Preface: Job costs are a decisive factor in service businesses. If you didn’t know your job costs before, call your CPA today.
What is Job Costing
Do know your job costs; maybe you need an Excel document from Robert Cratchit? Costs count; and accurate job costing is a major component when analyzing your business profitability. If you have a team of service technicians who say service computer networks, how do you know how much to bid on a new server install, or client network upgrade? How do you calculate what to charge per service hour? For instance if one technician works on three projects in a day, how do you begin to calculate your cost for upgrading a hard drive, repairing a server power supply, and resolving malware concerns?
Here’s Robert Cratchit’s expertise explained. Let’s say your service technicians costs $40 per hour including employee benefits, employer taxes, and perks. If a hard drive upgrade takes 3 hours, your cost is $40 * 3 = $120 for labor. So what should you charge? Let’s say you have 5 technicians who work a combined 420 billable hours per month. Your cost for employee wages would be approximately $1,600 per week (40 hours * $40 per hour), and $6,400 for the month ($1,600 * 4 = $6,400 – per technician, per month). Let’s say your overhead on the five technicians is $175,000 a year [rent, utilities, office supplies, advertising, office staff and sales reps]. In this instance your fixed cost for the service technicians salaries plus overhead is approximately $575,000 per year. At 420 billable hours per month average, your five technicians would work 5,040 hours a year. $575,000/5040 = $114 per hour of labor costs to breakeven. For an 8% net profit margin, you should charge at least $123 per hour ($123 * 5040 = $619,920 of yearly sales). So when you calculate costs of your technician wages at $40 per hour, you can see that your true cost for your business per billable tech hour is closer to $114 per hour to upgrade the hard drive, repair the server power supply, and resolve malware concerns
If you didn’t accurately cost your operating expenses in the above example, and billed $95 per hour, your business would have a loss of $96,200 for the year based upon the 5,040 billable hour metrics. However, if you can optimize efficiency from you technicians and have only 4 technicians working 1,260 billable hours per year [vs. 5 technicians working 1,080 billable hours individually] you could decrease service wages $76,800, and decrease operating expenses and service wages to $482,200 per year to say an average of $95 of costs per hour.
If you can optimize efficiency more, let’s say you have a good sales rep and have your 5 techs working 1,500 billable hours per year. That would be 7,500 billable hours, yearly. With an overhead cost of $175,000 and technician wages of $384,000 your total costs of say $575,000 would result in a cost of $77 per tech hour at 7,500 billable hours. So if you billed $95 per hour you would net $18 per technician hour, or $135,000 for the year with 5 billable service technicians.
Summary: Costing is key to profitability in service businesses. If you are uncomfortable with job cost methodologies, sharpen your pencil; contact your accountant. No matter your line of business service, you should calculate costs before they become an issue; maybe as frequently as monthly, to ensure profitability.