How to Use a Construction Job Costing System

Keeping track of the costs associated with construction projects is key to the success of any project. But it’s essential when managing complex, large-scale construction projects with pre-determined contract values.

Embracing a sophisticated construction job costing system enables companies to more accurately account for the granularity of costs associated with their projects. Project managers and leaders gain improved visibility into the true costs of labor, materials and overheads. They can use these insights to closely manage their projects and maximize profitability.

Establishing a construction job costing system unlocks all kinds of benefits beyond this. But before companies get to that point, they must understand the fundamental concepts of construction job costing.

In this guide, we’ll explain just that. We’ll run you through an introduction to construction job costing and discuss everything you need to know to set up an effective construction job costing system. We’ll finish by sharing a series of construction job costing best practices learned from the decades our team at James Moore has spent advising leading construction businesses.

Construction Job Costing 101: Key Concepts

Construction job costing is the process of breaking down all of the key components of a project, including labor, materials and overhead costs. It’s a vital process for construction companies working on more than one project, because it helps leaders understand which costs are associated with each project.

Actively managing construction job costing throughout a project ensures the costs of the work your company is performing are in line with your expectations. By doing so, companies proactively identify problems before they evolve into a significant cost overrun and can take steps to address these issues.

For instance, if costs are running ahead of where you projected them to be due to additional requests from the customer or changing material prices, you may need to ask for a change order. If you simply misestimated costs, you might not be able to issue a change order. But you can still manage your risk and learn to make more accurate estimates in the future.

Over time, all construction companies should seek to become more accurate in their job costing. Focus on becoming more accurate in your estimations. You don’t want to develop a reputation as the contractor who’s always asking for change orders.

How to Set Up a Construction Job Costing System

The cost of any construction job is equivalent to the sum of three main categories of cost: labor, materials and overhead. Within these three categories, project managers have to be extremely diligent to ensure they’ve captured all costs associated with a project.

Tracking costs at such a granular level demands you have a reliable construction job costing system. This system allows employees to input costs and assign them to a specific cost code. Every item used in a construction project should be associated with a specific code, and every expense incurred during the project should be charged against the relevant code for that job and category of expense.

The level of detail you get into here depends on your company and the nature of its work. Tying certain costs to different project milestones supports smoother work in progress (WIP) reporting and supports automated invoicing. At the very least, it’s important to be able to track unique projects distinct from each other and to separate costs into these three main categories.

Labor

This tends to be the largest pool of costs for construction companies and includes all expenses associated with the employees or subcontractors who work on a given project. Document hourly or daily labor rates for different types of employees, and then extrapolate these for the length of time you expect the project to take.

Don’t forget to build in additional costs for items such as worker’s compensation and payroll taxes. You also need to include as a share of the salaries of any management-level employees working on the project, such as project managers, designers and more.

Materials

The material costs associated with construction job costing fall into two categories: direct and indirect.

Direct costs are the costs associated with the raw materials purchased for the job (lumber, wiring, drywall and so on). Many companies add a margin to these costs to account for wastage and delivery fees.

Indirect costs are the costs for ancillary materials that are not used exclusively for a specific job, such as safety equipment, fasteners, caulk, etc. Any equipment costs, such as special machinery or equipment required for the job, should also be included here.

Overheads

The final bucket is your overhead costs — those associated with running your business that aren’t directly related to a particular project. These costs include the rent and utility bills for your office, office supplies, and professional services like a construction CPA or attorney.

It’s important to create a consistent way of assigning portions of your company’s overhead costs to a given job. Often, a rough approximation is the best path forward. For instance, if you’re working on five projects, all of similar sizes, you may allocate 20% of your overhead to each job. Doing so ensures your company accounts for these costs when estimating projects. This in turn helps you stay profitable.

Construction Job Costing Best Practices

Job costing is vital in helping construction company owners manage the risks associated with the projects they’re working on. As your company grows and you work on an increased variety and volume of construction projects, aim to improve your job costing processes.

To do so, keep these best practices in mind:

• Closely manage risky phases. During high-risk areas of a project in which costs could easily start to mount, project managers and company owners should take a very hands-on approach.
• Use job costing software. Using construction accounting software (or regular accounting software with job costing features) makes it far easier to code costs correctly and automate elements of the process.
• Have checks and balances. Both accounting teams and project managers should review job costing to make sure costs are coded to the correct project and that there are no errors. Periodic reviews ensure that job costing, and by extension your financial statements, stay accurate. Look for any unallocated costs and determine how to allocate them most appropriately.
• Be consistent. Regardless of how you approach construction job costing, you must be consistent across your business. This allows you to compare apples to apples when looking at different projects.
• Review cost estimates after the project. Once a project has been completed, the estimator or project manager should review the actual costs against their estimate to determine how their job costing process could be more accurate next time around.

By following these best practices, construction companies will be well placed to manage their costs and ensure that their projects are completed on budget and profitably.

James Moore: Specialized Construction Accountants

Evolving from a cash-based construction business to a more established company with mature financial processes can be a challenging task. However, it’s a vital step in your growth journey. A major part of that transition is adopting a construction job costing system.

Following the basic concepts and the best practices explained in this article will stand put in good stead. But if you’re looking for more hands-on support, the experienced construction accounting team at James Moore is here to help. We’ve worked with construction companies of many different sizes and love nothing more than helping high-potential firms build the financial foundations for their growth.

To learn more about how we can help your construction business, contact us today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.