You’re in business to make money. There may be additional reasons that you do what you do; ideally the work is interesting and personally fulfilling. But a business can’t survive without solid financial footing, so naturally, finding ways to generate profits has to be a top priority.
Project-based timekeeping, also called job costing, is one of the tools that businesses can use to trim waste and increase revenue. It’s an accounting method that tracks the real labor, material and overhead costs of any given job or project. Project-based timekeeping is a boon for employee time tracking and labor allocation purposes, but that’s just one way this method improves your bottom line.
It Makes Profit Trends Easy to Spot
There’s obviously a lot of value in knowing which of your jobs/services are the most profitable. Project-based timekeeping takes all costs into account, allowing you to identify exactly how much pure profit you’re making (or losing) from any given job. Comparing all that data lets you hone in on strategies to increase profits and trim waste.
For example, say the owner of an auto repair shop uses job costing and finds that brake jobs are the shop’s most profitable service. The owner can start marketing the shop as a brakes expert to attract more of those jobs. Alternately, the owner might discover that certain services are taking longer to complete than they should. They can train employees to do these jobs more efficiently or streamline processes to make these jobs more profitable.
It Prevents Time Theft
Employees aren’t machines, so as an employer you might not mind the odd social chat or personal phone call during work hours. But some employees are guilty of much more extensive time theft, and it adds up. An employee who is allowed to self-report their hours might round up to 40 each week, despite only putting in 38 hours of real labor. Over a 50-week work year, the employer pays for 100 hours of work that never got done.
Accurate employee time tracking is critical to curbing time theft. In workplaces that use project-based timekeeping, workers know that their employers can track workflow in real time. That’s extra motivation to stay on-task.
Keep in mind that time theft can go both ways. Employers can commit time theft by underpaying employees for hours worked. These violations can result in costly fines from the Department of Labor. Using job costing creates an accurate record of exactly who did what, providing complete transparency around labor allocation.
It Accurately Accounts for Overhead
It’s notoriously difficult to account for overhead when billing clients. Labor allocation and materials can probably be roughly estimated, even if you’re not yet using project-based timekeeping. But when you’re billing a client for a particular job, how much do you add for things like the rent or mortgage on your offices? Equipment depreciation? Administrative costs?
Fixed overhead costs have to be factored into your pricing to protect your business’s bottom line. Guessing how much to bill each job for overhead opens you up to pushback from clients, and could eat into profits if your estimate is too low.
With job costing, this problem can be solved by using a predetermined overhead rate. It’s generally an hourly rate that can then be multiplied by the number of direct labor hours on a given job. (For example, if your overhead rate is $4.55/hour and a job takes 100 hours to complete, $455 in applied overhead would be billed to the job.)
It Builds Client Trust
A business is nothing without satisfied customers. Earning repeat business is a fundamentally important element of improving your bottom line. Project-based timekeeping can be really useful here. It creates transparency that lets customers understand what they’re paying for. They may not always like your prices, but customers can’t dispute the validity of those prices when you can back them up with facts about labor, material and overhead costs.
Project-based timekeeping is especially beneficial for businesses that provide estimates. If you quote a client $400 but end up charging $450, you can point to a detailed record of what materials or labor accounted for that additional $50. That’s essential for making sure the client leaves satisfied rather than suspicious. (Plus, people who feel they’ve been ripped off tend to air their grievances online—job costing could be worthwhile for the sake of your Yelp rating alone.)
That said, a business that uses job costing doesn’t necessarily have to share the full details of a job’s cost with the client. It’s useful information to have if it’s ever necessary to justify why a job cost what it did.
It Helps You See the Future
The data that job costing generates can be an incredibly powerful resource for forecasting and budgeting. Knowing exactly what you made in pure profit from previous jobs lets you project your future costs and earnings, and makes budgeting for materials costs easier too. If you work with a business manager and/or accountant, having data about past jobs may inform their recommendations for how to grow your business. Plus, tracking the real costs of specific jobs could help you provide more accurate estimates for future jobs.
Job costing can transform the way a business approaches billing and employee time tracking. This method may save your organization time and money that you didn’t realize you were wasting. Check out our companion blog post, What Industries NEED Project Based Timekeeping, to see which industries are especially well suited for this method.
Contact Commonwealth Payroll & HR
If you are an employer seeking efficient ways to track employee time at various locations, clients or projects, Commonwealth offers a multitude of tools that easily allow employees to capture that information electronically once, ultimately translating it to payroll for allocation purposes. To find out more, contact us today.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.