Say you buy a sandwich for $5. The deli paid $2.50 for the ingredients. The employee who makes the sandwich earns 25 cents for the 60 seconds of work it takes to make and bag the sandwich. Surely the deli will make a profit from that purchase, right?
Not necessarily—not if the price of the sandwich doesn’t account for the real cost of the deli’s overhead in addition to its labor and materials. Without accounting for all of its costs, the business can’t set its prices to maximize profits. That affordable sandwich may actually cost the business money.
Enter project-based timekeeping.
Project-Based Timekeeping: Why It Matters
Project-based timekeeping, also known as job costing, is a way of measuring the dollar value of a specific project. Tracking what a job costs to complete lets you see exactly how much profit or loss it creates. Job costing takes into account all direct labor, material and overhead costs on a given project. (A predetermined rate, based on labor hours, is often used to account for overhead costs since these figures can’t easily be broken down by project.)
A good test to determine whether your business would benefit from job costing is to think about whether you do unique jobs for distinct customers. For example, there tends to be limited use for job costing in academia; a professor who lectures to 100 students isn’t providing a different service for each student. By contrast, an interior decorator who divides time among different jobs could benefit from job costing. This accounting method might reveal that she’s profiting more from living room jobs than from kitchen renovations, inspiring her to switch her focus and maximize profits.
Industries Suited to Project-Based Timekeeping
Project-based timekeeping generally tends to be a good fit in industries that specialize in this kind of client-focused or project-based work. A few industries are especially well suited for this method.
Project-based timekeeping is essential in manufacturing and construction. These are industries where rigid standards must be met and overhead can be significant. Plus, one manufacturer or construction company may have simultaneous projects going for different clients. Being able to track exactly how much each job costs is essential for turning a profit. (This is true of skilled tradespeople such as electricians and plumbers, too.)
These are also industries that use a great deal of valuable materials.
Job costing allows the employer to track exactly how much steel or wood is being used in a given project. Because costs should be constantly updated in their system, the employer can track material costs and other costs in real time. If the project is trending above budget, adjustments can be made. Watching these costs closely is critical for managing cash flow.
As with construction businesses, certain automotive businesses can really benefit from project-based timekeeping. Shops that do auto restoration, repairs and/or maintenance work on a project basis are well suited to job costing. These jobs can be somewhat unpredictable, with technicians troubleshooting problems as they appear. Meticulously tracking the cost of parts and labor is imperative if the business is going to bill the customer enough to make the job profitable.
● Law (and Other Professional Services)
It’s standard for attorneys to use some kind of project-based timekeeping system. They must track their time down to the minute in order to bill their clients accordingly. Many types of professional services firms may also benefit from using this kind of accounting system. Financial advisors and CPAs in particular may need to track their time and costs for client billing.
Projects in these industries don’t always involve significant material costs, compared to something like construction. But costs including postage, office supplies and parking fees add up and eat into profit margins if they’re not factored into client fees. Project-based timekeeping guarantees it’s all taken into account.
Anyone who’s received a detailed doctor’s bill knows that healthcare providers carefully track time and materials. Doctor’s offices and hospitals use their own kinds of project-based timekeeping systems. Other businesses in the medical services space (such as billing services) may also use job costing to assess profits and losses.
● Retail/Food Service
Job costing isn’t always an appropriate tracking system for businesses in the retail and food service industries. There are certain circumstances in which a retailer or food service business might increase productivity through project-based timekeeping. For example, a catering company that produces large batches of food each day might use job costing to track how efficiently those meals are being produced.
Independent contractors across all industries can benefit from using project-based timekeeping. Freelancers or consultants may work on multiple projects at a time, billing at different rates for different kinds of work. This kind of tracking system helps with billing accuracy and lets independent contractors identify their most profitable kinds of jobs. Plus, this method creates meticulous records about business expenses that become very handy at tax time.
For businesses that aren’t accustomed to project-based timekeeping, this accounting system may seem daunting to adopt. There may be growing pains but rooting out inefficiencies and maximizing profits are always worth the effort.
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.