You see an email come through from a new customer. They have a job they need filled, and it’s a big one. They want to know what your best price is, as they’re in the process of collecting quotes from a few different shops. You need to give them your most competitive price because you may not get a second chance to bid.

For many shop owners and managers, this is where things get a bit nerve-wracking. You obviously want to put in your most competitive bid, but you need to make your margin on the job. The problem is, you don’t know what a good margin is because you’re not 100 percent sure what the job will cost.

If you find yourself in this position from time to time, you’re not alone. At Shoptech, we talk to shop owners and managers everyday and one of their biggest challenges is accurately costing their jobs so they can send out good quotes.

Some shops still use a flat-rate method. They apply an hourly charge to each job and then add on a flat margin, hoping that it all washes out in the end. Others use activities-based costing, which is usually more accurate, but is still only as good as the data that’s put into the system.

Having the right job shop software is a good first step toward getting your costing processes under control. The job is just too complicated to handle with back-of-the-napkin math or even on a spreadsheet. A strong job shop software platform can help you isolate each specific cost and build it into every job you handle.

If you haven’t taken the step yet of using job shop software to refine your costing process, now may be the time to do so. Your costing process could be costing you big money. Here are few ways that bad costing could be impacting your business:

You’re not covering overhead costs.

The biggest problem with the flat-rate costing model is that you’re really just guessing on whether the added margin covers all of your overhead and indirect expenses. You probably know what the materials and direct labor on a job will cost, but how can you know if your margin covers everything else?

And let’s face it, “everything else” includes a bunch of stuff. You have your machinery financing costs, indirect labor costs like insurance and payroll taxes, rent, sales and admin costs, and more. Can you honestly say that your flat margin covers all of those things and more on every single job?

This can even be a problem on activity based costing models if you’re trying to do it all on a spreadsheet or an antiquated software system. It’s easy to forget about an expense or incorrectly apply the expense across each job.

That’s why it’s so important to use a software package that has a robust costing module. The software will make sure you don’t forget any kind of overhead. And it will also make sure that those costs are correctly allocated across all of your jobs.

You could lose business because you’re bidding too high.

Of course, the other side of the coin is that you may know that your process is broken and you may add on more margin to make sure you don’t miss anything. The problem with that, though, is obvious. You might be adding too much margin onto the jobs and sending out quotes that are higher than your competitors.

That may cause you to lose out on jobs that would otherwise be profitable. This is one of the fallacies of the flat-rate model. You can’t know that the margins are the same for every job. What if you are quoting a job that’s right in your wheelhouse and will require very little setup or transition time? Shouldn’t the margins on that be less than the margins on a job that could require a lot of prep work?

The only way to avoid losing business to bad costing is to use activity based costing with a detailed and thorough costing software system. That way the system can calculate exactly how much overhead and indirect expenses should be factored into the quote. That can help you offer your most competitive price possible and land more business.

You could make ill-informed equipment purchase decisions.

Your shop equipment is at the heart of everything you do. The more advanced and efficient your equipment is, the faster your turnaround can be, which can help you pump out more product and boost your bottom line.

If you’re like most shops, you face equipment decisions on a regular basis. At their core, most equipment buying decisions revolve around one question – Can this equipment help my shop be more efficient?

The problem is that it’s hard to answer that question if you don’t know what your current costs are. Do you know how much of your current equipment costs are allocated to each job? Do you know how improving your turnaround time would affect your direct and indirect labor costs?

That’s information you need if you want to make an informed decision about equipment buying. Again, the right costing software solution can help you do this.
At Shoptech, our E2 job shop software helps shops of all types and sizes get a firm grasp on their costing. For more information on how E2 can help you, contact us today. We would welcome an opportunity to show you our software and to learn more about your shop.