project management and payroll.
2. Centralization: Overall project progress and areas that need attention are visible in one unified data repository.
3. Clarity: An integrated platform facilitates reports from across the different modules within NetSuite, so your people are always in-the-know.
Any construction company that can gauge actual costs against revenue at any time and in real time has the power to make agile, smart decisions that keep projects and portfolios profitable. No more operating in the dark and hoping “things work out.”
4 Keys to Success
Cost control: A construction business will be able to control costs as never before. Budget in hand, a project manager will know sooner rather than later if there are going to be overruns. From a planning perspective, PMs can be proactive instead of reactive because they’ll have the full data set to know if there’s a danger of running over budget or under/over billing. The key to increased profitability is the ability to act early, before projects run out of budget or time.
Perpetual improvement: Armed with a history of job costing over past projects, a construction firm can continually improve how future projects are estimated and executed. Were past estimates close to the final result? If not, why not?
The construction industry has typically struggled with applying past learnings to future estimates because they lacked a coherent picture of job costing. They also lacked the time to do a deep analysis because they’re moving on to the next bid.
Competitive advantage: Technology that generates increased productivity gives a construction firm a distinct competitive advantage. This is about the flexibility that comes from having access to real-time data competing firms simply don’t have. Understanding the company’s financial position allows it to be smart when pursuing the next project or round of capital.
Standardization: A single system and source of data like NetSuite/Appficiency also brings standardization to the business — applied baselines against which all metrics are measured. A robust system will standardize codes, job classes, and processes, which helps eliminate time-wasting confusion. Universally applied standardization usually begins with a standard, such as Construction Specifications Institute (CSI) quotes or a form of master quote that won’t change from job to job. Then, variables get filled in using auto-applied, consistent coding. And again, this standardization can be applied to projects, groups of projects, and the entire portfolio.
Project Profitability, Maximized
Every construction business, be it an industrial and construction company, a project-based manufacturer, or even a consulting and services firm, can take advantage of recent leaps in technology — specifically, the availability of fully integrated and powerful ERP systems customized for use by the construction industry.
At its core, the NetSuite and Appficiency construction solution is not about making construction leaders spend more time with technology. Job costing reporting isn’t new. What is new is how accurate data can be and how fast it can be tapped for reporting.
If a firm is on QuickBooks for accounting, and another system for procurement, and another system for project management, everything is tracked separately and differently. Since costs are incurred through multiple departments, there’s no way for PMs to get visibility into factors that threaten profit margin in time to act. With one system, they can. And that means company leaders can spend less time putting out fires and more growing running the business, maximizing every project, and making better and faster decisions.
All of which leads to newfound levels of profitability.