1 Challenge
- “I don’t know how to prepare cost estimates for my business services.”
2 Questions
- “What is the best way to prepare job costing estimates?”
- “Will it impact my pricing and profitability?”
3 Ideas
Setting the right price for your services and offerings is the key to your company’s profitability. But if you don’t know your costs, you will struggle to prepare the best possible pricing estimates that can deliver a solid profit. And if your prices are lower than your costs, you will run into losses. Over a period of time, these losses will add up, and your business may even go under. To avoid such eventualities, job costing and pricing are both crucial.
In this article, we’ll show you 3 ways to estimate the costs in your business, so you can set the right price for your services and maintain your company’s profitability.
#1: Monitor Costs Daily
To ensure that job costs don’t go over profits, it’s essential to regularly track the costs. Ideally, you should track costs daily, to ensure that you don’t miss any critical information that may affect the way you price your offerings. Monitoring costs every day increases the chances that your cost estimates will exactly match your final project.
It will also help you identify any possible cost overruns, and take steps to prevent them from happening. More importantly, it will enable you to price your services with a healthy margin that covers your costs, and also yields a profit.
#2: Use Software
If your business is very small, primitive cost tracking methods like paper or spreadsheets may still be suitable. But as your company grows, you will get more projects coming in. You will have to prepare separate cost estimates for all these projects before you can price them. For this, it’s better to use costing software.
A job costing app or accounting software with a built-in job costing system can help improve the accuracy of job costing. You can experiment with numbers, and identify the right costs and set the right price for each project. You can even insert the data from completed projects into the software and apply that cost information to improve pricing for new bids or proposals. Over time, you will find that the investment is worth it in terms of accuracy, time saved, and profits earned.
#3: Identify the Scope of Work
Poorly defined project scope of work (SOW) often leads to poor costing, unprofitable pricing, and cost overruns. If possible, start every project with a detailed SOW or contract that takes all possibilities into account, and also allows for adjustments that could affect your costing or pricing. For example, the SOW could allow for price increases to cover any increases in the costs of materials.
You could also build some padding into your contract from the outset to cover such eventualities. Otherwise, you may have to renegotiate the contract, reduce the scope of work, or take a hit to your profitability. These issues can annoy clients, harm your reputation, and affect your bottomline.
Conclusion
The profitability of your business depends on how well you identify your costs, and whether you price your services as per their value. As you improve your costing skills, you will see a positive impact on your business’ profitability. And isn’t that what running a business is all about?
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