10.3 Job Costing, Break-Even Analysis & Cash Flow Forecasting

10.3 Job Costing, Break-Even Analysis & Cash Flow Forecasting

[!IMPORTANT] Profit is an opinion; cash is a fact. More Alabama mechanical contractors fail while showing a profit than while showing a loss. This section builds the three operating tools that prevent it: job costing, break-even analysis, and a rolling cash forecast.

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Job Costing: Comparing Actual to Estimate While You Can Still Act

A job cost system assigns every dollar and every hour to a cost code inside a job number.

The discipline that matters is timing. Cost codes must be posted weekly and compared against the estimate for the same code at the same percent complete.

Worked example: sheet metal was estimated at 180 hours. At the 40 percent complete milestone the crew has burned 96 hours.

• Expected at 40 percent: $180 \times 0.40 = 72$ hours.
• Actual: 96 hours - a 24-hour, 33 percent unfavorable variance.
• Projected at completion: $96 / 0.40 = 240$ hours, a 60-hour overrun.

At $33.10 fully burdened, that variance is a $1,986 hit that is still 60 percent avoidable if the cause - poor takeoff, a coordination conflict, a crew skill gap - is found this week.

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Work in Progress: Over- and Under-Billing

On contracts recognized under the percentage-of-completion method, revenue earned is:

$\text{Earned Revenue} = \text{Contract Price} \times \frac{\text{Cost Incurred to Date}}{\text{Total Estimated Cost}}$

• Overbilling (billings exceed earned revenue) is a liability, "billings in excess of costs and estimated earnings." It is normal, healthy, and it is the owner financing your job.
• Underbilling (earned revenue exceeds billings) is an asset, "costs and estimated earnings in excess of billings." It means you are financing the owner, and it is the clearest early warning sign a surety or banker looks for.

Example: a $240,000 contract with $150,000 of total estimated cost. Cost incurred is $90,000, so the job is 60 percent complete and has earned $144,000. Billings to date are $120,000. The job is underbilled by $24,000 - the contractor has spent money that has not been invoiced.

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Break-Even and Contribution Margin

$\text{Break-Even Revenue} = \frac{\text{Fixed Overhead}}{\text{Gross Margin \%}}$

Worked example: annual fixed overhead of $240,000 with a 30 percent gross margin.

$\text{Break-Even} = \frac{\$240{,}000}{0.30} = \$800{,}000 \text{ in annual revenue}$

At $800,000 of revenue the company earns exactly zero. Every dollar above it contributes 30 cents of pre-tax profit; every dollar below costs 30 cents.

Now watch what a margin slip does. If discounting drives the gross margin from 30 percent to 25 percent, break-even rises to $$240{,}000 / 0.25 = $960{,}000$. The company must sell $160,000 more work - a 20 percent revenue increase - just to stand still. This is the arithmetic behind the rule that price cuts are far more dangerous than volume dips.

Break-even in service calls: if the average service ticket contributes $210 of gross profit and monthly overhead is $27,300, the company must complete $$27{,}300 / $210 = 130$ calls a month before the first dollar of profit.

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Why Profitable Contractors Run Out of Cash

Alabama Retainage and Prompt Pay

The Alabama Prompt Pay Act, Code of Alabama Title 8, Chapter 29, governs private construction payments. Section 8-29-3 sets three rules worth memorizing:

1. Retainage withheld by the owner may not exceed 10 percent.
2. After the project reaches 50 percent completion, no further retainage may be withheld.
3. Retainage never increases as it flows down. A contractor may not retain a greater percentage from a subcontractor than the owner retains from the contractor, and a subcontractor may not retain more from a sub-subcontractor than was retained from it.

Retainage held in excess of the permitted percentage accrues interest at 1 percent per month (12 percent per year). Undisputed amounts are due within the statutory window after receipt of a proper pay application. Public work is governed separately.

Receivable Discipline

• Age receivables every week in 30/60/90 buckets. A receivable at 90 days is worth materially less than its face amount.
• Invoice the day the work is complete, not at month end.
• Require deposits on equipment-heavy residential replacements.
• Reconcile the schedule of values so that early activities carry a fair share of value - front-end loading beyond the value actually earned invites a rejected pay application.

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A Twelve-Week Rolling Cash Forecast

List by week, for the next twelve weeks:

1. Beginning cash.
2. Collections - by customer, using realistic historical payment behavior, not contract terms.
3. Payroll and payroll taxes - the largest and least deferrable outflow.
4. Supplier payments - by due date, honoring discount dates where taken.
5. Fixed overhead - rent, insurance, vehicle notes, software.
6. Debt service and owner draws.
7. Ending cash, which becomes next week's beginning cash.

Any week that projects negative ending cash must be solved now - by accelerating a collection, negotiating supplier terms, or drawing on a line of credit arranged in advance. A line of credit is arranged when the company does not need it; a bank asked for money during a cash crisis is a bank that says no.