7 reasons why construction job costing goes wrong
While you are doing the same job every day, job costing is easy. But in construction, every next job is different. Also, every project manager and estimator do job costing differently.
Job costing is so important for any construction company, but often it goes sideways. When it goes sideways, the company faces profitability issues. Let’s see what the main reasons are why job costing for specialty contractors goes wrong and what causes it.
When you don’t have the exact amount at hand, it’s tempting to take the easier, faster way out and guesstimate a number instead of correctly calculating it. Even experienced estimators make this mistake when too many inquiries come in. If you are short on time and need to be in a hurry, it is better to make an offer and note that the quantity will be recalculated before signing the contract. This one specific note can save you a day, because once the client is ready to sign a deal, you will be able to recalculate. Also, your client will be aware that you have the right to recalculate our estimates.
Error in a spreadsheet or form
Most offers—probably more than 90%—are calculated using spreadsheets. Not always the cells are protected against changes, and by accident, estimators can delete some formulas without knowing that. This can then give the wrong results.
In order to avoid such errors, it is always recommended to protect formulas against writing so that a special password is required to edit these fields. This will ensure that unexpected changes will be avoided.
Wrong material prices or costs
Estimators often run out of time, so they make assumptions about possible costs and use them for their calculations. Also, often suppliers are so busy that you have to wait weeks to receive an offer, and you are left with no choice but to guess the price. Also, as we noticed in 2021 and 2022, prices can go up by 100%. So for the big positions, it is always recommended to double check actual costs if possible. Also, if you run out of time or you have a missing price, you can always make a remark in your offer that your offer is based on such a price. In the event of a change, you can revise your offer.
Missing information in technical details
It depends on the type of contract you have between yourself and your client. In most cases, if some technical detail is missing, it should be covered by the client. But if you have a contract where you are in charge, then missing information in technical details could be costly. Whenever you are signing a deal where you are also responsible for technical details, you have to be comfortable with the work you will have to execute. You have to have enough experience with them, because only then will you be able to know whether something is missing, and if there was an error, you will also have possible ideas on how to solve such problems.
Wrongly chosen system or assembly technique
This can happen with experienced and unexperienced teams. Experienced teams can be overoptimistic about their knowledge; they roughly go over drawings and specifications and realize this is just another typical project. But then, once they start, they realize that they missed key information and that the conditions are different than they were expecting.
For unexperienced teams, because of a lack of knowledge, they can perform poor jobs, which then must be redone.
This can only happen when the contractor is delivering materials and needs to cut and optimize them. If the material is expensive, he can run out of budget very quickly. Whenever you are preparing an offer where material costs are significant, it is better to optimize it. There are many tools now that can help with optimization.
Lack of productivity
Productivity at work can affect many things: missing material delivery, changes in drawing, lack of experience, poor management, and more. Actually, most contractors admit that, in most cases, they are wrong about calculating their productivity. Experienced estimators often add extra reserve coefficients just in case. And even then, often contractors can pass that number. The only solution is to avoid using software that helps calculate productivity for them.
How to avoid errors in job costing?
I only reviewed seven possible causes of why job costing could go wrong. In different niches, there can be different reasons for it. Most contractors are avoiding possible errors by increasing margins and reserves. This gives them safety precautions in case things go wrong, and in most cases, things go wrong. Sometimes contractors can add 15-20% extra reserves and end up with only 5% profit. The use of software is now helping contractors better forecast costs and avoid possible errors when doing job costing.