It’s the start of construction season, is your job costing system in place?
While the start of a busy construction season may not be the time to do a full-scale revamp of your current job costing system, it is certainly time to give it a thorough review for the upcoming season and perhaps make some modifications to your existing system within QuickBooks. As you read through this article, take some notes and see what you can change now and what should wait until you are in “off season” before implementing.
- QuickBooks is a very flexible and versatile program. The Customer Center List provides you with the ability to track your Customers (project owners, awarding authorities, or general contractors) that you perform work for. For each Customer you can then track the various Jobs (projects) that you are working on for that specific customer. For each Job that you are working on you can also track Sub-Jobs (your Change Orders or Extra Work orders) that are specific to the original job.
Each Job and Sub-Job should have its own Estimate; the Estimate that you create at the Job level should be for the Original Contract, whereas, the Estimate that you create at the Sub-Job level should only be for the items that are specific to the change order/extra work order.
ALL costs that are entered into QuickBooks should be posted or job costed to either the Job or to the Change Order/Extra Work order.
Variations:
Sometimes the contract owner wants the Change Order/Extra Work Order to be added or included with the original contract for billing purposes, in this case it is recommended that you still set up both the Job and Sub-Job records in QuickBooks for job-costing purposes and also add the Change Order/Extra Work Order (in whatever sort of detail required) to the BOTTOM of the Original Estimate for billing purposes.
NEVER, I repeat – NEVER simply open the original QuickBooks Estimate and simply change the dollar amounts of any line item to reflect the new amount after a change – this will NOT provide you with a good documentation system.
2. Review your QuickBooks Chart of Accounts and make sure that you have suitable accounts listed there for Direct and Indirect Job Costs
3. Review your QuickBooks Item List – it should be set up to match your industries cost code lists with all items being “Double-Sided” (having both a Purchase and a Sales price) and using “Group Items” as appropriate.
4. Review your QuickBooks Payroll Item List – does it have different payroll wage items that reflect the type of work (work classification) that the employee performs work under on the jobsite?
5. While we are on the subject of Payroll, you should be doing your payroll in-house or through the use of QuickBooks Assisted Payroll and entering employee hours using the weekly timesheet – mirroring the information that is sent from the field.
6. Make sure that you are accounting for your Equipment Costs on the job site and in your job costing reports.
7. Track committed costs, material purchases, and subcontracts using customized QuickBooks Purchase Orders and the Cost Codes you create in your Items List.
8. Create Estimates that reflect the Schedule of Values using the Cost Codes you create in your Items List and then use the Progress Invoicing feature to generate the base billing.
9. Use our free Project Info Worksheet as a means of providing essential contract information to the appropriate people.
10. Document procedures.
11. Get your employees involved; make sure that everyone is trained properly.
12. Monitor the work flow carefully and make adjustments as necessary.
For many contractors job costing is a key part of the success of their business – how else will they know if they are actually making a profit on the jobs they are bidding on.
Job costing in QuickBooks starts with the Item List. When you tell this to most contractors they respond with “Items — I don’t sell ITEMS — what does Items have to do with construction?????
This is a common feeling shared by many who use QuickBooks – not just contractors.
What is an “Item”?
By way of explanation, QuickBooks is a generic software program which can be used in any industry or business type; therefore, many of the terms in QuickBooks are generic and often confusing when trying to make it work in a specific industry. For example:
- For a shoe store, Items equals various types of footwear; sandals, work boots, dress boots, loafers, etc.
- For a contractors, Items equals various cost codes or divisions; Division 01 – General Requirements, Division 03-Concrete, 03.20.00 Concrete Reinforcing, etc.
- For a bakery, Items could equal different types of pastries, cakes, donuts, or pies.
The bottom line is this – your QuickBooks Item list should contain all the goods and/or services that you as a business “sell to OR charge your customer for.”
Creating an Item in QuickBooks
The second area of confusion for many QuickBooks users is the actual creating of an Item or Cost Code in the Item List.
When you access the Lists menu -> choose Item List -> click the Item button -> and select New – QuickBooks presents you with a very basic New Item window where you can select the Item Type, give it a Name/Number, make it a sub-item of another item, give it a description, a rate, assign a Tax Code to the Item and associate it with an Account (usually an Income Account).
Below is a screen shot of a “basic” item setup showing the Income or Revenue side of the item:
The “secret” to making this item work for job costing purposes is that VERY misleading checkbox statement – “This service is used in assemblies or is performed by a subcontractor or partner”.
Checking this option allows you to turn this item a powerful job costing tool.
When you check the option of “This service is used in assemblies or is performed by a subcontractor or partner”- information about the purchase or cost side of the item is now displayed.
Your Item window now displays both Purchase and Sales information – this procedure is commonly referred to as making an Item “double-sided”. It’s important to note that on the Purchase Information side of the transaction the “Expense Account” that you select can be EITHER an actual Expense Account OR a Cost of Goods Sold Account.
Making your Items Work for you
Once you have made your Item “double-sided” you then have to take a careful look at how you enter checks, bills from subcontractors, employee timesheets, etc.
When entering a bill, use the Items tab:
When you write a direct check to a vendor, use the Items tab:
When you enter an Employee’s timesheet, select the Item in the Service Item column:
All of these actions record your costs that are associated with this Item or Cost Code – and Job Costing is born.
Question:
How do I determine the Cost of Goods Sold for an item?
Answer:
I tell my clients that Cost of Goods Sold (COGS) is any cost incurred that directly relates to getting the sold goods out the door.
I have them ask the question “Would you have this expense if you hadn’t made the sale?”
Typical examples of COGS are product purchased for resale, subcontractors or vendors you hire specifically for preparing a product for sale, shipping materials like packaging, freight costs of receiving the resale product and shipping the product to your customers, payroll/labor costs of your employees who are directly related to preparing the goods to be sold or shipped out (would you have hired them if you didn’t have the product to sell?).
Costs that are not directly related to getting the product out the door are considered Expenses or Operating Expenses and include things like your liability insurance premiums, telephones, office supplies, office-related postage and delivery, advertising, clerical payroll, employee benefits and health insurance for the employees and would be considered costs of managing the paperwork for the overall business,
Again, if you would have the expense if you weren’t selling your product or service, it is an expense considered overhead. If you have the expense only because you selling the product or service, it’s COGS.
This is a very simplistic definition and there are certainly areas of disagreement among different people, but if you relate it strictly to your business you should be able to come up with your COGS vs Expenses.
In a nutshell…
Cost of Goods sold is anything and everything that costs you money to buy items for resale, have them delivered to your store to sell, package and label them, import them, fix them or otherwise make them fit to sell.
If it costs you $100 to purchase an item, $5.00 to have each one shipped to your store, it costs $2.50 each in import duty and taxes, $10.00 each to have them inspected by QC, and $5.00 each to fix little problems with each item, your COGS is $122.50.
ASA (American Subcontractors Association) of Arizona Shows Leadership in Securing Prompt Pay of Retainage & Final Payment.
(from Contractor Power Newsletter)
ALEXANDRIA, Va. — A new law (S.B. 1375) signed by Arizona Gov. Jan Brewer (R) on May 11, 2010, adds requirements for timely payment of retainage and final payments to the state’s prompt payment statute for construction. The law, supported by the American Subcontractors Association of Arizona and its allies representing a broad range of the state’s construction industry, establishes a payment cycle according to which non-residential project owners, prime contractors, and subcontractors normally will have to pay retainage and final payments for properly completed construction services and materials, or else pay a penalty of 1.5-percent interest per month.
The governor of Arizona has signed into law the most significant construction legislation improving subcontractor rights within the last 10 years, said ASA of Arizona President Jeff Banker, Banker Insulation Inc., Chandler, Ariz. ASA of Arizona was proud to have a leading role in helping shape the new law and the future of construction in Arizona.
The law, which applies to projects for which contracts, plans or specifications are distributed on or after Jan. 1, 2011, will require prime contractors to submit timely applications for payment according to the project’s billing cycle (normally 30 days). Unless stated otherwise in the construction plans, project owners will have to approve within 14 days, and pay within 7 days after that, proper invoices for retainage that subcontractors submit at substantial completion of their work. The law will also establish a 21-day cycle for project owners to pay prime contractors proper invoices for final payment. It will limit owners withholding of such payments to 150 percent of the reasonable costs to complete any work that is under dispute.
Prime contractors and subcontractors will have seven days from receipt of retainage and final payment to pay their subcontractors and material suppliers, except when reasons for withholding are detailed in a written notice. The law will entitle subcontractors to written notifications of retainage releases by owners once subcontractors request such notifications. It will specifically protect subcontractors from wrongful withholding for defective work or materials that are not their fault. Where subcontractors are not at fault, the law says, The Contractor shall nevertheless pay any subcontractor or material supplier … within 221 days after payment would otherwise have been made by the owner.
ASA of Arizona and its allies worked hard throughout this long legislative process to prevent damage to existing prompt payment rights and to enact these beneficial payment reforms, said ASA of Arizona Advocacy Chairman Richard Usher, Hill and Usher Insurance & Surety, Phoenix, Ariz. The volume of Arizona construction is down dramatically in all market segments, which makes protecting payment rights and getting paid promptly as important as ever to subcontractor prosperity and survival.
Founded in 1966, ASA amplifies the voice of, and leads, trade contractors to improve the business environment for the construction industry and to serve as a steward for the community. ASA’s vision is to be the united voice dedicated to improving the business environment in the construction industry. The ideals and beliefs of ASA are ethical and equitable business practices, quality construction, a safe and healthy work environment, and integrity and membership diversity.
ASA Contact: David Mendes
(703) 684-3450, Ext. 1335
dmendes@asa-hq.com
Tracking retainage is a common function of percentage-of-completion contract billing using AIA Forms G-702 & G-703. To learn more about AIA Billing and how to complete forms G-702/G-703, click here.
Using QuickBooks in the construction industry can be a daunting task.
There is not a lot of construction specific help available for QuickBooks users and the accounting professionals who support them.
That’s one of the reasons that we’ve decided to start a “QuickBooks for Contractors” Group on LinkedIn – please feel free to join us – http://www.linkedin.com/e/vgh/3105723/
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