Why Back Costing is Worth Your While
Stay informed financially
Back costing is another of those pesky financial tasks that can make or break a trades company. It boils down to a simple idea: you need to be charging more than it costs you to complete the project, or your profits will be nonexistent.
To back cost a job is to look back over a completed job or project, or one in progress, to determine whether your quoted cost has covered or will cover the actual costs incurred (labour, materials, overheads) with a profit on top. Whether or not it is too late to change the outcome, knowledge is power. Thorough back costing will equip you with the information you need to quote accurately and adequately going forward.
On ‘charge up’ jobs, back costing can help you to ensure all costs incurred are correct and catch errors before they become a bigger issue. Perfecting the process is quite a skill, but it’s one aspect of business where tech tools can do a lot of heavy lifting!
Be informed with back costing
If you are not back costing diligently, can you confidently state what your profit margin is? Is your quoting accurate or is it simply educated guessing? Taking the time to look back on your projects enables you to see exactly what you have spent on each job and what you are making in profit. Back costing means you can keep a good track of the following:
- Materials purchased and not used on a job, therefore needing to be credited by the supplier.
- Whether your suppliers are actually getting those credits through to you.
- Whether your labour costs and estimates are correct.
- Whether any of your services are not worth continuing to offer.
- That you are not invoicing a customer for materials that ended up not being used on the job.
- The status of your profit: does it exist? Is it adequate?
Removing nonprofitable services from your repertoire, increasing your markup, leaving more room for error in your labour estimates: difficult but transformative business decisions like these are more easily made when you have the cold, hard facts (in this case, numbers) in front of you.
Let’s be real: as a business owner, you went into it intending to make a profit. And to quote Bayley Peachey of Trade Business Success:
“profits are not something you hope for at the end, it is something you plan for in the beginning.”
Having robust back costing processes in place allows you to understand how your business is truly performing to assist with growth management and cash flow forecasting.
One tradie’s case for back costing
One trades client invoiced a completed job before back costing had been done. Once done, it revealed that the customer had been mistakenly charged for two of an item when one had actually been returned to the supplier. This meant that it was necessary to refund the customer plus spend a significant amount of time on comms and correcting the error. None of that time is billable! Thankfully, in this case the error was caught quickly, but this type of thing can cost a lot of time and money. Back-costing done quickly and properly can prevent both small issues and large ones, as well as helping to create a blueprint for accurate quoting.
Use tech to your advantage
The right job management software platform is a trade company’s secret weapon in many different ways. One bonus of a good JMS is the ability to back cost with ease! If your people are using the software correctly and inputting all the necessary information, back costing a job can be as easy as pulling a report—no poring through invoices and timesheets.
Need help finding a digital system that will do it all, including the time-consuming task of back-costing? Get in touch with the team and let’s transform your operations together!