Isaac Ludlow Series Part 11: The comprehensive guide to effective back-costing

Hey team,

Do you ever find that you’re working really hard in your business, but after you’ve paid all your bills there’s not as much as you would like left over? Do you ever wonder how much you are actually making in profit each week, each month, or per job?

If you have back-costing in place already, then congratulations!  I’m sure you’ve found the benefits already.

However, if you’re not back-costing at the moment and you’re not sure how much you’re making on each job - or if you are making any profit at all, then today’s article is perfect for you, you’ll see some examples of back costing per month, per job and per hour as well as some simple tips for how to get back-costing underway, so you’ll know exactly how much profit (or loss) you are making.

To put it really simply, back-costing is working out how much profit you made in your business and breaking it down into parts – like profit per hour, week, month, job, team member, or subbie.

Here are a few simple examples of how back-costing works:

Back-costing for an individual month: Let’s say, for example, that you have expected to earn $50,000 in one month, and after you pay your team, materials suppliers, and subbies, you have $15,000 of gross profit left over to pay the overheads of running the business and $5,000 of net profit left over after that.

In the process of back costing, you might find that you earned $50,000, but once you’ve paid your team, materials suppliers, and subbies, you only have $8,000 to pay the overheads and instead of having profit leftover, you’ve made a loss of $4,000 this month.  It’s very handy to know these kinds of figures so that you can work out what’s really going on and make changes to ensure that the future is more profitable. (These figures will be available in your profit and loss statements in your accounting software)

Back-costing the hourly rate for you and your team: For charge up work, one of the most important things to back-cost is the hourly rate - for you and your team. Let’s do an example, let’s say you wanted to work out how much profit you are making from the work of your team members:

If your charge out rate is $60 per hour and you are paying them $25 an hour, at first glance, it might look like you are making $35 dollars per hour.

In this example, as well as the $25 you’re paying them, you may have extra costs such as: Income tax 20% ($5.00), Holiday pay 8% ($2.00), Sick leave 2% ($0.50), ACC 6% ($1.50), Kiwisaver 4% ($1.00)

Total extra costs: $10.00

The hourly rate initially looks like you’re making $35 per hour, but when you take out the taxes and extra costs it drops down to $25

You may also have other associated costs like paying them for non-chargeable time, training time and expenses, phone, vehicle, tool allowance, apprenticeship costs as well as team social events or gifts that average out over the year.

It may be that you’re only making half what you thought you were making

If you want to have a profitable business, you’ll need to know these figures.  It will give you the information you need so that you can work out what’s going on and make sure that every hour charged is profitable and your team is providing the value you need from them.

Back-costing for fixed price jobs: The simplest way forward is to make a list of what you quoted for, and then compare that to the actual costs on the job. Here’s a real quick example of back costing a small fixed price job.

Say you’ve quoted for a job like building some steps on a deck. You may have quoted $1,500 to the customer -  $1,000 for labour and $500 for materials. When you did the quote, you allowed for your expenses; including the wages of $700 for your team to do the job and $350 to your supplier for the materials, which should leave you with a profit of $450.

However, when your team dug the pile holes, the ground was really hard, so it took longer than expected.  When the guys picked up the decking timber, they didn’t pick up enough and had to make another trip to the supplier to pick up a few extra metres.  So in the end, the job took longer than expected. The back costing might look something like this:

Materials Quoted at $500, expected cost was $350, actual cost was $350, leaving $150 profit.

Labour Quoted at $1,000, expected cost was $700, actual cost was $900, leaving $100 profit.

In this example, the total profit that was expected was $450, but the actual profit for the job was only $250. It's essential to know these numbers so you can either charge for variation or make sure that you charge more in the future

Tips for getting started on back costing:

When you’re quoting, you have probably budgeted the number of hours for labour, material quantities, quoting time, project management time, time to pick up materials, profit margins, and allowances for errors or delays. To keep it real simple, using a piece of paper or spreadsheet makes this fairly easy.

When you have the information, you may wish to work out what kinds of jobs are more profitable and whether you need to quote higher so that you’re making a good margin on your jobs, or you might have a wake up call realising that certain work is making you very little profit or even a loss. You may decide to stop doing some jobs and activities because there’s no money in it.

I hope you have an exciting and profitable day.

Isaac Ludlow

Business Coach
ActionCOACH 
The World’s #1 Business Coaching Firm
Hamilton, New Zealand
Mobile: +64 27 548 3302

If having a successful team is important to you then please get in touch with Isaac at isaacludlow@actioncoach.com or 027 548 3302 who can work with you to achieve your goals.