Capturing your extra costs on a project and knowing the reason for them can help you improve your estimating and site management processes. Are you able to do this?
Many builders I talk to, still use Excel spreadsheets to create a basic form of purchase order to send to their suppliers and contractors and then re-entering the details into the job costing part of the accounting system or in slightly more advanced situations, using the job costing part of the accounting package to create the purchase order.
You break down your operating expenses for tax each year so why wouldn't you break down where your 'extra' costs are coming from?
This is fine if you only want to know at the time when your accountant finalises the books for the last financial year, which is usually six to twelve months past the end of the financial year. Knowing what your costs are some 18 months later is not the hallmark of a good business person, let alone a good builder.
Extras are the Nightmare of any Builder
If you are running a small, one-man show then you can keep a lot of the reasons why you have extra costs in your head but what happens when your company grows and you can't keep it all in your head anymore?
One of the keys to getting on top of your 'real' costs are knowing where the problems and extras are coming from. Just like you prepare a budget or have accounting codes to let you know the areas where you are spending your money each year, then you have to be able to break down your construction costs into the areas where you are spending extra money that is not budgeted for.
If you are using the job costing part of your accounting system then you will be able to break down the costs into the various codes to produce purchase orders but this will not enable you to identify the 'extra' costs and the reasons for the 'extra' costs.
The easiest way to break down your 'extra' costs is to create a number of separate codes that identify the various reasons where 'extra' costs come from. For example, estimating errors, site or supervision errors and issues, customer variation requests, theft and damage, design errors, rate increases and so on.
These 'reason' codes or 'variance' codes enable you to pin point where significant 'extras' are coming from and with some investigation can lead to improvements in your processes, purchasing, estimating and site supervision.
The difficulty for smaller builders is how to record and report on these 'extra' costs. You could develop your own database and enter all the data about the 'extra' costs. But an easier way would be to start using some construction software that can provide these reports for you and at the same time enable you to prepare purchase orders.
One such construction software is Hyphen Homefront . This software enables you to create any number of 'extra' cost codes that are used when creating a purchase order for 'extra' items either from the office or in the field.
Standard reports can provide you with all the information on where the 'extra' costs are being created, on what job and from which contractor/supplier and purchase order area.
Find out more about Homefront by contacting Alpha Edge today.
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