Plumbers are, without question, the backbone of modern infrastructure — the average American uses 400 gallons of water per day. As a vital part of society, competition in the plumbing trade is fierce. Of the 115,000 plumbing companies in the U.S., no single company accounts for more than 1% of overall industry revenues.
How, then, can plumbing contractors differentiate themselves and carve out a larger share of industry revenues for themselves?
Whether a master plumber or an apprentice, plumbing contractors can rely on job costing as a primary tool for long-term growth. But why job costing? Can’t a plumber use any run-of-the-mill accounting or costing method, such as process costing, and be just as successful?
In this article, we’ll answer the question of job costing vs. process costing for plumbing contractors and look at why job costing should be the source of truth for all specialty trade contractors.
Job costing vs. Process costing
Job costing is a cost accounting system for tracking all associated costs for a particular job.
Associated costs will include labor, materials, equipment, sub fees, and additional costs incurred to complete the job.
For an in-depth guide on job costing, download our essential guide to construction job costing.
- Total job cost = materials costs + labor costs (including labor burden) + equipment costs + subcontractor fees + additional miscellaneous costs
In comparison, process costing is an accounting method that assigns and divides actual costs across units of production. In other words, you look at all the components it takes to make the product or perform the service, like materials, labor hours, and overhead costs, and add them up to get the total cost. Then you divide the total cost by the number of products made, so you know how much it costs to make each product.
Process costing systems are best used for manufacturing companies. In the construction industry, however, it’s best reserved for specialty trades that mass-produce identical products, such as carpenters that make the same type of furniture in large quantities.
- Process costing: cost per unit of output = total expenses / total number of units produced
That said, job costing is the preferred accounting method for virtually every specialty trade in the construction industry. The main reason is due to the variability of construction. No two jobs will ever be quite the same. Even if two jobs have an identical scope of work, there are bound to be differences in the form of unforeseen obstacles, fluctuating material prices, or labor efficiency.
For this reason, job costing allows contractors to plan for each individual job. Instead of averaging costs across multiple inputs, job costing will treat each job as its own entity. Allowing contractors to analyze the success of each job on a granular level. This helps to forecast growth carefully and reveals a path forward for what can be realistically achieved.
As a business owner, it quickly becomes apparent that time in the office is perhaps even more important than time in the field. Keeping your books balanced and costs in check is critical for sustaining your livelihood. Easier said than done; it all comes down to having a cash reserve that can be used to finance upcoming jobs, pay employees, and keep the lights on. Of course, there will be times of feast and famine. Eventually, jobs will be hard to come by, making cash flow even harder to manage. Contractors can avoid most of these pitfalls with a competent job costing system.
6 reasons plumbing contractors should be job costing
1. No two jobs are the same
Plumbing is a highly variable trade. No two jobs are ever the same. Even if they have identical scopes of work, each will bring unique obstacles and conditions that impact the cost and time to finish the job.
For this reason, contractors need an accounting system that can account for the nuances in cost that each job brings. That system is job costing. Job costing does this by tracking each major cost category for a given job. As a result, you’ll know exactly how much you spent on labor, direct materials, equipment, and sub costs; not just for the entire job, but also for each phase or stage of the job.
This is where job costing outshines process costing. When using process costing, contractors only know that they overspent, but not where they overspent. This is even more important when factoring in change orders.
Identifying which phase went over budget (or even the specific task within a phase) is crucial. Although the next job will, of course, bring its own set of challenges, you’ll be better primed to avoid the same mistake.
2. Improved efficiency & profitability
Plumbing has a relatively high earning potential compared to other trades. However, this depends entirely on how cost-effective a contractor is; earning potential is directly tied to efficiency. Therefore, creating an efficient process is paramount for plumbing contractors looking to maximize profit margins.
However, there is no one-size-fits-all process for plumbers. Send ten plumbing contractors to do a job, and all ten will likely complete the job differently. Things are done your way. And that is perfectly acceptable as long as you work to make your process productive, qualitative, and profitable.
Installing a consistent and thorough job costing system ensures your way is as efficient as possible. Through job costing analysis, you can better evaluate the following:
- Scheduling: are the right workers on the right jobs?
- Productivity: are we completing what we need to when we need to?
- Materials used: was it really necessary to buy five extra hacksaws for this job?
- Overall job performance: can we complete this type of job on-time and under budget? Why or why not?
Depending on the type of contract, such as fixed price, profit can be entirely based on efficiency. Job costing is a powerful way to effectively evaluate performance to ensure you are not leaving money out on the job site.
3. Justification of prices
Clients or project owners will, at some point, request that you provide a basis for your prices or cost estimates. They may even challenge you outright. This shouldn’t cause panic or frustration. This is an inevitable part of running a business. With job costing, however, you’ll have irrefutable data to back up your pricing numbers — as long as pricing is done fairly and based on real cost figures.
Not only will you have historical data to justify past projects, but you’ll also have current data to justify any adjustments in price for more accurate estimates. Claims should always be backed up by real numbers, and job costing provides the historical database to do so.
4. Better job selection
Nothing is more crushing than a contractor who wears their body down to push through a job that, in the end, doesn’t bring in a profit.
Avoid this at all costs. As a business owner, you have more control over this than may seem at first glance. It’s pivotal that contractors are able to identify and stay away from jobs that consistently lose money.
This is not always easy, especially during slow periods. Sometimes any job, even one that you know is unfavorable, seems better than sitting on idle hands. Avoid this as much as possible. It will only lead to more financial struggles.
Instead, look to identify chronically unprofitable projects by analyzing historical data (captured through job costing).
The reasons are many:
- Maybe you haven’t figured out how to estimate or price a certain type of project the right way.
- Maybe you haven’t been able to efficiently schedule specific jobs because they require a specialized skill that your team is not equipped to handle.
- The job site is likely to cause too many unforeseen issues
- The job is expected to bring hidden costs (permits, weather delays, expensive materials)
Whatever the reason, job costing gives you the power to parse out profitable jobs from costly ones.
5. Financial goal setting
If a job is trending in the wrong direction, it’s vital to course correct early and often. Real-time job costing allows contractors to check in on performance. In addition, job costing provides an instantaneous picture of your finances. If you’re on track, understand what you’re doing well. If you’re not on track, why? Again, understand what is causing you to fall short and adjust accordingly.
Without a job costing system, many contractors won’t know if they will come out ahead or behind until the job ends. Making better decisions on the next job is impossible if you don’t know what went wrong (or right) on the last one.
6. Employee compensation & retention
Providing fair compensation is vital to employee retention in a highly competitive trade such as plumbing. Hiring new crew members is a big decision. It brings commitment on both sides. As a business owner, you must deliver on your commitment which is fair compensation for hard work. Some business models look to maximize productivity from a worker until they burn out, at which point a fresh recruit replaces them, and the process repeats.
With an ongoing labor shortage, the right people are worth more to you as an employer than a few saved dollars. Happy workers are productive workers. The goal is to afford to pay employees what they deserve to keep them on board while still hitting financial goals. Job costing will allow you to budget, prepare, and plan for competitive employee compensation without breaking the bank.
How Knowify helps
At Knowify, we believe in the potential of every plumbing contractor. Which is why we do everything we can to give them the tools they need to reach that potential.
As we’ve seen, job costing is essential for increasing profitability in the plumbing business; it serves as a north star for contractors looking to elevate their business. Just as no plumber would ever be caught without an arsenal of wrenches, no plumbing business should be caught without an efficient and comprehensive job costing system.
Thankfully plumbing professionals don’t have to do it alone. Knowify has built a cloud-based accounting software solution specifically designed for contractors who want to take control of their jobs.
Knowify provides an all-in-one suite of tools for contractors to manage job costing:
- Track costs for each job, including labor, materials, and equipment.
- Evaluate where you have over or under-spent on a particular job.
- Improve efficiency & profitability by monitoring scheduling and productivity.
- Offers insight into job costs and profitability in real-time.
- Generates easy-to-read job cost reports.
- Helps contractors make decisions quickly and accurately anticipate financial outcomes.
Knowify takes the complexity out of job costing. Get the information you need when you need it with our robust suite of tools to maximize profitability. To see for yourself, book a quick 30-minute demo to see how our tools can transform your business on your next job.