Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #11 - Cost Variance
When I first started working with builders on their financials, I’d walk into our meetings armed with accurate data, detailed reports, and carefully tracked metrics. I was confident and excited to share what I’d uncovered, knowing these numbers could transform their business.
But there was a problem: I might as well have been speaking another language. It became very clear very quickly that my clients didn’t just struggle to understand the reports—they didn’t know what the metrics meant, let alone what actions to take, if any.
By the time I explained the significance of the metric, I’d already lost their focus. And the worst part? We never got to the best part—the actionable insights that could actually drive their dollars to meet their goals!
Enter: The Data to Dollars Series and The Playbook for Builder Profitability! In this series, we’ve broken down the key metrics residential construction companies need to track, what they mean for your business, and—most importantly—what to do with them to drive profitability and growth. We’re currently taking every metric covered in the series and packaging them altogether into one Playbook especially for Builders. Armed with this Playbook, you’ll know exactly what to do when with what you find in your financial reports.
Let’s dive into this week’s metric and see how it can help you turn some data into dollars.
#11 - Cost Variance
What It Is -
Cost Variance measures the difference between your budgeted (or estimated) costs and the actual costs incurred for a project or task.
How we calculate it -
Cost Variance = Estimated Costs - Actual Costs
For example, if you estimated that a task would cost $10,000 but it ended up costing $12,000, the cost variance is -$2,000, indicating an overrun
Why We Track It -
Cost Variance highlights areas where actual expenses deviate from the budget, giving you insights into whether you’re managing costs effectively. For custom home builders, even small variances can compound over the course of a project, eroding profits and straining cash flow.
Why You Need to Know It -
Cost Variance ensures you’re:
Staying on budget and maintaining profitability.
Identifying specific tasks or areas where costs consistently exceed estimates.
Tracking trends to refine future estimating and budgeting processes.
What Cost Variance Tells You -
Good: Minimal or zero variance means your estimating process and cost controls are working as planned.
Bad: A negative variance (overrun) reveals inefficiencies, missed change orders, or underestimating in your budgeting process.
Action Steps Based on the Cost Variance -
If Cost Variance Is Positive (Under Budget):
Review whether estimates were overly cautious. If you’re contracts are cost-plus, being under budget is just as much of a red flag as being over budget for your bottom line. You’ve projected profits you won’t be seeing because you came in under budget.
Use insights to refine future estimates without underpricing your work.
If Cost Variance Is Negative (Over Budget):
Review the Overrun Source: Was it a missed change order, rising material costs, or inefficiency in labor?
Refine Budgeting Processes: Use historical data to adjust future estimates and include contingencies for unpredictable expenses.
Improve Change Order Tracking: Ensure every approved change is documented and billed promptly.
If Cost Variance Patterns Emerge:
Spot Recurring Issues: If the same categories (e.g., labor or materials) are consistently over budget, investigate systemic problems.
Improve Cost Monitoring: Implement real-time cost tracking to address overruns before they spiral out of control.
Train Your Team: Educate project managers on the importance of accurate cost tracking and reporting.
Conclusion-
Cost Variance is a powerful metric for understanding how well your projects are performing against budgeted expectations. By identifying areas of inefficiency and refining your estimating and tracking processes, you’ll strengthen your profitability and set the foundation for scalable growth.
At Catalyst Construction Accounting & Consulting (Catalyst CAC), we specialize in helping residential construction businesses just like yours track and understand key metrics like GPM and more. Whether you need help with construction bookkeeping (data accuracy, essential construction financials), construction controllership (holistic oversight over construction financial processes & strategic financial guidance), or a construction CFO advisor (forward-looking, strategic, big-picture financial guidance), we’ll work with you to eliminate financial chaos and give you the tools to drive profitability and growth.
Let us help you turn your data into dollars. Contact us today to learn how we can become your valued partner in building a stronger, more profitable business.
What’s Next -
Stay tuned for the next episode in the Data to Dollars Series as we uncover yet another metric to help you operate smoothly while driving profitability to scale your business!
