The design-build process is gaining in popularity – that’s great news for you. But you won’t realize your profits if you don’t properly track your costs and revenue.
Profitable design-build firms diligently allocate every single expense to every client/project.
First, let’s review the key elements of “job costing;” then we’ll walk through a systematic approach to profitable expense tracking.
Job costing tracks expenses for each customer’s project in three buckets:
Direct Costs – these are fixed or variable expenses clearly tied to the customer’s project. They may include:
- Design phase in-house and contracted labor for every stage (e.g., consultation, assessments, research, pricing and scheduling, plans/documents/drawings, material and finish selections, permit acquisition, interior design, project management, etc.)
- Build phase in-house and contracted labor for every stage (e.g., demolition, hauling, construction, plumbing, electrical, heating/ventilation, painting, flooring, fixtures, windows/doors, lighting, finishes, décor acquisitions and placement, landscaping, project management and administration, etc.)
- Materials that are project-specific purchases, and those acquired in bulk to be assigned to projects (e.g., structural elements, appliances, fixtures, finishes, interior design features, consumables, etc.)
- Equipment (e.g., use-charges for owned assets and rentals from external sources, etc.)
- Other (e.g., expenses for legal, permits/fees, surveys, etc.)
Indirect Costs – these are expenses that aren’t tied to one project but need to be spread across multiple projects. Your design-build firm may have the bandwidth to work multiple projects concurrently. When this occurs, quantify these shared costs, and allocate them to each project using a calculated rate. Indirect costs may include:
- Design phase (e.g., design software, purchasing, research, etc.)
- Build phase (e.g., storage, temporary facilities, etc.)
- Materials (e.g., unassigned consumables, etc.)
- Equipment (e.g., small tools, equipment rental, etc.)
- Other (e.g., hailing, bond expenses, licenses, permits, legal fees, etc.)
Overhead Costs – these are the general and administrative expenses required to keep your business operating and your doors open. You often hear me call these the costs to keep the lights on. These include payments made for administrative staff, employee benefit programs, building leases, back-office costs, insurance, accreditation, and more. You should use an overhead rate to allocate these costs to each project.
Now that we have clarity on the expense categories, here are some expense-tracking tips.
I. Segregate accounts, and document transaction details in real time:
- Consider using separate bank accounts for payroll, reserves, taxes, operations, and even project-specific accounts. It’s easy to transfer money between accounts as needed, and you’ll reduce inadvertent comingling of dedicated funds (i.e., paying for non-payroll expenses with payroll-designated funds).
- Capture your receipts to avoid missing costs. Use either your accounting software app or a third party app recommended by your bookkeeper to capture the details of these transactions to ensure all project costs are accounted for.
- Don’t wait until the end of the project to record expenses – update the transaction recordkeeping as they occur (or weekly, at a minimum). The iterative nature of the design-build process makes timely recordkeeping a critical task.
II. Record your job costing allocations and tracking:
- Be sure your costs in your project management system are aligned with industry cost codes. Map these cost codes to your accounting software to ensure they are being properly allocated to your financial reports.
- Require consistent labor-hour tracking records for in-house staff and from subcontractors; requiring project numbers and task descriptions for all time worked.
III. Audit proof your records:
- You’ve taken the time to collect receipts, allocate expenses to projects, and file invoices and other documents in an easy-to-find location. Because “life happens,” you need to have backups in case the original items are lost or damaged.
- Consider having digital copies of the records by 1) attaching them to the transactions in your accounting software, 2) saving them on a cloud-based platform such as Dropbox or Google Drive, or 3) saving them to a portable external storage device.
- Back up your records weekly or whenever you add new documents.
Control and accurately measure profitability with detailed expense tracking. We want to help you move the needle in your business, so let’s have a conversation about financial strategy. Schedule a Get to Know call here.