You Should be Back Costing—Here’s Why
Arm yourself with important information about your pricing
There’s a simple reason that back costing is a worthwhile activity for any trades business owner! It’s this: you need to be charging more than it costs you to complete any given 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, if you’re on top of things) to determine whether your quoted cost has covered or will cover the actual costs incurred (labour, materials, overheads) plus profit. Whether or not it is too late to change the outcome, knowledge is power. Thorough back costing will provide you the information you need to quote accurately and adequately going forward.
Many trades businesses are in a quiet patch, and that’s a great opportunity to look at your financial systems.
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 from it. You should be keeping track of:
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. Are you charging out your staff taking into account the amount you pay them plus KiwiSaver, ACC, and any other costs associated with them?
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.
Your back costing investigations don’t have to wait until the very end of a job! You can assess the progress of your costs as you complete stages—of course, this does require breaking up estimates by stage too: for example, excavations, foundations, framing, roof, each as a separate item. Back costing by stage can help you to get back on track if things aren’t going to plan. It’s an opportunity to adjust (where possible) before it’s too late.
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 the tools at hand
There’s some good news for busy trades business owners: if you have a good job management software in place and properly implemented, it will do the lion’s share of the back costing job for you. Make sure you’re entering the right information, pull the right reports, and you’ll know what you need to know. Need help choosing or setting up your JMS? Our sister company FreeUp has all the expertise necessary
Having the right people on your side is also a big help! Released has a broad pool of talent including VAs who specialise in all the financial details of running a trades business. Keep your books neat and your profits on track with our business support services—just book a chat to get the ball rolling.
