In today’s fast-paced world, success is often attributed to a combination of intelligence and hard work. Electricians stand out as a prime example of this ideal blend. With a combination of sharp decision-making skills and labor-intensive resilience, electrical contractors themselves serve as a driving force behind the rapid growth of the electrical industry.
As the construction industry is expected to expand by a whopping 85% by 2030, it’s evident that ambitious electricians are seizing the opportunity and looking to find their place in this growing market. But what’s the reason behind this exceptional growth? What separates successful electrical contractors from the others? What can you do to not only survive in this environment but thrive?
The answer lies in consistent job costing. To reach your electric company’s full potential, you must have a complete understanding of your business. From your bidding process to scheduling, to crew productivity, and everything in between, it all affects your bottom line.
Understanding what you do well and what you don’t do well is vital for making decisions that drive long-term growth.
In this guide, we’ll teach electrical contractors everything they need to know to build an effective construction job costing process. Build your business the right way with these job-costing tips for electrical contractors.
Electrical trade at a glance
The main services performed by electrical contractors are installation, repair, maintenance, assembly, identification, and design of electrical equipment networks. Most electrical businesses are independently operated, but some larger organizations do offer contracting services.
Like many trades, the electrical industry is in the midst of a significant transformation due to shifting technological advancements. Rapidly advancing 5G technologies, the increasing need for data center capabilities, and a cultural shift toward new energy sources, such as EV infrastructure, are poised to reshape the industry. Contractors who adapt their business to their strengths will position themselves above the rest.
Electrical services industry at a glance (as of 2022)
- The U.S. electrical contractors market is expected to grow 4% from 2022 to 2028
- The median annual wage for an electrician is $60,240 ($29/hr)
- Electrical services made up 66% of the electrical market share in 2022
What is job costing?
Job costing in construction is a job-level accounting method for meticulously tracking all major expenses associated with a specific job. These expenses include labor, materials, equipment, subcontractor fees, and miscellaneous costs. In practice, you’ll carefully designate costs for each category and closely monitor the actual spending throughout the job.
Once the job is complete, this data allows for a breakdown of exactly how much you spent in each category. You can use this breakdown for a direct comparison between actual costs and revenue collected. This comparison offers valuable insights into where you earned your money, how it was earned, where shortfalls occurred, and the underlying reasons behind any impact on profitability.
Why should electrical contractors care about job costing?
It solves common business problems
Frankly, job costing will answer nearly every question you might have regarding job performance. Did you miss on your labor estimate? Did material prices dig into your profits? Did your crew take too long during the rough-in, causing labor costs to overrun? Are you pricing your jobs correctly, or are you underselling yourself, which is eating into your profit margins?
If you job cost every job and run through the numbers with a fine-toothed comb, you’ll not only understand each of those scenarios, but you’ll most likely find a solution that you can use to quickly address those issues along the way.
Job costing will answer nearly every question you have leading into a new job:
- Do I make money on these jobs?
- Have I been estimating the correct price?
- Are there scheduling improvements I can make?
- Can I improve the efficiency of my crew on this job?
You’re just as much of a business person as you are a contractor
What sets apart the contractors who consistently rake in lucrative jobs from those who struggle job-to-job? The answer, although not exciting, is no less important–the differentiator is business savvy and effective accounting techniques. In other words, it’s consistent job costing.
You’re a master of the job site execution side of things. It’s most likely why you got into the specialty trades in the first place. Working with your hands and solving problems on the fly means no two days are ever the same. But this means it’s all too easy to let the business side of your trade fall to the wayside. Those who put just as much attention on the business side as they do the actual work will far outpace contractors who neglect the former.
But don’t be mistaken; job costing is not a quick fix or a shortcut to wealth. On the contrary, it requires discipline and forces you to confront the hard truths about your business. Exposing both your weaknesses and shining a light on areas prime for improvement.
This might seem scary, but revealing the “why” behind all the challenges and uncertainties you may face as a company is the first step in solving them. For this reason, it’s the ultimate resource for handling the business side of your trade.
Feelings-based vs. Data-based
Imagine you have jobs booked out for the next 12 months, working 10+ hour days, all the while you’re lining your pockets with hard-earned cash. It seems like you’re on the fast track to success, right?
But here’s the question: What does your data say? Can you prove that you’re making a profit, or do you just feel that things are going well? Don’t let those feelings fool you. It’s easy to get caught up in the excitement of a booming business, but data is the only real measurement of success regarding the sustainability of your company.
This is especially important to remember if you’re expanding your business or taking on new employees. In these situations, job costing becomes crucial. It’s the key for making calculated risks as a business owner. Growing your team, buying new equipment, and taking on bigger jobs are examples of some of the risks you’ll encounter as a business owner. Job costing will eliminate a portion of the risk in these decisions so that you can confidently take your business where you want it to go.
When making crucial business decisions, it’s all too easy to rely on our instincts and emotions. But job costing eliminates the risk from this approach and replaces it with data-driven decision-making. This reveals valuable insights that help make each job more profitable than the last. In the following section, we’ll explore the best way to measure job performance and how it can revolutionize your business.
Reliably measure job success
Job costing measures the performance of each individual job. But how can you actually measure your performance? Or better yet, what key metric can you use to gauge whether or not you’re striding toward your financial goals? That metric is gross profit. gross profit reflects the amount of revenue left over after direct costs (job costs) have been taken out.
For example, you can calculate this by taking the total revenue and subtracting the costs of labor and materials, expressed as percentages. This leaves behind a percentage of profit that you can use to fuel your business growth.
Why is this number important? Because it determines the money that you are free to use elsewhere in your business. Just because you have money coming in doesn’t mean it’s all fair game to spend as you please. A core principle of running a contracting business is understanding that just because you have cash coming in doesn’t mean you’re free to use that cash however you want. It’s advised that you use cash more strategically to ensure you have the resources you need to keep jobs moving forward and on schedule.
In essence, Gross Profit is the money you’re free to invest back into your business–which is vital to know so you don’t overextend yourself or stifle any growth opportunities.
For this reason, your primary focus as a business owner should be on improving your job-level gross profit numbers. Of course, this leftover profit is still subject to fixed expenses such as overhead costs, owners’ salaries, and employee wages–that’s net profit. Moreover, owner’s pay (or what you pay yourself) must be subtracted from revenue to have an accurate and fair representation of Net Profit.
If you include owner’s pay in net profit, it’ll significantly skew your profitability numbers. Of course, all of this depends on the size and nature of your business and the complexity of the jobs you take.
Electrical contracting benchmarks
Electrical contractors should aim for the following:
- Gross profit margin: 50%+ on every job
- Net profit margin: 17-20%
It’s important to understand that every business is unique, and these benchmarks may not be realistic for your business. It’s acceptable to set goals that are different than these if they fit the needs and circumstances of your business. However, what’s important is that you’re setting financial goals in the first place and sticking to them. These goals are paramount for keeping your business on track and ensuring you appropriately compensate yourself as a business owner.
How to get started with job costing
To calculate job costing, you must understand how each main cost category comes into play. You’ll need to track, evaluate, and report these cost categories to gain the valuable data that job costing can give you.
Each job will have its own circumstances impacting how you allocate each cost, but generally, labor costs will account for the majority of overall job costs. It’s also important to note that job costing does not take into account overhead.
Understand the major cost categories
Labor will likely be your biggest expense (as a percentage of revenue) for every job–usually accounting for at least 50% of total project costs. Since labor accounts for such a large portion of job costs, your biggest opportunity to improve profitability is found in labor efficiency.
Labor will include the cost of your physical efforts (if you’re an owner/operator) or the work performed by any employees you assign to a job. On that note, whether you have a crew or not, you should track your own labor on every job. If you’re the sole electrician in your business, tracking your labor is essential since you effectively account for all labor costs.
But if you do employ apprentices or journeymen and you step in to help with a part or all of a job, you still need to account for your labor. Your employees don’t work for free, and neither should you. Any labor spent on a job means time, money, and resources are spent to complete the job. Don’t miss out on capturing these costs.
If you’re not sure what your wage should be as a company owner, there are a few steps you can take to help you figure this out. Start with your financial goals, your desired salary, and any business needs specific to your business. Second, contact your accountant and have them help you work through an appropriate rate that will accurately factor in the above considerations.
To calculate labor costs, you’ll need to answer the following questions:
- Who did the job?
- What is their wage?
- How many hours did they take to complete the job?
However, there’s still a huge missing piece of the puzzle. When you employ and schedule someone on a job, the cost they incur on your business is far beyond their hourly wage. Their total cost on your business also includes taxes, insurance, bonuses, or paid time off.
These additional costs are known as labor burden. We can’t stress enough how important labor burden is. Frankly, missing labor burden will put you out of business. Calculate the labor burden for every employee and factor it into all of your estimates, bids, and budgets.
Labor burden includes:
- Payroll taxes
- Social security
- Health insurance
- Workers comp/liability insurance
- Retirement contribution
You must also account for seemingly small everyday costs such as:
- Company cell phones (or other communication expenses)
- Insurance for any equipment used by an employee
- Training and employee development
- Company apparel
To calculate labor burden, gather payroll reports and look for hourly wages, taxes, unemployment insurance, and fees from your payroll providers. Also, be sure to track down workers’ comp and health insurance documents to get the specifics of those costs.
Use the following formula to calculate a labor burden percentage for each employee:
Labor burden = (burdened labor costs + additional costs) / wage * 100%
In addition, convert annual numbers into hourly rates by dividing by 2080 (working hours in a year). For a more accurate approach, take a look at our full breakdown of labor burden to learn everything you need to know about labor burden in construction.
The specific amount of materials needed for a job can differ greatly depending on the complexity and intricacies involved. Material expenses may only add up to a few hundred dollars for simpler tasks. But for more complex and in-depth jobs, the price of materials can be much higher.
One of the reasons why material costs are tricky to predict is that they vary from job to job. Factors such as job size, market rates, and material quality all play a role in determining these costs. Moreover, it’s not viable to average out material costs across multiple jobs. You’ll need to allocate and track materials costs on each job individually.
Start with a material takeoff
When creating an estimate for a job, you’ll likely perform a material takeoff. This list should include all electrical components, electrical wiring, switches, outlets, circuits, breakers, conduits, and anything else needed for the entire project. This list of materials and prices will serve as a great framework for job costing material costs.
Perform your takeoff by counting all the symbols on the drawings, such as receptacles, switches, and fixtures, and measuring the wiring runs. From there, this information can be extrapolated into a list of material quantities with corresponding prices and labor units. This list should encompass all necessary electrical components, wiring, switches, outlets, circuits, breakers, conduits, and any other items needed for the project.
In essence, you now have a complete breakdown of every material needed and its cost. This means you have a firm material budget against which you can track actual spending. As the job progresses, you’ll be able to see exactly where material spending is exceeding expectations. This evaluation of material spending is a crucial aspect of effective job costing (more on this later).
If a job calls for specialized tools or equipment, you’ll want to ensure the costs of renting, owning, or operating this equipment are captured in your official construction job cost report for the project.
Ownership costs include depreciation, insurance, and licenses, while operational costs include fuel and repair expenses. In addition, leasing costs cover any leased equipment used.
Some projects may call for work that falls outside of your wheelhouse. In this case, you’ll need to sub out the work to the appropriate trade. By bringing in subcontractors, you can save money and focus on your main strengths. This will help you avoid taking on tasks beyond your capabilities.
However, it’s important to carefully evaluate if their services are necessary to meet the project deadline. If so, carefully review bids and include these costs in your budget planning.
These costs can’t be ignored and can’t be spread across or added on top of other cost categories. You should separate these costs from the other cost categories.
These additional costs are any expenses that fall outside of labor, materials, equipment, and subcontractor fees. Although they may not have as much financial impact as direct costs (i.e., labor and materials), they’re equally crucial to factor into your job costing breakdown. If left unchecked, these costs can quickly accumulate and jeopardize the profitability of a job.
- Financing fees (loans/interest)
- Contingency funds
Start with budget
At a bare minimum, you’ll need to capture basic costs at the job level so you can see what you spent on each job. But if you don’t start each job with a budget, you won’t have enough information to effectively evaluate job performance. You’ll know the numbers coming in but won’t know where they fall relative to your estimate/bid.
Ideally, you’ll start every project with a detailed budget that you can use to track each category to see how actual costs compare to your estimate. To do this, you’ll need to create a line item-by-line item budget for labor, materials, equipment, subcontractor costs (if applicable), and any additional costs that fall outside those categories.
With these major cost categories in mind, break the job down into phases or stages. It’ll look something like this:
Notice that you don’t provide a general lump sum for each phase. It’s best to treat each phase as a mini-project budget with a specific cost number given for each major category. For instance, rather than estimating a blanket $22,625 for the first phase (tear down and disposal), determine the individual costs for labor, materials, equipment, subcontractor fees, and miscellaneous expenses that will go into that phase.
In addition, it’s always a good idea to work a contingency fund into your business. Add a little extra to your estimated quantities to allow for any waste or unexpected events. This should amount to about 10-15% extra. Moreover, be sure to include additional expenses such as taxes and delivery fees.
Problem-solving using job costing data (how to evaluate the data)
Am I actually making money on jobs?
Are your profits falling short of your expectations? Don’t be too quick to blame material costs. Before pointing fingers at your suppliers, take a closer look at your own inefficiency and flawed labor costing. Labor is likely to be the root cause of your profitability struggles.
Let’s say you are a single owner/operator, and after a full year, you bring in $100,000 in take-home pay. On the surface, this may seem like an impressive feat. But, when the numbers are broken down, you worked a staggering 100 hours per week to achieve this. In reality, you only made $20 per hour ($100,000 / 5000 hours = $20/hr), which falls far below the industry average of $29 per hour.
While the take-home pay here is great, it’s unsustainable and indicative of severe issues regarding the jobs you’re going after, underpricing, or a combo of both. Moreover, you might find that you weren’t considering your take-home pay when looking at net profit numbers. This means all of your profitability numbers are skewed and look much larger than they actually are.
If you have a crew, you must evaluate their labor performance religiously and measure its impact on gross profit for each job. Let’s assume your last five jobs reflect a gross profit margin that is below your goal of 40%. Sifting through the job costing data, you find that labor resulted in a cost overrun in every one of those five jobs. Now you have to understand why.
Did your crew take longer than expected to complete one or all job phases? Did you need to pull in another employee to help an apprentice on a task? Did you schedule too many people for a phase, resulting in too much idle time?
Find the why behind the cost overrun, and you’ll know how to reel in your labor costs. If labor costs are consistently higher than expected, then you and your crew must find ways to execute jobs more efficiently, with less waste, and with a standardized process.
After doing everything you can to improve your own labor efficiency, it’s time to look at material costs. This starts with negotiating with your suppliers. Seek out a select group of reliable vendors and see if you can secure more favorable terms to meet your business needs. Keep in touch with trusted suppliers and always check prices against an industry standard. In addition, don’t be afraid to ask your fellow electricians what they deem to be fair prices for certain materials.
Next, review your estimating process. If you consistently miss the mark in material spending on a certain type of job, it may be time for a revamp. This likely means you’re not allocating sufficient costs to materials for this job.
Finally, the typical knee-jerk reaction to declining profits is to raise prices. However, accurate job costing can reveal whether your issues stem from inadequate prices or internal shortcomings. A key advantage of job costing is its ability to force introspection. By recognizing areas of overspending and taking corrective action, you can pave the way for a more efficient workforce and a higher-quality product.
Of course, this doesn’t mean you should never increase prices. If you have a solid justification, by all means, go for it. But remember, relying on price hikes as a blanket solution is a short-sighted approach. It may temporarily boost revenue, but if your gross profit numbers remain consistently low, you’ll find yourself back at square one.
Am I estimating correctly?
The age-old question of what to charge for a particular service can cause great stress and uncertainty. However, job costing can once again help here. First, you must turn our attention to the backlog of work. The sweet spot for pricing lies in being booked out 1-3 months in advance. If you find yourself struggling to secure jobs, it may be time for a price evaluation.
On the other hand, being booked out a year plus in advance could indicate that you’re actually undervaluing your services. It’s a simple matter of supply and demand: when a cheap service is readily available, consumers will flock to it. Frankly, if you crunch the numbers and discover that your team is completing projects under budget and on time, yet you still miss your gross profit goals, it’s clear that a price increase is in order. In the end, always trust your numbers.
Scheduling can be greatly improved through job costing. This starts with setting clear and specific goals at the beginning of each project. To do this, provide yourself and your crew with clearly defined timelines and objectives. The idea here is to set specific goals at the start of a job so that your crew has a clear sense of direction that helps keep everyone on track and moving forward.
This concept can be applied on a larger scale when planning out various jobs and determining the most effective way to delegate tasks among workers. When estimating the time required for a job, factors such as site preparation, travel time, breaks, and clean-up should all be taken into account. Any and all time spent on the job site for the benefit of the project should be allocated to the job.
While there may be some personal preferences involved, such as whether or not to cover lunch expenses for employees, the general rule of thumb is to allocate any time spent on the job site towards the specific project. This ensures that each job is accurately accounted for and helps to streamline the scheduling process.
Generally, there are three steps to use job costing data to evaluate scheduling:
- Evaluate your team’s productivity and work output. If your team consistently hits output goals and completes projects on time and under budget, you may need to raise prices or cut costs elsewhere. However, this scenario largely depends on your team’s ability to consistently perform at a high rate of productivity.
- Evaluate time cards and assess efficiency from past jobs. If you break down your job into phases, you’ll be able to evaluate the efficiency of each task of the job. This can help you assess scheduling, crew training needs, or general lack of productivity.
- Evaluate overall team scheduling. For example, it could be that you scheduled too many people on one phase or not enough on another. Use this information to better allocate your crew. If a phase needs extra hands on deck, you’ll have the data to back up the need to schedule more workers.
Job costing with Knowify
Transform your construction business with Knowify, the ultimate solution for specialty contractors. Designed specifically for the specialty trades, our powerful construction accounting software empowers you to make data-driven decisions and take your business to new heights.
But that’s not all: we combine the organization of accounting with business improvement capabilities through our comprehensive job costing software that provides accurate job cost reports for every project. It’s time to move on from manual calculations and elevate to streamlined and accurate job costing with Knowify.
To see how our tools can integrate with your business, schedule a free 30-minute demo to talk to a Knowify expert today.