Last fall we began collecting data for our Cost of Doing Business Report, which will appear in our March issue. The NAHB research team collected the data but found that they had to spend a lot of time on follow-up calls to clarify the methods companies used to calculate common financial benchmarks. This is a problem that plagues this column, too, because remodelers can't seem to agree on a common definition and shared formulas for critical financial measurements.
Even something as fundamental as cost of goods is not exempt. Differences between cash, accrual, and percent-complete accounting methods are part of the problem. But remodelers using the same method still disagree on what should be counted as a direct cost and what is part of overhead.
A good example is supervisory time. Most remodelers count field supervisors, such as production managers, as overhead. But most of what production managers do can be pegged to a particular job. Why not put these costs above the line, as direct costs to the job?
Steve Farrell has never done it any other way. The owner of Farrell Construction, a third-generation remodeling company in Palo Alto, Calif., includes supervision in an above-the-line item in all estimates, along with temporary sheds, jobsite toilets, fencing, hauling expenses, and final cleanup costs. His production managers fill out time cards for all their hours, and “they all understand the affect of overhead on a company,” Farrell says. “I make sure.” He challenges any hours that haven't been assigned to a particular job because he wants everyone to be aware that those hours become overhead.
For large projects, Farrell figures about 10 hours per week for supervision, and he estimates almost double that on “smaller” projects, which for him are in the range of $300,000.
What do clients think about supervision costs? Farrell does a lot of time and material work, so the line item for supervision is always listed in estimates. “It can be a large line item number,” says Farrell, “and because people tend to focus on the large numbers on their estimates, it is often discussed. But I always explain that proper supervision saves money overall when the project is done. I've never had anyone complain at the end of the project about the cost of supervision; in fact, just the opposite.”
What about vehicles, cell phones, and other expenses generated by production managers? Farrell puts these in overhead, but Joan Stephens keeps them above the line. They are all part of a labor-burden formula used to calculate labor billing rates. The current president of NARI, Stephens owns Stronghold Construction in Boise, Idaho. The company's production manager has listed his hours as direct costs to the job for five years — ever since Stephens changed her company's accounting practices to align with those of her Business Networks peer group. But knowing what she does now, she would have made the change anyway. “Psychologically, it makes the cost of the job more realistic,” Stephens says. “Salespeople feel better about the overall cost if more stuff is put into hard costs. It just makes you feel secure that you've got it covered.”
Stephens figures about 2% of total costs into every estimate to account for supervision time. This number is higher when the job is outside normal travel time from the office, and she also adjusts this percentage periodically based on job-cost analysis of her production manager's time sheets. But unlike Farrell, Stephens finds that smaller jobs require less of the production manager's time because the project manager (similar in function to a lead carpenter) handles many of the meetings and other non-productive time.
Why It Matters More accurate estimates. Supervision time is often omitted from estimates or undervalued, which ultimately reduces net profit on the job. Including production managers above the line ensures that supervision time is accounted for.
More accurate job costing. When supervision is a direct cost, production managers keep time sheets like everyone else. If supervision costs are higher than anticipated, it's easier to find out why and make adjustments in future estimates.