Job Cost Accounting for Lawn & Landscape
Contractors, Builders, Estimators, Purchasing Departments

The concept of "job cost" has wide application and significance for most contractors. Costs are incurred and introduced into various construction projects every day. Knowingly or unknowingly, the contractor is using costs that are estimated to provide job bids. Later and as the work is begun, costs are introduced into the job. The most obvious costs are those costs that are referred to as direct costs. These direct costs are easily seen and understood by use of materials and through the introduction of labor. The job goes forward, the costs build up and accumulate until there are no more costs for that particular job. The work ends, and a billing is made. The big question at that point is usually "Did I make any money on that job and if so ... how much" ? The answer to that question is usually asked "too late" if the outcome of profit and loss or marginal results is not seen and understood before, and during the production stages of the work. When it's all over, the answer to our question serves only as an educational tool, one that we can learn from. But the real function of knowing and applying costs is done with one and only one thought in mind ... control. Making it happen. Control comes from and control is managed best when we know what to expect failrly accurately in our costs. Otherwise, the profit becomes an unknown and setting the right price becomes a mystery.

Control comes from and control is managed best when we know what to expect.

Cost is a term that contractors should equate with another word ... goal. The goal is to complete the work within the confines of reasonable cost. Reasonable cost, all expense accumulated as the work is begun, carried out and completed, leaves an adequate amount of room for profit. No company except perhaps a non-profit company survives without profit. The amount of profit we earn tells us that we are properly setting a price, controlling the application of materials and labor, and therefore realize that a profit and the amount of profit expected is guaranteed to happen. Price, costs, production and above all management that's effective. Cost is the beginning of that chain of events after a price has been identified. Knowing costs is absolutely essential if (IF) we are to control costs. By that I mean we're not interested in discouraging costs by cutting corners, or trying to overwork our workers to make up the difference in our cost. Controlling costs means that you don't surpass the estimated costs, thus discouraging profitability. Controlling costs is a matter of getting to know costs, using them in labor and materials estimates and actually making them happen during field conditions. In the absence of controlling costs, while in the presence of an adequately priced job, not controlling costs means that profits are being wasted. Pure and simple. When the price is the "right price" and the costs fully known, to then exceed these costs is to give money away as if you were in the business of making contributions, instead of in the business of making money.

The illusive nature of costs is that they are constantly undergoing change. It's not only wage rates rising, or materials being higher, fuel costs changes and the like ... but the level of productivity from the workers on the job can have a great impact on cost. The differences in labor applied happen on every job even though the job itself may be identical in nature. Like building 10 houses exactly the same in a row house construction site. Weather conditions, employee "mix", motivation, who is in charge as foreman, work pace and a variety of variables offer a challenge every time a new project is started. Unlike manufacturing where you may have an assembly line of robots "timed perfectly" to coincide and work together, with products moving down a conveyor belt to completion stages, the "human element" isn't that predictable by comparison. The best you can hope for then when working with changing costs ... is the average cost ... expected when taking into consideration various costs elements and sometimes you are over and sometimes you are under ... but on average you survive and on average you make a profit.

Cost Theory

The theory of costs is important to understand for several reasons. They tell us about the inner workings of our business. Consider these scenarios of cost:

. Costs were far underestimated so all jobs were bid too low. Many of them far below what the average competition would have charged for the exact same work.

. Costs are ignored and jobs are priced on what the competition charges for the same work. Later, it's discovered that while the prices were right (competitive market conditions) no attempt was made to control costs, and know them so that adequate profits could be produced. Since costs were "unknown" no one knew what the "goals" were so that labor and material input targets to reach or maintain were not understood.

. Substantial cost increases are forthcoming for most of the coming year but ignored or not considered by management. Every one of the competition raised prices ... except for you. Now, customers are beating a path to your door because of low price which is good for them, but job cost and profit losses which are bad for you.

. Costs are unknown so management doesn't know just how much business must be contracted to cover all costs and produce and adquate level of profit. In the meanwhile, prices are set too high, only a few contracts are signed, the current overhead costs "gobble up" the available cash generated on an inadequate sales volume.

Precautions about "cost" ... being cost savvy ... knowing your numbers

Most people think that cost is what you spent when you bought something. What you actually paid for it. In accounting we call that an expense ... NOT a cost ! The cash that goes out the door to pay and buy something. Forget that idea ... that's not good enough ... if that's what you are using your cost for estimating and pricing purposes for your business ... and know that real costs for our purposes is not what YOU PAID for something but "what it was supposed to cost you" ... now it gets a little confusing you're saying ?

Cost - It's not what it actually is (how much you spent)... it's what it's supposed to be (standard cost goals)... call it an "ideal cost"

What you were "supposed" to pay for something is what we call a "standard cost" (expected average costs based on cost history, adjustments and forecasts) AND a cost that will be competitive and accepted by the market and customer who must be able to afford to absorb them ... even after a profit is added. That standard cost is also an "ideal cost" because we need to come close to making it happen if we're to survive in business. If you don't believe that ... may I drop one name on you ? ... China. So, when you begin to investigate your costs, look beyond those numbers in front of you and ask ... hey wait a minute ... sure the cost I see is ($whatever$) but what should it have costed me ? ... now you're thinking like an accountant ... you're thinking ... what would my costs be if I used the best production method (can't be done faster or better) and had state of the art equipment, materials, tools and "ambitious workers" to help make it happen ? ... well if you're thinking those things ... along those lines now you're talking like a business man. In other words ... it's not what it is ... it's what it's supposed to be ... call it an "ideal cost" ... that's your target to go for ... and you can't go for it if you don't know what it is. What are your ideal costs for what you service or produce ?

For the small business owner who must create his own paycheck running his business, this paycheck comes from two sources in most businesses. One, a salary of check drawn each week which you could say represents a "management cost" to his company, even though he is the management and part two a return on investment of assets employed to carry out the work. Above those amounts and we look for other amounts called bonuses or payouts above normal costs. Why? ... because your job as Boss is only worth just so much. That amount is what it would cost to replace you at what you do in your own company. That's why it's called a management cost to the company. It's what the job is worth in the labor market. In other words, if you were employed by others (doing what you do) that is the amount expected as a paycheck. Remember to keep that in mind when pricing your work because if ... (IF) your own paycheck is excessive then your price may also be excessive since you may have "costed it into your price schedule" and that excess will not help you to compete with others who take a more "realistic" salary in the same industry that you work in.

__________________
Phil Nilsson
Toll Free 866-280-2252
www.nilssonbooks.com

Nilsson is a Nationally recognized "Best Selling Landscape Industry Author," Business Consultant, Speaker with over 30 years experience in the Landscape Industry. His articles appear in Grounds Maintenance Magazine, Lawn & Landscape, PRO, The Arborist, Landscaper Publications, P.G.M.S. and P.L.C.A.A

www.nilssonbooks.com

How To Determine Contract Costs

Phil Nilsson
"Best Selling Author"

The better you know costs, the more certain you are of profits. This book clears up confusion about determining costs and controlling them. Step-by-step examples are used and explained so that you can apply them to your business. Examines systems used to bid the work and compare costs upon job completion. How To Determine Job Costs - for commercial Lawn Care Services - Landscaping Business - Grounds Maintenance Contractors is a tool for bidding & estimating, cost & profit improvement and to track business results. Learn how to calculate direct costs, indirect costs, overhead costs and apply an overhead rate to your job bidding & pricing estimates.

How To Control Costs
Setting Up A Company Cost System
How To Establish a Price Based On Cost
Cost Accounting - What You Should Know
Chart of Accounts - Financials - Cost Reports
How To Develop Cost "Models" for Fast Job Bidding
Standard Costs and How To Use Them To Control Labor
Easy Way To Pinpoint: Direct, Indirect & Overhead Costs
Cost Variables - Track Profits Everyday in Under 15 Minutes
Track Employee Performance Using Predictable Labor Cost Hour

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How To Determine Contract Cost - Book # C-25 - Price $39.50 plus S&H $5.00 can be ordered by phone by calling Nilsson Associates Toll Free 1-866-280-2252 - Sent Priority Mail 2-3 day delivery. To order by mail or fax using Credit Card, Debit Card, - Fax to 1-860-628-0174 Checks Payable To Nilsson Associates
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__________________
Phil Nilsson
Toll Free 866-280-2252
www.nilssonbooks.com

Nilsson is a Nationally recognized "Best Selling Landscape Industry Author," Business Consultant, Speaker with over 30 years experience in the Landscape Industry. His articles appear in Grounds Maintenance Magazine, Lawn & Landscape, PRO, The Arborist, Landscaper Publications, P.G.M.S. and P.L.C.A.A