As trade business owners, the aim to get the most profit we possibly can from our business. That is why quoting is critically important. Get it wrong and you can actually lose money from a job! The cost of the job is the step before you add the profit margin. This profit margin is the extra money you have earned by completing the job.
In order to determine the cost of each job, there are 5 elements that need to be considered:
- Direct materials cost
- Indirect material cost
- Direct labour cost
- Indirect labour costs
- Additional overheads
1. Direct materials cost
Direct materials cost is exactly that, the costs associated with the materials needed to complete the job. For example, this could be the cost of timber used to build an outdoor deck, or the cost of a new toilet you are installing for a customer. Every material used on every job needs to be included. Don’t give things away for free!
2. In-direct material cost
Indirect material costs are those costs which can’t be specifically traced to any specific job and therefore need to be allocated to them on some equitable basis. E.g. lubricating oil needed to grease the machines or the cost of hand tools used on all jobs.
3. Direct labour cost
Labour (hourly rate) costs are incurred as a result of the service provided. It includes wages at the operational level. Labour-related costs such as overtime premiums, sick pay and holiday pay also have to be taken into account.
This will normally stay the same for most jobs (apart from overtime) but should be reviewed every 6 months.
4. Indirect labour costs
Indirect labour represents the wages of supervisors and admin staff, who are not directly involved with the physical production of goods and services but who are still paid a salary/wage from the business.
5. Additional overheads
Overheads include other expenses such as rent and electricity/power rates, insurance, repairs and depreciation.
Now you understand what elements are involved in job costing, what are the benefits?
Increased profitability
Once you know the breakeven price of each job, you can accordingly price specific jobs for a profit and also direct marketing efforts towards the most profitable ones.
Improved employee performance
By looking at direct labour for each job, you will now gain insight as to how long each employee spends on each job. You may even realise from looking at the numbers that some employees may be quicker at completing certain jobs than others, and therefore reassign jobs to cater to this
Continual monitoring of costs
By allocating costs to each job, you will be reviewing them constantly and as such, understand exactly where your money is going all the time. This monitoring of costs also means your quoting is going to be accurate and all jobs will make you profit!
So the question now is, do you know if you’re making money on each job? Better find out.
What’s next?
- Join our Kick-Ass Tradies Facebook Group, for access to trade business specific conversations, tips and resources, plus a like-minded community of tradies.
- Book a 15-minute Game Plan Call with Andy, owner of Dr. DRiP plumbing and co-founder of Lifestyle Tradie, to clarify your priorities and get clear action steps.
