The Importance of Understanding Job Costing

RCS Influencer Marty Stout says that understanding your company's job costing can help improve your company's ability to turn a profit.

Editor's note: The following consists of a conversation between RCS Multimedia Manager Megan Ellsworth, and President of Go Roof Tune Up Martin "Marty" Stout.

Megan Ellsworth: Hello everyone, my name is Megan Ellsworth. Back again for a January influencer topic here with Marty Stout from Go Roof Tune Up. Hi Marty, how you doing?

Marty Stout: Hi, how are you this morning?

Megan Ellsworth: I'm doing good. I'm excited to hear your thoughts on this month's topic. So let's just dive right in. So for this month, our question is understanding your numbers. What do roofing companies need to do to be sure that they are making a profit being more than profitable?

Marty Stout: Well, I appreciate the opportunity to answer the question, and I apologize for being late in the cycle.

Megan Ellsworth: Oh, no worries.

Marty Stout: There's nothing more important than understanding the numbers of any business. But roofing contractors as a group, and I'm certainly one of them, we oftentimes are very good tradesmen. We love our trade and we're not always really good accountants. And so we get confused with the numbers. If we go sell a $25,000 re-roof on a big house, we think we've just hit the lottery sometimes. And we have to understand in that $25,000, is there any money left or did we spend $27,000 to do that $25,000 job, which can happen.

So the best way that a roofing contractor can understand his numbers is to focus primarily first on job costing. And if a roofer really understands or anybody, but we're talking roofing right now, if a roofer really understands what it costs him to do every job and he has a set overhead figure and a set profit figure that he's built into that job and he tracks the job, what are my true costs? What is my overhead percentage for my business and what is the profit that I'm targeting and did I achieve it here? If he tracks every job and knows exactly what those costs are, then he can make decisions on the next job that he's going to bid and he can make decisions on what his overhead should be. And years ago, if I can share a story with you.

Megan Ellsworth: Yes, please do.

Marty Stout:
I knew an expert consultant who was selling a program, or attempting to sell a program for tracking, job costing and things. And this was 35 years ago probably when computers programs for all contractors were very, very new. And he had an analogy that has stuck with me ever since. And we did everything in those days on a ledger sheet, and I had a ledger sheet for every job that I did, and I could track every one of my costs and what my overhead was and everything. And my dad taught me that. And the guy that he first started working for in the 50s, taught him that it was a basic ledger sheet. Anyway, the analogy that this expert consultant shared with me was the first roofing job that I ever did, or any roofer ever did. I can take you to the house and I can show you the house.

I can tell you about the people. I can tell you about how many bundles were left over. And now this was well over 40 years ago. I can tell you what material I had left over. I can describe the half a box of nails that I had left over and the can of mastic and the two bundles of rigs that I was short. All of that is predominantly in my mind as I think about that job. And so I can trace that back. I know exactly what I did on that job. And his analogy is that's similar to walking down the street and looking at a telephone pole. As you're walking along, you're not in a hurry. You're walking along, you look this telephone pole and you see bend over nails on it, and you see where someone has posted a sign, that garage sale, or you even look close.

You can see on the post there's a number. The last time the number of the pole is inventoried. And when it was last inspected, it's all on the pole. You can look up and you can count the wires. All that detail is available to you because you're just walking by this telephone pole. When you get on a bicycle, you can see the telephone pole and you can see some of the detail, but you can't see near as much of it. When you get in a car, you see less detail. There's telephone poles, but you see far less detail. When you're in a supersonic airplane. You just see a blur. You don't know what's there.

So as your business grows, you're moving faster and these jobs are moving by you faster. And you have to be able to capture the information and analyze everyone. And he described this camera that the military has on supersonic planes where they can take a picture, they can freeze frame a picture, take a picture of a telephone pole and tell you everything about that telephone pole in great detail. And so in business, it's the same thing. You have to have a system, whether it's a ledger sheet or one of these new high tech programs that will run through a CRM or something, whatever works for you. You have to have a system. And depending on your speed, depends on how high tech the system needs to be, but you have to be able to freeze frame every job and look at it and analyze.

Did I make any money? Did I have a half a box of nails left over? Is there any trim that was short? Whatever those things are, you have to do that because once you just start looking at the big picture and you're just blending all of the jobs into one and you think you're profitable, you're likely not. And so the first and foremost thing to watch for every contractor, especially as someone is growing, is individual job costing.

Megan Ellsworth: Yeah, absolutely. I was just going to say that is so well said, and thank you for replying. That's great.

Marty Stout: So I have one more piece on this same thing. The second most important thing, when it comes to what, and in most people's mind, this may not be the second most important thing, but it might be that the invoices get old. If you're doing homeowner work and you don't collect a check the day you finished the job, you have a problem. The longer that sits in your aging, the less likely it is to collect a hundred percent. And so if you make a deal with someone to get paid in 15 days, on day number 16, you have a problem. And it's for watching numbers, those two things. If you watch those two things, those two numbers, your job costing and your receivables, you're probably going to be okay.

Megan Ellsworth: Absolutely. Well said. Yay. That was great. Okay, I'm going to stop the recording so we have two recordings.

Marty Stout: Well, thank you.

Marty Stout is the president of Go Roof Tune Up Inc. See his full bio here.