The Bridge Between Cash Flow and Profitability – Job Costing

The Bridge

You can walk onto several construction job sites and find a few tools that serve multiple purposes. For instance, a power drill can be used for drilling holes, and by changing the bit, it can also be used to tighten or loosen screws. Similarly, a pipe wrench can be adjusted to various sizes, and a circular saw performs different tasks with a blade change. In each case, the tool is the bridge. Same tool, different uses.

In construction accounting, the tool known as job costing is the bridge. Job costing contributes to steady cash flow and helps ensure profitability. It's the same tool, but it has different uses. 

Job Costing for Cash Flow

First, let’s discuss job costing and its impact on cash flow. One benefit of job costing is identifying potential cash flow issues early in a project. Construction companies can make necessary adjustments before the financial impact reaches a critical stage.

Further, job costing for cash flow provides these additional benefits:

Quick payment collections – customers receive timely and correct invoices, leading to faster and more efficient collections.

Prevent under- or over-billing – accurate cost tracking supports the contractor's ability to bill appropriately, thus avoiding strains on financial reserves or damaging the customer’s trust. 

Mitigate risk – minimizes financial risk by controlling costs and preventing budget overruns.

Improved stability – maintain consistent cash flow, preventing shortages caused by underestimating or overspending.

Forecasting – understanding the actual costs and revenues associated with a project provides insight into future cash needs.

Job costing enables contractors to identify cost overruns before they spiral out of control, informing data-driven pricing decisions for both current and future work.

Job Costing for Profitability 

Now, let’s discuss job costing for profitability. So, what’s the big deal about job costing and profitability? It avoids "profitless" work! Look at it this way: Without accurate job costing, a construction company might accept projects that appear profitable on the surface but ultimately drain resources due to hidden costs, resulting in an outcome that falls short of the desired result. 

Some additional benefits of job costing for profitability include:

Accurate bidding – knowing the actual cost of a project enables construction business owners to set competitive and profitable prices that accurately reflect the expenses involved. 

Cost control: tracking actual expenses (labor, materials, equipment, and overhead) against estimates during a project helps identify areas where expenditures exceed the budget, thus allowing for adjustments.

Profit identification – comparing the total project cost against revenue allows construction business owners to determine each job's actual profit or loss rather than relying on estimates alone.

Strategic decision-making – cost data allows construction companies to evaluate the actual value of a project. Furthermore, analyzing profitability data from past jobs provides valuable insights into what worked well and where improvements can be made. 

The data collected through job costing can be used to improve pricing strategies, develop more accurate estimates, and identify ways to increase efficiency. 

Illustration of Job Costing Effectiveness

(Author’s Note: I often rely on the team members of The Profit Constructors to give me information to include in the blog posts presented here.) 

Recently, I asked our team a couple of questions via our internal messaging system. 

1. Do we have clients whose stories demonstrate how misclassified costs or poor tracking can make jobs appear profitable while actually draining cash?

2. Can you provide an example of a contractor who improved profitability and cash flow by implementing better job costing?

The hands went up! Well, actually, the fingers began flying across the keyboards.

I received answers shortly after. I quickly learned that several of our clients initially fell into the “misclassified costs or poor tracking” category and have since been reclassified into the “improved profitability and cash flow” category. 

I also received two more bits of interesting information from team members. One mentioned a brand new client and said, “[This company] definitely has the misclassified costs and I believe jobs are looking profitable while their cash flow is a huge problem. . .however, I think it is too early working with them to really give them a clear picture- we are just barely getting them set up to change a lot of those issues. I think within a couple of months you could probably put together a really nice write-up.”

The second piece of information I received that caught my attention was from a team member who named one of our clients and said, “One of the reasons [this company] hired us was specifically because she wanted to avoid those issues.”

Putting It All Together

Job costing for cash flow and profitability means construction contractors gain the following advantages.

• Clear visibility into project expenses and revenues

• Early identification of unprofitable jobs

• Assurance that delivered value is billed

• Better pricing strategies

• More confident bidding  

• Increased cost control

• Improved client invoicing

• Prevention of overspending

• Enhanced financial stability

Job costing is the bridge between cash flow and profitability.

If you want to know more about job costing for cash flow and profitability, check out our article, How to Price for Your Construction Projects.

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

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