Secrets Of Successful Job Costing And Creating Measurable ...show-presentations.s3.amazonaws.com/tcia... · Webinar provided by Tree Care Industry Association Measurable Goals •

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Tree Care Industry AssociationCopyright Guy Gruenberg filthyrichcontractor.com

Secrets Of Successful Job Costing

and Creating Measurable Goals

by Guy Gruenberg

Grow Consulting

[email protected]

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Tree Care Industry Associationfilthyrichcontractor.com

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What Is Important For You To

Learn From This Work Shop?

List Items on Flip Chart

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The Goal is to

Increase Your Profits• Some common ways:

–Increase Sales

–Raise Margins

–Cut Costs

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The Goal is to

Increase Your Profits• Some less common ways:

–Eliminate loosing jobs

–Become more accurate with

estimates

– Increase production efficiencies


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Goal Two

• Save time in the job costing process!

• How much Time does it take you to

estimate a project?


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Three Basic Questions

• How much profit do you need annually to sustain your business?

• How much profit would you like to make to grow your business and increase your personal wealth?

• Do you have a business budget?


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Secret One•You need to develop a

budget!

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Creating a budget

will help you:• Understand and allocate overhead

• Plan your profitability

– Understand Gross Profit

– Realize Net Profit

• Types of overhead

– Fixed costs

– Variable costs


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What is a Budget?• All Expenditures and Income

• The budget of a company is compiled

annually.

• A finished budget usually requires

considerable effort and can be seen as a

financial plan for the new financial year.


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Budget Basics• Some examples of Fixed

overhead

–Mortgage or Rent

–Insurance Premiums

–Annual Salaries


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Budget Basics• Some Examples of Variable

Expenses

–Utilities

– Information Technology

–Fuel

– Interest Expenses

–Commissions filthyrichcontractor.com

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Budget Things To Consider

In A Difficult Market

• Marketing and Promotion

– Should you cut back on these expenses?

• Fuel Costs

– How can you minimize your impact?

• How to lessen overtime?

– Reduce garage and repair time

• Materials

– Purchase materials in advance (gas in tanks)


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Spread Sheets• Windows

– Excel

– Open Office

• Mac

– Numbers

• If you have interest in learning more about Job Costing and

available Spreadsheet tools contact Guy Gruenberg at Grow

Consulting


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Monitor Your Budget

• How often should you review your budget

position?

• If this is your first budget how do you

interpret the meaning of the numbers.

• Compare Budget data year to year by

monthly results.


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You Don’t Have a Budget!

• Where would you start?

– Talk to your Accountant

– Business Software (Spread Sheets)

– Industry Consultant

– Local College

– Business Mentor

– Trusted Banker

– Network Groupfilthyrichcontractor.com

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Secret Two• True costing is an essential part of

determining how much money you

will make on each job.

• Gross profit starts at the job

level.


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Using True Costing To Help

Predict Financial Success!

• Understand what types of jobs are

most profitable for your company.

• Spend more effort acquiring these

jobs!


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T.C. vs. A.B.C.True Costing is different from Activity

Based Costing.

True costing measures the actual

components that go into the project.

Activity based costing takes this further

using the true costs and other factors to

cost the activity.


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Secret Three• Every Project Should Be Profitable!

• If your answer is yes, then:

– How many of you know how much profit you

make on each individual job?

– What would your business look like if you

eliminated jobs that are not profitable?


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What True Costing Isn’t!

True costing isn’t selling as many

jobs as possible and counting

how much money is left over at

the end of the year when all the

bills are paid.


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What True Costing Is!

• True costing is a simple method of

understanding costs for each

individual project by determining how

much time and material is required

and allocating an amount for the

equipment that will be used.


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The Three Main Components

of True Costing

• Cost of labor

• Cost to Materials

• Charge for Equipment Allocation


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Guy’s Definition of Profit

• True Cost + Overhead = Break Even

• Break Even + Profit Margin (mark-up) =

Selling Price


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There is so much information

my head is spinning!

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Break Even at The Job Level

Direct Costs

+Subcontracted Costs

+Commissions

+ Overhead

= Break Even

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Calculating Labor Costs

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Direct Labor Costs

• Calculate with burden

• Overtime costs

–Distribute evenly?

• Bonuses and Incentives


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Overtime Averaging

• Use historical data

Dave earns $15.00 per hour

He works an average 60 hours a week

Regular Time $15.00 x’s 40 hrs = $600.00

Over Time $22.50 x’s 20 hrs = $450.00

Divide $1050.00 earnings by 60 hours which

equals $17.50 per hour.


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Secret Four• In My Opinion The Hardest Part of

True Costing is understanding the

amount of time it will take to

complete any project.


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Time Exercise


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A Little

Time

Test


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Time

Test

Answers


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Calculating Your

Material Costs

• Obtain Theoretical Application

Rates

• Include Applicable Taxes


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Calculating Your

Equipment Allocation

• There are several options you can

choose when calculating equipment

costs.• Return on Investment

• Replacement Cost

• Standard Accounting Procedures


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Calculating Your

Equipment Allocation• These cost do not take into

account:

• Cost of borrowing money

(amortization)

• Maintenance

• Fuel


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Big


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Bigger


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Biggest


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How much detail do you need?

• This depends on several considerations:

– What office resources are available

• Personnel

• Computer Software

– Your profit margins

– Competitiveness of your market

– The number of quotes and jobs produced per year.


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Secret Five

Use data to help you close

more projects!


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Measurable Goals

• Will make you smarter!

• Measurable goals will help determine

team capabilities.

• Create history on an individual job basis

to help improve efficiencies

• Motivate Team Members

• Assist in Analyzing for investment and

expansionfilthyrichcontractor.com

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How Do You Create

Measurable Goals?

• Decide what is important to measure

• How will this information measure

– Productivity

– Material usage

• Collect consistent data


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What Measurable Goals Are

Important to You?–Trees per man hour?

–Mulch per man hour?

–Square feet per gallon?

–Square feet by application

–Square feet by conditions


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Estimate vs. Actual

Comparisons

Tracking and comparing the actual:

–Labor Costs

–Material Costs

–Equipment


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Closing Rates

• What percentage of your quotes do

you close?

• Are you “bidding” or “selling”

projects

• How predictable are you to the

competition?filthyrichcontractor.com

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Things to consider when

calculating Markup!

• How much of your markup is “Overhead”?

• Carefully consider adjusting M/U based on

competitive conditions

• Manage M/U to job size

• Base on annual M/U goal ties to budget

• Adjust M/U based on work backlog


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Tree Care Industry AssociationCopyright Guy Gruenberg filthyrichcontractor.com

Pricing Jobs correctly To Win

Is A Methodical Process

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Things to consider when adding your

markup to your true costs:

• How much of your markup is “Overhead”?

• Carefully consider adjusting M/U based on

competitive conditions

• Manage M/U to job size

• Based on yearly M/U goal

• Adjust M/U based on backlog


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Using Data to WIN!

• Use Win/Lost Data

To Increase Sales.

• How do you know if you are pricing

projects correctly?

• Do you have a sweet spot related

to a service or price range?


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Measurable Goals

• Will make you smarter!

• Measurable goals will help determine

team capabilities.

• Create history on an individual job basis

to help improve efficiencies

• Motivate Team Members

• Assist in Analyzing for investment and

expansionfilthyrichcontractor.com

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TIME

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Markup Calculator


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Measurable Production Goals

• Measurable production goals can be

honed after accumulating information

• Field team members usually embrace

production goals


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Scheduling

• Routing

• Partial Day Jobs

• Right Sizing Equipments


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What has been your Biggest Changes In

Costing You Faced in the last 18 Months

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Balanced Scorecard


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Let’s look at a costing equipment

• How long should I plan on using

equipment for costing purposes?


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Job Costing With Your

Accounting Software• Materials

– Create item lists

• Labor

• Equipment


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QuickBooks

• Groups verses Assemblies

• Groups do not manage inventory


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Is All The Work That Goes Into

Creating Measurable Goals Worth It?


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Costing Spoils

• Do you calculate the value of materials

you remove from the field and resell?


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Job Complexity &

Degree of Difficulty


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Numbers

• Do we have a budget number or

competitive information?


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Gross Margin vs. Mark Up


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Gross Margin vs. Markup

• The miscommunication involves two very

common terms:

• Gross Margin & Markup.

• First, allow me to define them. Then, I will

explain why everyone in your company needs to

master their use and meaning. Formula time -

YEA!

• GM = GP / P

• MU = P / DC


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• Let's translate the formulas into English

• Gross Margin (GM) equals Gross Profit

(GP) divided by Job Price (P)

• $1,000/$5,000 = .20 or 20%


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• Gross Margin is the portion of the sale that

contributes to your overhead and profit. It is

calculated by subtracting the direct field costs

from the job price, divide that by the job price,

then multiply by 100 to turn it into a percentage.

$5,000 - $4,000 = $1,000

$1,000 / $5,000 = .20

.20 X 100 = 20% Gross Margin


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Gross Margin vs. Mark up

Markup (MU) equals Job Price (P) divided

by direct Field Cost (DC)

$5,000 / $4,000 = 1.52


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Markup is the multiplier you use against your direct field cost to arrive your job price. Markup is easy to calculate, unless your estimator has buried his costs.

Mark Up


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The Rub between

Estimator and Owner

The source lies in the different perspectives of the owner and the estimator.


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Estimators

Estimators are required to think linear and forwards: calculate cost, mark the cost up by some factor, and arrive at the price to offer the customer. This leads estimators to use a forwards-looking term.

In other words, markup!


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Owners

It is the foundation for future business decisions, especially those that involve staffing and investment.

When in this mode, they think in terms of the past, which leads them to a backwards looking term. In other words, Gross Margin.

Owners need to review and evaluate past performance. It's a very important part of their job!


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Who is Right?

The estimator is running around asking "How much do I need to mark this up?"

The owner is running around asking "How much money did I make?"


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Both or Neither?

• Most contractors assume the two terms

mean roughly the same thing and move in

nearly the same magnitude.

• They don't.

• They don't mean the same and they

certainly don't move the same.


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Gross Profit vs. Mark Up

• Fairly small movements in markup

lead to big movements in gross

margin.

• For example, going from a markup of

1.2 to 1.3 equates to your margin

going from 17% to 23%!


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That is the First Lesson

• That's the first lesson here: the two

do not move at the same rate.

• Wondering whether there is a formula

for translating the two?


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You can calculate the

gross margin from the markup by:

• GM = 100 x (MU - 1) / MU

• You can calculate the markup from the gross

margin by:

• MU = 1 / (1 - GM/100)


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Challenge

• Calculators are allowed. You don't actually

carry one on your belt do you?

• You want a 27% gross margin on the

upcoming job. What markup should you

use?

• Hmmm. Let's see.


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Calculation

• That's 1 divided by 1 minus .27. So, that's

1 over .73.

• Even I can't do that one in the head easily

and I'm really good with numbers.

• Your calculator will reveal that your

markup needs to be 1.37.

1 / -1 -.27 / 73 = 1.3698


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Gross Margin vs. Mark Up

• Do you see why estimators and

owners struggle with the transition

from gross margin to markup and

back?


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• That's lesson number two:

• The mathematical gymnastics are

beyond the normal person's ability to

do it in his head.

• Again, leading to great

misunderstanding.


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Owners

• Owners have a gross margin they've

built their budget around. They lock in

on that number and stay focused on it

year round. They know if they hit it,

their bank account will end up the

size they wanted.


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Owners

• Just glance at your income statement.

The gross margin is laid out for you

so nicely. You have a line item for

gross profit (or something along those

lines) and you have total sales. Divide

the gross profit into the total sales

and there you have it: gross margin

for the year.

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Software

• Most accounting packages offer a report

that shows income and expense line items

as a percentage of sales.

• It's a very useful way of looking at your

financial performance and figuring out

where your money is going.

• It can make for a nice rule of thumb for

future budgets


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Question?

• We frequently get asked "I gross 22% on

my jobs. How does that compare to other

contractors?"

• Gross margin is the natural language of

the owner - just like markup is the natural

language of the estimator.


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Tracking Mark Up Success

• Tracking and analyzing markup success is

one of the primary reasons an estimator

should ALMOST NEVER hide markups

inside his various cost components.

• An example will clarify.


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Overall Mark Up

• It is quite common for estimators to

markup materials prices by, say, 10%;

subcontractors by, say, 5%; and self

performed work by, say 35%. Next, the

estimator pulls them together into one

number and starts adjusting the final

number based on intuition and recent

history.


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Costing Information

• Then the owner walks up and asks how

much he is going to make on the job?

What's our cost?

• And the estimator replies, "Hold on. I'm

not sure. Let me back that out."

• No. No. No. No


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The Golden Rule of job selection:

• 1. Know what the job will cost you to

complete.

• 2. Know the price you can get.

• 3. Decide whether you want the project.


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Now The Difference

• (If you are keeping score, the example

used markups of 1.1, 1.05, and 1.35. They

were NOT gross margins of 10%, 5%, and

35%.

• MAKE SURE EVERYONG IN YOUR

OFFICE KNOWS THE DIFFERENCE.


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Pricing Jobs

• Estimators must become disciplined at

adding up all the costs first; then applying

a standard markup; then adjust in

accordance with the competition, backlog,

and quality of client.


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Property of Guy Gruenberg & Ron Roberts©


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Secrets Of Successful Job Costing And Creating Measurable ...show-presentations.s3.amazonaws.com/tcia... · Webinar provided by Tree Care Industry Association Measurable Goals •