In today's competitive business landscape, achieving operational efficiency and maximizing profitability is crucial for long-term success.
To optimize resource allocation, control costs, and enhance decision-making, drain cleaning companies can benefit greatly from implementing a standard costing system.
None of us are great at job costing, but it can help tremendously. Especially in today’s volatile market where there’s really no such thing as a “fixed cost” anymore.
Here’s a look at the importance of standard costing in the drain cleaning sector and a practical guide on how to implement it effectively.
Understanding standard costing
Standard costing is a management tool that enables companies to estimate and control costs within their operations. It involves establishing predetermined standards for various cost elements, like labor, materials, and overheads, which serve as benchmarks for assessing actual performance. By comparing actual costs to standard costs, companies can identify areas of inefficiency, take corrective actions, and make informed operational decisions.
Implementing a standard costing system can bring several benefits to drain cleaning businesses.
Cost estimation and control: Standard costing helps establish realistic cost expectations for drain cleaning procedures. It enables companies to analyze historical data, such as labor hours, material usage, and equipment maintenance, to determine the most accurate standards.
By constantly monitoring actual costs against these predetermined standards, companies can track and control expenses effectively. This allows for better budgeting and cost management, leading to increased profitability. Most of us don’t keep track of this level of detail per call, but doing so on a consistent basis can allow you to tweak pricing at or near the local saturation point.
Performance measurement and variance analysis: Standard costing provides a framework to measure and analyze performance variances. Any deviations from the predetermined standards can be promptly identified and evaluated.
By distinguishing between controllable and uncontrollable variances, management can focus on improving efficiency and optimizing resource allocation to achieve better overall profitability. Variances analysis helps highlight areas where operational improvements can be made to minimize costs and maximize productivity. This is where you take the baseline number that you’re currently running and compare it to how your crews are doing to see if things need to change.
Pricing strategy: Standard costing enables companies to accurately cost their services. By understanding the actual costs associated with drain cleaning operations, companies can establish competitive yet profitable pricing strategies.
This ensures that pricing decisions are based on reliable data, maintaining a healthy profit margin while staying competitive in the market. By aligning pricing with costs, companies can achieve a balance that attracts customers while also maintaining profitability.
Decision-making: Standard costing provides management with reliable cost information, which forms the basis for various decision-making processes.
Whether it's evaluating investments in new equipment, expanding service offerings, or assessing the profitability of different customer segments, a standard costing system allows businesses to make data-driven decisions and allocate resources efficiently. It provides a clear picture of the costs involved in each aspect of the business, empowering decision-makers to make informed choices that positively impact the bottom line.
Implementing standard costing
To successfully introduce a standard costing system, consider the following steps.
Define cost elements: Identify all cost elements involved in drain cleaning operations. This includes direct labor, materials, subcontracting costs, equipment usage, and overheads. Each element should be broken down into smaller, measurable units to establish accurate standards and facilitate tracking.
For example, labor costs can be measured in hours, material costs in quantities, and equipment usage in machine hours. This can be for lining or bursting jobs, jetter services, spot repairs, etc. Everything is tracked.
Determine standard cost standards: Use historical data on labor hours, material usage, and other relevant cost drivers to determine realistic standards for each cost element. Consult with experienced technicians, supervisors, and industry subject matter experts to establish accurate benchmarks.
This step requires a thorough analysis of past data, taking into account factors such as average time taken for different types of drain cleaning tasks, average material consumption, and any other direct and indirect costs incurred. You’ll see successful companies eventually get to a point where they start a different pay scale based off the numbers they need to hit. This is where you can really juice extra profits out of your service offerings.
Track actual costs: Implement a robust cost-tracking mechanism to monitor actual costs against the predetermined standards. This may involve collecting data on labor hours, material consumption, maintenance expenses, and any other cost drivers identified.
It is essential to ensure accuracy and reliability in data collection to establish a strong foundation for cost analysis. Utilize technology such as cloud-based software or customized spreadsheets to facilitate the process efficiently.
Analyze variances: Regularly analyze the variances between actual costs and standard costs. Identify the root causes of significant variances, categorizing them as controllable or uncontrollable.
This analysis will help management pinpoint areas of improvement and take corrective actions as necessary. For example, if the actual labor costs are higher than the standard, it may indicate a need to train technicians for better efficiency or consider different scheduling techniques to reduce labor hours.
Continuous improvement: Standard costing is an ongoing process. Encourage the involvement of all relevant stakeholders to continuously review and revise established standards based on changing market dynamics, technological advancements, and industry best practices.
Regular communication and collaboration with technicians and supervisors can unveil new insights and ideas for improving operational efficiency and profitability. Regularly update the standards to reflect updated costs and best practices in the industry for a continually improving cost management process.
About the Author
Anthony Pacilla is a registered master plumber for McVehil Plumbing in Washington, Pennsylvania. He has over two decades of experience in the plumbing and HVAC trades and has a bachelor’s in business and economics from Thiel College.
