Cost Codes: Too Many or Not Enough

Charles Mahaffey

July 2005

I know this is probably a boring subject for some of you, but just stay with me because I feel that this subject is of major importance to any contractor.

Having a cost code for every material item or labor function that you use on a job is overkill. Conversely, not knowing the cost status of your projects until they are completed is moronic!

Just to give you an idea of what cost codes can do to help you in the management of your business, I will tell you the story of "Dufus,” the project manager.

Dufus was one of about 10 project managers who worked for me when I was president of a large subcontracting company a few years ago. Let me set the record straight here, because I know some of you are wondering why I would even hire Dufus: I didn’t hire him, I inherited Dufus when I took the position.

Shortly after assuming my position with the company (and practicing what I preach), I was analyzing the job cost on several of our large projects. I took the cost reports and visited each job to see how the estimated cost compared to the actual cost incurred. I took a floor plan and marked the progress of each labor activity on the floor plan. In the next step I applied the unit cost (from the estimate) and extended it to compare the estimated to the actual cost.

Well, almost every cost code looked reasonably close except one, and that was the cost code for cleanup. The cleanup cost was huge for about five of the projects. As I thought about the stage of completion of each project, I realized that one project had about $10,000 posted to cleanup—and the board hanging had not even started yet! How could we have incurred any significant cleanup cost while in the framing stage? It just didn’t add up.

I got with my regional manager and the accounting manager and told them my concern about this cost. I asked them to "drill-down” and find out everything they could about these costs. I also asked them not to say anything to Dufus yet because every one of the jobs with cleanup cost overruns belonged to Dufus. Something was beginning to sound like a duck quacking, and at this point I did not want to spoil the surprise before I could see the duck walking.

In a couple of days the information related to these costs was now compiled. It seems as though Dufus had hired the services of a "rent-a-drunk” labor service to provide cleanup labor for each of his projects. What really looked suspicious was that Dufus (not the job foreman) signed all of the labor tickets. A number of the tickets showed overtime, double-time and Sunday postings. Hmmmm. First it sounded like a duck, and now it walks like a duck—you know it must be a duck. Could our Dufus possibly be a thief?

Yes, Dufus was a thief. We brought him into the office and laid all of our findings on the table for him to see. After asking him what this was all about, Dufus confessed that he and a representative with the labor service were partners in a scam to split the money on falsified labor tickets. This one cost code led to a discovery of more than $120,000 that had been stolen from the company.

How closely do you monitor job cost? Dufus is still out there. Would you know if he were working for you?

If you are in the drywall business, I suggest that you breakout your labor cost to monitor these items: supervision, cleanup, stocking, exterior wall framing, trusses, interior wall framing (deck height), interior wall framing (below deck), drywall ceiling and soffit framing, exterior sheathing, wall hanging, doorframe installation, drywall ceiling/soffit hanging, finishing and insulation.

Personally, I would not go to great lengths to monitor all of the different material cost codes. I believe that too many cost codes for material slows down the entire cost accounting/bill paying process. Your material cost is usually set and should not vary more than 2 percent of your overall material budget.

About the Author
Charles Mahaffey is president of Accuest, LLC, Marietta, Ga. Accuest provides estimating and consulting services for commercial drywall subcontractors.