Every contractor should be using some form of cost codes when building projects. When budgets are set up using cost codes, it allows you to track the progress of the project as it is being constructed. Waiting for a project to complete before knowing how much profit you made is a sure way for your business to fail.
With cost codes, you will see an earlier picture of the project’s progress whether it is on budget or not. They give you tracking capability. You will see early indications of budget issues that you will have time to correct if your cost codes are properly set up and tracked.
Cost codes can be set up by labor, material item and/or project location. Let’s say your company is an electrical contractor and you are building a 250 room 20 story hotel. The labor budget on your project is $38.00 per hour including burden. You want to track the progress of the faucet installation in each hotel room. You can set up a cost code 0200 for the faucets in the hotel rooms. Each room has one faucet in it and the estimate has established $55.00 including tax to purchase each faucet and .75 hours to install each faucet. Your cost code may look like this:
Budget
|
Cost Code |
Item Description |
Budgeted Total Material Dollars |
Actual to Date Material Dollars |
Budgeted Total Labor Hours |
Actual to Dated Labor Hours |
Budgeted Total Labor Dollars |
Actual Total Labor Dollars |
|||
|
0200 |
Room Faucets |
13,750 |
0 |
187.5 |
0 |
7,125 |
0 |
|||
With this cost code established, the purchase order and invoice received should state that these faucets are to be charged to 0200. The personnel on the project installing these faucets will charge their time to cost code 0200.
When you or your project manager walk the project and they see that they have received 125 faucets on site and have installed 100 of them, the job cost report should show the following:
Actual
|
Cost Code |
Item Description |
Budgeted Total Material Dollars |
Actual to Date Material Dollars |
Budgeted Total Labor Hours |
Actual to Dated Labor Hours |
Budgeted Total Labor Dollars |
Actual Total Labor Dollars |
||||
|
0200 |
Room Faucets |
13,750 |
6,875 |
187.5 |
75 |
7,125 |
2,850 |
||||
Material
If the material dollars are lower, that means that you purchased the faucets cheaper than the budget which could translate into more profit. If the material dollars are higher, then they were purchased for more than the budget. This means a lower profit margin than expected. The project manager should check out why they were purchased higher than the budget. Maybe the ones specified are no longer available. If so, you should be able to submit a change order for the difference.
Labor
If the labor dollars and man-hours are lower, that means that you are ahead of schedule which can translate into more profit. If the labor dollars and hours are higher than budgeted, then you are behind your budget which will translate into less profit. If it is caught early enough, measures could be put in place to correct the situation. If the labor hours are correct but the total dollars are over budget, that means that you are hitting your budget on time but the installers are costing more than your budget. You now have a choice, either speed up the existing installers to offset the higher labor rate or get lower priced installers to install these faucets. If you do nothing, you will not hit your budget on the faucet installation which will lower the profit on the project. If the labor is running higher than expected, it could be from issues that are beyond your control. If so, you may be able to submit a change order and get paid for the issue.
These are just a few examples of how you can run a smarter company by using cost codes. If you don’t use cost codes, you will have to wait until the end of the project to find out how you did. It’s little late to do anything about it.
In our next issue, we will discuss different ways to use cost codes and how they should be set up depending on the type of project and your contractual obligations.
Thanks,
Bruce J. Medlin
ACES Estimating Software
A ƒunctionWare Company
www.acesestimating.com
bmedlin@acesestimating.com
