Job Supervision as Overhead or a Direct Job Cost?

[Jerrald Hayes]

So do you think Job Supervision be figured for and calculated as part of your Fixed Overhead or figured for as a Direct Job Cost? Feel free to present any reasoning you have for your thinking too.

(Now to clarify something that could be confusing and hopefully to dodge any debate on the semantics of what I mean by Overhead as I've used the term here I am talking about Overhead as "Company" overhead or "Fixed Overhead", a cost of doing business so to speak, because it certainly could be argued that Job Supervision when you figure it as a Direct Job Cost it could very well be looked at and called "Job Overhead" since in a sense that is what it is in that case.)

[Brad S]

Re: Job Supervision as Overhead or a Direct Job Cost?

In commercial work, job supervision is always part of job cost. Makes sense, jobs vary, some are more time consuming to supervise than others. Making it a direct cost to the job is a more accurate way of quantifying the amount of labor it takes to supervise. Some jobs might be 2 hrs/day some could be full time. It is almost never the same percentage of cost for each job.

[Allan Edwards]

Re: Job Supervision as Overhead or a Direct Job Cost?

Several issues here. In the NAHB Chart of Accounts, there are two categories for expenses. The 800 (or 8000) series is for what I would call office overhead. The 400 (or 4000) series is for what I would call job overhead. Both are basically expenses, and hit the P&L monthly as opposed to job costs which accrue until the job is completed or sold. I do not charge my superintendent (job supervision) to the job in the sense that you would charge material or labor to a job and accrue in Work in Progress. I charge his cost to the 400 series which allows it to be expensed monthly, thus allowing me to “deduct” his cost immediately, rather than when a job closes, which may be several months later. Old saying “a tax delayed is a tax saved”. That’s the accounting and tax aspect of how I do it.

For internal purposes, some contractors may want to charge that cost to a job, for obvious reasons, primary being to see which jobs require more supervision. I don’t do that, for me it just wouldn’t serve any purpose. For higher volume homebuilders (unit wise) it probably makes sense to do this, in fact I think that is the advice Emma Shinn gives.

Another point is if you are doing cost plus AND you charge supervision to the job, obviously you would want to charge supervision to the job. In my cost plus jobs I absorb supervision.

If you hit a certain number in annual sales (I think 10 million), I believe you are required by the IRS to accrue all job overhead and charge to a job and not expense it out (like I do). I think. Not totally certain on this last point but I think I’m correct on it.

[RWeber]

Re: Job Supervision as Overhead or a Direct Job Cost?

I say it depends on the business model. The commercial work above I think was the first thing I thought of, and I would expect to see it as a part of each specific job. I see design/build residential with supervision as a line item for that job. But then I think of some trades, say a plumbing outfit, where each job is much shorter. You might have 5 vans out at 5 jobs in a day and one guy providing what little supervision is necessary, and there likely via phone. That scenario I think whatever time that business owner considers he's spending supervising the crews has to be looked at in a longer time scope than job to job, thus more readily being figured as just a part of the overhead of the business in general.

[Ode]

Re: Job Supervision as Overhead or a Direct Job Cost?

Since we, contractors are reactors to laws in many ways, this can be relevant. TN considers in its state laws that job supervisors hired by homeowners doing cutomer built addtions, (remodeling), and custom built supervisor positions for the construction of new homes the same as a General Contractor with the same freedoms and restrictions. It is new enough that we do not have court precedence to my knowledge.
Hopefully, this interjection will make thie decision more finite here.
Ode, CAPS

[Stacey]

Re: Job Supervision as Overhead or a Direct Job Cost?

Many expenses can be above or below the line. Not just job supervision is in question.
The more items you put above the line, the lower your markup can be.

A good example of this is vacation/holiday pay. Do you expense this to a job, or do you put it below the line as overhead?

I add many items above the line that people wouldn't think of - credit card fees (when a customer uses a credit card), fuel for company vehicles that are driven to a job far away, plan copies, gifts for customers, tools that are used for that job.

It's all in how you want to split it out.

[Jerrald Hayes]

Re: Job Supervision as Overhead or a Direct Job Cost?

Many expenses can be above or below the line. Not just job supervision is in question.
The more items you put above the line, the lower your markup can be.

A good example of this is vacation/holiday pay. Do you expense this to a job, or do you put it below the line as overhead?

Hmmnnn,... sematics again. I think of Overhead as being "above the line" since it is called Overhead, and Direct Job Costs are "below the line"

A good example of this is vacation/holiday pay. Do you expense this to a job, or do you put it below the line as overhead?

Regardless of the semantics, we think there are in reality two types of Overhead, Fixed and Variable and in my contracting company we look at vacation/holiday pay as a component part of Variable Overhead since it varies relative to how many employees. It is essentially a part of Labor Cost. Shawn McCadden (while he doesn't use the term VariableOverhead) wrote a good article for JLC on Calculating Labor Costs back in February 2002. And the Capacity Based Markup Spreadsheet that I have out (The PILAO Worksheet) works based on the idea that there is a distinction between Fixed and Variable Overhead costs.

I add many items above the line that people wouldn't think of - credit card fees (when a customer uses a credit card), fuel for company vehicles that are driven to a job far away, plan copies, gifts for customers, tools that are used for that job.

Other than special cases (such as going into Manhattan or off to the Greater Hartford area for a project we account for our normal fuel for company vehicles in our Variable Overhead. Most small tools we figure for that way too. As for a special tool for a specific job (generally things like cutter heads) we'll figure as Direct Job Costs. Plan copies we budget as Direct Job Costs too. Gifts for customers with us however comes out of our Marketing budget (Fixed Overhead) in that we have never though of gifts as part of the planning process for any project that I can recall but I get your point and could see planning for something like that as a Direct Job Cost.

Good points.

[Jerrald Hayes]

Re: Job Supervision as Overhead or a Direct Job Cost?

Randal, first of all, good article on Spraying Clear Waterborne Lacquer. I only wish it had appeared back in the beginning of this past summer for us but we're still going to put the information in it to use and get a pressure pot.

I say it depends on the business model.

While in my contracting operation we figure Job Supervision as a Direct Job Cost in a cabinet company I consult with we look at Job Supervision as Overhead. In their case they have two job supervisors, one roams out in the field supervising installations while the other is a shop foreman. In the case of the shop foreman it would be virtually impossible to break out and look at his time as Direct Job Cost billable to a specific job so it's looked at as overhead and while the Field Super's time probably could be looked at Direct Job Costs it's typically split pretty evenly project to project so it would be moot to figure it as a Direct Job Cost.

So while I think for most remodeling contractors and builders who work on varying types of projects it is a better practice to look at Job Supervision(corrected 11.02.05) as a Direct Job Cost I have to put my vote in this poll for "It depends" since like you I think it does depend on the business model.

[Allan Edwards]

Re: Job Supervision as Overhead or a Direct Job Cost?

Just wondered if you guys are using the terms “above the line and below the line” in an accounting context. Above the line denotes revenue and expense items that enter into the calculation of net income, as opposed to below the line items that affect capital accounts (WIP) directly and net income indirectly. In other words, expensing an overhead item immediately would affect your income statement for that month, thus it would be “above the line”. On the other hand, if you attributed it to direct cost of the job it would impact your Work in Progress and be “below the line” and affect your income statement only when you converted the revenue vs. costs to a net profit (typically when a job is completed or closed).

To me, that’s the only result of how you treat overhead, do you want it to impact your P&L monthly or at the end of the job. I choose to let all the overhead I can hit my income statement monthly, thus postponing paying taxes as long as possible.

[Allan Edwards]

Re: Job Supervision as Overhead or a Direct Job Cost?

it is a better practice to look at Overhead as a Direct Job Cost

Jerrald:

Your original question was if Job Supervision should be considered Overhead or Direct Job Cost. It can be done either way, I choose to treat it as Overhead. I think it's just more of a timing issue. However, your statement that "it's a better practice to look at Overhead as a Direct Job Cost" is something I've never heard anyone advise, in fact, quite the contrary. Overhead is a distinctive, separate accounting classification, as is Direct Job cost, and the two should be tracked and accounted for separately.

[Jerrald Hayes]

Re: Job Supervision as Overhead or a Direct Job Cost?

Jerrald:..... your statement that "it's a better practice to look at Overhead as a Direct Job Cost" is something I've never heard anyone advise, in fact, quite the contrary. Overhead is a distinctive, separate accounting classification, as is Direct Job cost, and the two should be tracked and accounted for separately.

Yup, you've never heard anyone say "it's a better practice to look at Overhead as a Direct Job Cost" because that's stupid and non-sensical and not at all what I meant to say. You can't look at Overhead as a Direct Job Cost, it's and either or situation. Either a cost is a Direct Job Cost or it's Overhead. A terrible compositon error on my part, I guess I didn't proof read what I wrote. What I should have said/written and I've now corrected it to say is that:

I think it's a it's a better practice to look at Job Supervision as a Direct Job Cost.

Thanks for spotting that.

[Allan Edwards]

Re: Job Supervision as Overhead or a Direct Job Cost?

Jerrald:

I sort of figured you were typing faster than you were thinking, I do that quite often. If you want to place job supervision in direct cost, I see no problem. But if you are recognizing revenue when the job is completed, which is typical for contractors, placing that supervision in WIP, you are delaying deducting that as an expense. May be splitting hairs here, though.

[Jerrald Hayes]

Re: Job Supervision as Overhead or a Direct Job Cost?

Jerrald:

I sort of figured you were typing faster than you were thinking, I do that quite often.

That was quite an embarrassing gaff though. Thanks again for spotting that. Not quite as bad as the one I made when I first launched my Paradigm-360 website though. Back then I misspelled my own company's name as Paradimg in the header graphic that appeared on each page and no one told me about it for at least a week.

.....But if you are recognizing revenue when the job is completed, which is typical for contractors, placing that supervision in WIP, you are delaying deducting that as an expense. May be splitting hairs here, though.

Nah, from a Financial Accounting perspective I don't think it's splitting hairs at all and your right on the money (pun intended) with your point. For a contractor working with borrowed money who has to a bank or other lender with a Financial Statement that's puts his or her company's operation in the best possible light that makes tons of good sense. Especially if the projects have long durations that cross over fiscal reporting periods too.

I'm thinking that when I posted this poll I was thinking from a planning or managerial accounting perspective looking for how contractors plan for recovering their Job Supervision costs.

The reason I brought this up as a poll was a week and a half ago I met with a contractor regarding doing some consulting to find out why he wasn't making the money he thought he should and in looking over his books and records I found the greatest discrepancy and his biggest problem was in figuring for and accounting for Job Supervision. He figured for Job Supervision on his projects as part of Overhead and worked it into his markup when he was pricing his jobs and he wasn't coming close to getting it right. He had taken the dollars he had spent for Job Supervision in the past, averaged it and converted into a percentage which he applied to his projects as part of his markup. The problem he encountered was that the projects he was doing now didn't fit that "average" he came up with from the past and he was falling short.

I had thought that a lot more contractors here would poll saying that they see Job Supervision as Overhead than did so the results here have surprised me.

[Allan Edwards]

Re: Job Supervision as Overhead or a Direct Job Cost?

Jerrald:

I think one of the best things I’ve ever read about contractors and accounting was by Emma Shinn, who said that in her many years of builder consulting and analysis that the most profitable were those who “knew their numbers” really well. I’ll put that right up with her “cost does not create value” as very good advice. I think if you really “know your numbers” inside and out, it doesn’t matter where you put job supervision, because you are top of your costs and know what your financial status is on a monthly basis.

Something I do routinely with Buildsoft, and I wonder how many contractors do this, is that I am required to close out each period (month) in my General Ledger, thus automatically producing an up to date income statement and balance sheet. So at the end of each month, I go to menu item “General Ledger”, then “Close Accounting Period”. I think this is one mark of having a clean and up to date accounting system. That, and of course reconciling bank statements monthly (amazing how many don’t do that!), making the occasional journal entry, booking liabilities, move completed Work in Progress to an inventory account, close out a job and enter a closing statement allocating all line items to the proper account, running a trial balance monthly and reviewing, and using a double entry accounting system. When my lenders ask for up to date financials, I have them. Jan 15 every year I can produce a current and accurate P&L and Balance Sheet for my CPA to do my taxes, I hate to extend. I am certainly not bragging, because I had such a screwed up system for many, many years, it drove me nuts. But I’ve learned on my own to do all of these things and it’s been the most beneficial thing I’ve ever done in my building career.

[Peter Bush]

Re: Job Supervision as Overhead or a Direct Job Cost?

Allan,

It appears that you reconcile cost on a "Completed Contract" basis rather than the method advocated by Steve Maltzman "Percentage of Completion".

Why's that?

Pete