Accurate Job Costing Aligns Incentive Pay with Company Success

A $100 M subcontractor in residential construction

The client had a very strong and trade-knowledgeable organization capable of delivering operational excellence on jobs ranging from very simple but high pace to very difficult but time-consuming. With such $100 M in volume, it was very difficult to tell if the company’s revenue-based commission plan was aligning the value of the contracts with the pay of the sales team, which led to negativity and the top salespeople feeling underpaid and threatening to leave jobs at competing companies.

Our approach in these situations is always to get a data structure in place that gives the right level of granularity. We believe that if a management team must estimate which contracts and customers are most valuable, that’s a lost opportunity in a world where the answer can easily and cheaply be known. The solution was created this way

Devise a data structure that causes the variable costs to be attributed to jobs.
Redesign the transaction processing for AR and AP to capture the new data elements.
Reimplement the ERP system with the new data elements and publish the reports showing job profit and job profit margin by the salesperson.

(NOTE: It’s also very important in this type of project not to make the data capture and reporting too granular. With our long experience in the building supply and subcontracting worlds, we know that making something too detailed means it will likely not become part of the management process because it’s too unwieldy.)

In the first year of implementing this model, there were some meaningful changes in how the sales team was paid, especially for work that was very different from the middle of the range in terms of complexity and product cost. Armed with the comfort of knowing that the pay was aligned with the value being contributed, the company saw the pay of its top contributors go up, which caused job satisfaction and internal strife to go down. Management was also able to have fact-based discussions about the value of the contracts with all the salespeople. The company went on to nearly double sales over the next three years with zero turnover at the top of the sales team rankings.