Costing Things Out

by WOHe

Costing Things Out


Carefully monitoring, and then controlling, project costs from the
original estimate through change orders is an important key to
profitability for kitchen and bath remodelers.

Peter Feinmann takes a simple approach when it comes to
estimating and tracking kitchen and bath remodeling project costs:
Avoid any surprises.

Feinmann, president of Feinmann Remodeling Inc., a Greater
Boston-area remodeler specializing in high-end kitchens and baths,
starts by preparing an accurate estimate. He then tracks actual
costs on a weekly basis throughout construction to ensure that the
project is coming in on budget. Tracking these costs, Feinmann
asserts, is nothing short of essential for the profitable operation
of his $3-million remodeling firm.

His method for tracking project costs and controlling the
outcome of the projects he handles provides an illuminating case
study for kitchen/bath specialists, who often struggle to maintain
30+% margins as a result of tough competition and undisciplined
business management tactics.

According to Feinmann, there are several essentials that should
be put in place in order to implement an effective cost-tracking
system for kitchen and bath remodeling projects. Among these are
the following:

  1. Qualify leads as solid, profitable clients and then requalify
    those clients as you go through the design process and fine tune
    the final budget.
  2. Monitor production’s performance in delivering the job within
    the budget parameters.
  3. Determine which jobs produce the highest profitable return, and
    use that information to target future business.


The estimate
On the front end of each project, Feinmann relies on four levels of
pricing to come up with an accurate estimate. His first step is to
come up with a realistic target budget for the job based on similar
projects he’s completed. After several meetings with the client and
input from subcontractors, Feinmann begins to fine-tune the
estimate. With numbers in hand, he then meets with the client to
review plans and the budget, and gain the client’s commitment.

With the client’s approval to proceed, Feinmann can further
fine-tune the project estimate within 5 to 10 percent of the second
revision, and begin to solidify actual costs from subcontractors
who will be working on the project. As the final details and budget
numbers are being prepared, the remodeler constantly validates the
client’s commitment through memos detailing costs.

“The key is to have no sur-prises for the client or yourself
when preparing estimates and submitting those final numbers,”
Feinmann explains. “If the final estimate is going to be higher
than what was discussed in preliminary meetings, your client needs
to be aware of that well before you present the final
estimate.”

With a final estimate approved by the client, a contract is
created and the project is underway. At this point, Feinmann uses
QuickBooks Pro software to track the project’s actual job costs.
Twice a month, accounting information gathered through the software
is downloaded to Excel accounting software, which allows Feinmann
to easily analyze the project status and, in particular, whether or
not each phase is on target with projected budget numbers. The
system is so effective that Feinmann can tell at one-third or
halfway through a project how close to the original budget estimate
the actual costs will be when the project is completed.

“I can begin to collect costs as various parts of a project are
completed and then compare those actual costs with what I budgeted
at the time the original estimate was prepared,” Feinmann observes.
“If I’m over, I can then take a look at what can be done to tighten
up the remaining activity on the project.”

The tracking system has proven to be a valuable tool in
communicating with lead carpenters and Feinmann shares the
information to keep his lead carpenters abreast of the labor costs
for completing each phase of a project.

“We had several jobs in the past where labor costs were
exploding and we realized that through our tracking system,”
Feinmann recalls. “As a result, we were able to pull back some of
the labor we had scheduled for the projects, make some adjustments
and then bring our actual costs back in line with the dollars we
budgeted for those particular parts of the projects.”

The constant feedback the remodeler’s job costing system
generates not only helps the company perform within established
budgets, but also helps crews in the field evaluate what they’re
doing.

“By keeping our people up to date on actual project costs,
they’re in a much better position to analyze how to approach the
task at hand,” Feinmann says. “If costs are starting to run over
budget, they have to think of ways to bring those costs down and
complete the job within the budgeted timetable.”

The information collected and the manner in which Feinmann’s
field crews respond to that information is also helpful in
preparing estimates on future projects, Feinmann notes.

Maintaining focus
Through the actual project costs tracking systems Feinmann has
developed, the remodeler is able to maintain a very tight design/
build market focus on the projects he wants to pursue. On average,
projects designed by the remodeler generate a 32 percent gross
profit margin, with kitchens generating 34 to 35 percent. Projects
designed outside the company generate 25 to 30 percent gross profit
margin.

“We don’t want to take on a lot of projects designed outside of
the company, and we want to do more kitchens,” Feinmann notes. “By
tracking our actual production costs, we’re able to determine early
on in a project just how profitable it’s going to be. Based on
experience, our designed projects, and our kitchen projects in
particular, are the projects that will generate the profits we
want.”

By tracking selling price, material costs, time sales and the
production that’s put into a given project as well as the number of
change orders typically tied to each type of project Feinmann is
able to quickly determine which jobs generate the greatest profit
potential. Kitchens have become Fein-mann’s greatest
profit-generator, and one his company can pursue competitively.

Tracking actual costs also serves to keep clients informed. If
delays caused by the client’s failure to make decisions add costs
to the project, Feinmann has a way to capture and document those
costs. If the project is running on schedule and on budget, he may
let a client slide, but at least he has the tools to show the
client that the delays are costing him money.

Change orders, for all the difficulties they may present, do
help offset budget overruns, since they often generate a higher
margin. Clients who always initiate a change in design or materials
rarely question the cost of making the change.

Having ready access to actual job costs is also a good tool when
reviewing performance, both of sales and production personnel,
Feinmann points out. If one salesperson generates a higher gross
profit from a lower volume of business, Feinmann can use the
information collected to direct the efforts of his sales force to
the low-volume/high-profit projects.

Similarly, in the performance review of lead carpenters, if the
job-costing numbers show a reduction of productivity, it can be a
good starting point to analyze what happened, or to see what caused
a lead carpenter to produce less than he produced the year before.
It also may reveal, for example, that the types of jobs a lead
carpenter was responsible for in a given year were more
labor-intensive and not as profitable than the jobs he produced in
the previous year of work.

“At least you have some numbers to point to and begin asking,
‘Why did this happen?’ or ‘What do we need to do differently to
avoid this from happening again?’,” Feinmann notes.

“Without any formalized documentation, all you can do,” he says,
“is scratch your head and wonder what happened.”

This article was reprinted with  permission from Kitchen &
Bath Design News’ sister trade magazine, Qualified Remodeler.


Start With Basics for Job Costing, Dealers
Advised 

In order to have an effective job-costing system, kitchen and
bath remodelers need to start with the basics.
The key tools include the following:

  • An estimating system The method you use to price a job or
    change an order for a homeowner should be used every time so that
    it’s consistent. Document how each job or change order is priced
    and how you came up with the price for the job or change order.
    You’ll use this information repeatedly for future jobs.
     
  • A way to track costs by job To assign a cost to a job, you need
    to note on the bill what job it belongs to and then enter the bill
    into the accounting system and assign the cost to a specific job.
    If your accounting system cannot assign a cost to a specific job,
    you need to correct that situation in order to compare estimates to
    actual costs.
     
    (Note: A cost should only be assigned to a job if it’s easily
    tracked to a job. For example, an electrical subcontractor’s bill
    can be tied directly to a specific job. A phone bill, on the other
    hand, could be broken down by job, but it would take a lot of
    effort to do so. For change orders, just track the cost to the job
    and not to the individual change order.)
     
  • Estimating to tie into actual costs Remember, your estimate
    needs to match how you track your costs in your accounting system.
    If you have items in your estimating system, you need to have the
    same items in your accounting system. This is where you decide how
    detailed you want to be. The minimum items you should include are
    labor, materials and subcontractors. You can break down these
    categories even further depending on how detailed you want to be.
    For example, labor can be broken down to represent different
    aspects of a project: rough, finish, exterior, supervisory,
    administration and overhead.
     
    Remember, if you choose to break down items in detailed subgroups,
    you need to track the costs for these items. Just make sure your
    estimate items match the accounting system in order to track
    estimates versus actual costs. 
     
  • Analyzing estimate costs vs. actual costs Before you get too
    involved in setting up estimates, you need to determine if your
    current system can support showing estimates versus actual costs,
    or if you can create a system that will. It could be a basic
    system, like an Excel spreadsheet showing your original project
    estimate and then inputting actual costs from your accounting
    system as they come in. Your accounting system might have a
    function where you can input your estimate and create reports that
    show estimates vs. actual costs. 
     
    The setup of the analysis should look like this:

    Original Estimate + Change Order Estimate = Total Estimate.

    Actual Costs +/-Variance = Projected Costs.
     
    This approach ensures you are looking at all aspects of the job.
    The original estimate plus change order estimates will show the
    total estimated costs. This is then compared to the actual costs to
    show the variance. This is where the analysis comes into play and
    the projected costs are calculated. Projected costs are what you
    believe the item will be at the end of the job, based on the
    analysis.
     
    For example, if you estimated total costs for plumbing to be
    $10,000 and the actual costs to date are $6,000, but you also know
    another $7,000 worth of plumbing work remains, you can revise the
    projected costs to be $13,000. By updating the projected costs, you
    can see where you think the job will come in. 
     

  • Keep track of your past jobs Tracking estimated costs versus
    actual costs should also be used to help prepare your next
    estimate. If you keep track of all job estimates vs. actual costs,
    you’re building a history that you can analyze to improve
    estimating skills. This can be very helpful when you’re doing quick
    estimates for an interested homeowner.
     
    When you improve your estimating system, keep the basics in mind,
    realizing that your estimating system needs to tie into your
    accounting system in order to develop a tracking system that allows
    you to compare the original project estimate with the actual
    costs.
    Daniel Warren, CPA
    Warren & Associates, Sutton, MA

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