BMATWT 353 - Business of Building

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Job Costing & Budgeting

Resources: Course Packet - McCadden, Shawn. 2002. "Calculating Labor Costs", Journal of Light Construction Feb, 2002 p. 81-84

Course Packet - Lerman, Stuart. 2002. "Accounting Habits of Successful Contractors ", Journal of Light Construction Mar, 2002 p. 67-72

Course Packet -Holtzman, Jay. 2003. "Changing Hands", ProSales June, 2003 p. 28-38

 

Lecture objectives

Budget for PROFIT First

1. Fully Burdened Costs
2. Overhead Expense Budgeting
3. Job Cost Profitability
4. Look for Anomalies - Budget vs. Actual
5. Cash Flow and Working Capital
6. Credit, Collections and Accounts Receivable

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1. Budget for PROFIT First

It's OK to make a good living. Begin at the Bottom Line and decide what is an acceptable level of profit.

Every investor has options for their money. What is an acceptable level of Return on Equity?

If you are to invest $100,000 in starting up your business how much PROFIT would you expect to receive on that "investment" above and beyond your own Salary!

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2. Fully Burdened Costs

First you need to decide if an expense is a DIRECT COST or an OVERHEAD cost.

Rule of thumb, answer the question "If you didn't have the project or the employee, would you still have teh expense?"

If the answer is "Yes" it is an OVERHEAD cost, and shouldn't be included in the calculation of a burdened labor rate.

If the answer is "No" then include it in the DIRECT COST and use it for calculating the burdened rate.

Charge a rate that covers:

• Not only the Basic Wage/Salary, but also the other cost "burdens"

 

• Taxes & Insurances

• FICA (Social Security) & Medicare
• State Unemployment (SUTA)
• Federal Unemployment (FUTA)
• Workers' Compensation (varies by job classification)

Medical Benefit (if applicable)

• Benefits & Meetings
  • Holidays
  • Paid Vacation Days
  • Office/Staff meeting time
  • Training and Education time
• Other Expenses/Benefits
  • Tuition/Training fees
  • Company Car/Truck expenses
  • Company Cellphone/Pager

    Total up all expenses and divide by the number of billable hours

We've just covered direct job costs, now how do you cover your overheads?

First budget for them, what are they, how much, and when do they occur?

Examples:

Advertising and Marketing

Office Expenses

Telephone

Executive Salaries

Insurance

Rent

Power, Heat and Light

Gross Profit on Job costs need to cover Overhead Expenses (and Profit)

Job Revenues

minus

Job Costs

yield Gross Profit

Gross Profit Margin = Gross Profit / Job Revenue (Then convert to Percentage)

If budgeted Overhead plus profit required over a year = $140,000, we can earn this a number of ways.

Low Margin = 25%

Required job revenues = $140,000 / .25 = $560,000

Medium Margin = 30%

Required job revenues = $140,000 / .30 = $466,667

High Margin = 35%

Required job revenues = $140,000 / .35 = $400,000

 

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5. Look for Anomalies - Budget vs. Actual

These can be:

• data entry errors
• incorrect budgeting/estimating
• sources of unexpected profitability/loss

6. Cash Flow and Working Capital

We don't always make money, each day, each week, each month or each year.

Working capital (Excess Current Assets over Current Liabilities) covers short term negative cash flows.

See Income statements from Remodeling Company Inc.

7. Credit, Collections and Accounts Receivable

Do good work, but then GET PAID FOR IT.

The 80/20 rule.

Works for revenues: 80% of your customers account for only 20% of your revenues.

Works for collections: 20% of your customers account for 80% of your headaches (collections)

 

Credit

Most businesses operate on "account" an extension of credit.

These sales become Accounts Receivable until paid.

Some customers don't pay the next month.

We measure our "collection" (ability to collect accounts receivable) by the "age" of our receivables.

Younger is better.

Credit example

Credit terms:

2/10 n 30, service charge 1.5% per month after 30 days

2% discount if paid within 10 days of invoice, otherwise net amount of invoice due within 30 days

Invoice Date - November 1, Invoice amount - $1,000.00

If paid by November 10 - Pay $980.00

If paid by November 30 - Pay $1,000.00 - Age = Current

If paid by December 30 - Pay $1,000.00 + $15.00 svc. charge - Age = 30 Days Past due

If paid by January 30 - Pay $1,000.00 + $30.00 svc. charge - Age = 60 Days Past due

 

Note: Banks and Lenders look at a business's Accounts Receivable and Age of receivables. Old receivables represent increasing likelihood of losses.

Produced and maintained by David T. Damery
Building Materials and Wood Technology
Department of Natural Resources Conservation
College of Natural Resources and the Environment
University of Massachusetts, Amherst.