By: Mike Andriola
Is your bottom line understated simply because you don’t have the necessary documentation or lack the accounting insight to allocate job costs to contracts? Or are you paying too much in taxes because you have an overly aggressive cost allocation strategy? If you are in either situation, the lack of a sound job costing strategy is costing you money.
In the construction industry, there are three main types of costs: direct costs, indirect costs, and general and administrative expenses. The proper classification of costs amongst these three categories is essential to implementing an effective job costing strategy. It’s the only way to paint a true picture of what it actually costs to complete a contract. Once all types of costs are considered and the true cost of what it takes to complete a contract is known, the next step is maintaining the proper documentation to support your classifications amongst the three categories. Detailed timesheets for estimators and project managers may create a bit of an administrative burden to your organization, but they could help to increase your bottom line significantly. Without proper documentation and a lack of strategy, organizations tend to rack up a significant amount of general and administrative costs. Since these types of costs have no relation to contracts, they are merely an expense of the company and do not trigger any revenue recognition under the percentage of completion calculation.
On the other hand, if documentation is maintained to reallocate a portion of what would have been considered general and administrative expenses to contracts, revenue can now be earned on those same costs that were previously a charge against your bottom line. Believe it or not, the simple reallocation of a cost from a general and administrative expense to a contract-related cost will increase net income.
It's important to note that a novice accountant who is not an expert on implementing a job costing strategy could potentially make current year net income look great, but could also be digging a hole in the next period, ultimately putting the company out of business. Only a true professional and trusted advisor should be tasked with implementing a proper job costing strategy. At Wiss, we strategize with our clients throughout the year to ensure the necessary controls are in place and the proper documentation is maintained in order to complement their accounting strategy. We work closely with the owners and CFO’s of our clients to help strike the balance between minimizing taxes, while still meeting financial covenants. Implementing and maintaining a successful job costing strategy is just one of the ways we help our clients to achieve that balance.
Mike Andriola is a Partner in the firm, servicing a wide range of clients in the construction, nonprofit, higher education, and governmental industries. Contact Mike at firstname.lastname@example.org or (973) 994-9400.