If you’re running a security installation business or working as a security dealer, you’ve probably heard the term “job costing” thrown around. But what exactly is it, and why should you care? More importantly, how can it transform your business from guessing at profitability to having concrete data that drives smart decisions?
In this comprehensive guide, we’ll break down everything you need to know about job costing for security dealers, including the three main methods and how to choose the right one for your company to improve revenue and profitability.
What is Job Costing?
Job costing for security dealers is essentially project revenue and profit tracking. Think of it as putting your finger on the pulse of your security business’s financial performance. Rather than focusing on the negative connotation of “costs,” you can view job costing as a comprehensive system for understanding the financial performance of each project.
At its core, job costing for security companies involves what we call the “three T’s”:
- Tracking – monitoring all expenses and revenue related to specific jobs
- Tracing – following the flow of costs through your system
- Troubleshooting – identifying what went right or wrong on each project
Job costing helps you understand how complete you are on various jobs, how much you need to bill, and most importantly, whether you’re doing what you said you were going to do when you submitted a proposal to your customer.
Advantages and Disadvantages of Job Costing
Advantages
Improves Pricing Strategy: With concrete data on actual costs versus estimates, you can refine your pricing to ensure profitability while remaining competitive.
Tracks Productivity and Profitability: You’ll know exactly how much labor and materials went into each security installation job, helping identify your most efficient processes.
Enables Troubleshooting: When a job doesn’t perform as expected, job costing data helps you understand why. Was it more labor-intensive than anticipated? Did material costs exceed estimates? This insight is invaluable for future projects.
Provides Business Intelligence: Job costing gives you insight into potential revenue for any given month or year, helping with cash flow planning and resource allocation.
Supports Business Growth: As you expand into new security service areas, job costing helps you determine if you have the skill set and resources to be profitable in those areas.
Disadvantages
Requires Time and Attention: Job costing isn’t a “set it and forget it” system. It requires ongoing management to ensure your team is properly allocating time and materials to jobs. For job costing to work, everyone to follow the process consistently.
However, the benefits far outweigh the drawbacks. Job costing works because you’re putting time and effort into it!
The 3 Job Costing Methods
There are three job costing methods for security dealers, and they are primary methods for handling job costing, each with its own advantages
and complexities:
1. Direct Expense Method
How it works: Any cost incurred on a job hits your profit and loss statement immediately. This is considered the easiest of all three methods because you simply record receivables and payables, and if they’re job-related expenses for security projects, they immediately impact your income statement.
Key requirement: You must perform over/under billing adjustments to ensure proper matching of revenue and expenses. Without this adjustment, you might show a significant loss in one month when you’re incurring costs, followed by a huge profit the next month when you bill the customer.
2. Work in Progress (WIP) Method
How it works: This method matches revenue recognition for security projects billing to hit your income statement as you bill, but expenses are held in WIP accounts on your balance sheet. When you bill a percentage of the job, it brings down a corresponding percentage of the expenses you’ve incurred.
Key requirement: You must regularly “true-up” your costs to ensure accuracy. If you’ve billed 50% of a job but only incurred 25% of the expected costs, the system will only bring down 50% of the actual costs incurred, potentially showing inflated profits until the remaining costs are incurred.
3. Completed Job Recognition Method
How it works: With this method, revenue and expenses do not hit your income statement until you mark the job as complete. This method is the most accurate job-level profitability since all costs and revenue are matched when the job closes. You can create accrual entries for partially complete jobs to smooth out monthly financial statements while maintaining the integrity of job-level reporting.
Key requirement: You must review and close jobs routinely. If you don’t close jobs regularly, your income statement will look very anemic because no completed work is being recognized.
Which Method is Right for Your Security Business?
Choosing the right job costing method depends on several factors:
Choose Direct Expense if:
- You primarily handle small, short-duration jobs
- You want the simplest system to manage
- You’re willing to perform monthly over/under billing adjustments
- Your team can consistently allocate costs to jobs as they occur
Choose Work in Progress if:
- You want to match revenue recognition with your billing cycle
- You have the resources to manage the true-up process
- You need more sophisticated cost management than direct expense, but you aren’t ready for complete job recognition
- You can commit to the ongoing attention this method requires
Choose Completed Job Recognition if:
- You handle larger, longer-term projects where you want to see the complete financial picture of each job before recognizing any profit or loss
- You want the most accurate job-level profitability reporting
- You have processes in place to routinely review and close jobs
- You’re comfortable with potentially uneven monthly financial statements (unless you use accruals)
Job Costing Best Practices for Security Dealers
Regardless of which method you choose, success depends on several key practices:
Use Expected Completion Dates: Enter expected completion dates on all jobs. This allows you to run reports showing which jobs should be completed by month-end, helping with revenue projections and resource planning.
Review Jobs Routinely: Don’t wait until month-end to review job performance. Jobs should be reviewed as soon as they’re listed as completed to identify issues and apply lessons learned.
Track Labor Accurately: Ensure technicians are consistently applying time to jobs. This not only helps with job costing but also lets you understand technician productivity and availability.
Issue Parts Directly to Jobs: When possible, issue parts directly to jobs rather than through inventory. This is especially important when you receive special pricing on parts for specific jobs.
Focus on Percentage Complete: Regularly monitor how complete each job is based on costs incurred versus budget. This helps identify potential problems before they become major issues.
The Bottom Line on Job Costing for Security Companies
Job costing isn’t just about tracking expenses – it’s about building a system that helps you grow your business profitably. It provides the business intelligence you need to make informed decisions about pricing, resource allocation, and business development.
If you’re not getting the financial visibility and control you need, it might be time to implement or improve your job costing system. Contact us to find out how our business management software for security dealers can help you implement job costing to help you better understand the financial performance of your projects and grow your bottom line.
Your expertise in physical security and installation work got you started in business. Job costing will help you understand and expand that expertise while building a more profitable, sustainable security company.