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How do you know what you should charge or what you can afford to discount unless you know how much it costs to perform a detail job? How can you increase your efficiency if you can’t handle job costing?
Job costing, in its simplest form, is taking the amount you were paid to do a job and subtracting from it the money you paid to get the job done — your costs for labor and materials. Overhead costs and burden should not be included.
Once you’ve determined how much a detail job costs, then you can figure your gross profit in terms of a percentage. A good industry average should be about 40 percent gross profit. After figuring your gross profit, you then deduct your fixed and variable expenses to arrive at a bottom line profit or loss.
Certainly, the most difficult cost to compute is employee labor. As a rule, the following items need to be calculated in order to determine the true cost of labor:
• Wage per hour;
• Worker’s compensation insurance rate;
• State unemployment insurance rate;
• Federal unemployment insurance rate;
• FICA rate;
• Medical benefits;
• Paid vacation, holiday, and sick day hours per year; and
• Bonuses, commissions and other benefits.
The true cost of labor must include all of the benefits because you are paying for them as a result of the volume you do. Some of the insurance taxes you have to pay are based on the hours your employees actually work as opposed to their total income.
Once you’ve figured your labor costs per hour for employees, you then multiply that by the number of hours worked on a particular job. When running these formulas, 15 minutes won’t usually affect the efficiency or gross profit. If an employee spends one hour and 14 minutes on a job, you can charge the job one hour. If they work one hour and 16 minutes, though, you might want to charge 1.5 hours.
In some cases, owners and employees can become worn down by the daily routine of micromanagement (job costing every job).
In some shops, especially those where technicians are paid by the hour, spot job costing is an option. Rather than costing every job that comes through the shop, a vehicle is randomly chosen to be tracked through the shop. Simple detail jobs, such as a wash, engine clean or carpet shampoo, would be job costed infrequently because of their simplicity.
The greater concern for owners should be the full detail jobs. These types of jobs need to be tracked to see how long workers are taking to complete the entire job versus what was estimated and paid for by the customer. From there, you can look back and try to analyze any inefficiencies or excessive time it took to complete the detail.
It is also helpful to have the full support of your detail staff. If you’re spot checking, keep it as simple as possible and inform them of the randomly selected vehicle. This will help minimize any inconveniences, promote team work, and reduce tracking burnout. Of course, computerization can go a long way towards avoiding burnout.
Beyond job costing
Is gross profit an important measurement? Absolutely. Is job costing every detail job important? Possibly not. You job cost a job to make sure your process is working right. If you’re really getting everything you can out of a job — and you really have all things working — then what is job costing every job going to tell you?
For example, if you have a $200 detail that takes all day to complete and a $500 job that takes two days to complete, what would be your dollars per day? What we are saying is that your gross profit can be very high on the $500 job, but if you can’t turn it around fast enough, it doesn’t earn you (as many) dollars per day.
As to whether people should measure their gross profit on every job or spot check, that’s an individual business decision. As to not job costing at all, well, that is probably not a good decision at all.
But whatever you do, gross profit is not the end–all. The key is being able to do more with less — or being able to do the same amount with a lot less. Why? Because you are not going to be paid – and you are not being paid now – for inefficiency. You have to find ways to turn around cars faster. Detailers are recognizing that the faster they turn a car, the more money they actually make, regardless of the actual gross profit (per job) — to a degree.
Say you’ve already maintained that gross profit because your system works right. You can’t squeeze any more out of it. You’ve done everything you could. Now, let’s take that $500 job. What if we get rid of all those efficiencies — the delays, the bottlenecks, etc.? What if we could eliminate all of that and turn that car in one day instead of two? That is a much greater profit.
Remember, turn rate — your prosperity is going to be based on faster turn rate.
R.L. “Bud” Abraham is president of Detail Plus Car Appearance Systems,