Construction Cost Codes – Everything You Need to Know

Unless you’re an accountant, keeping track of all your company’s finances probably isn’t your idea of fun. Luckily for us in the construction industry, there are a lot of tools out there that can make our lives easier here. Today, we’re going to be talking about construction cost codes – one of the best resources contractors can use to simplify their accounting process. 

Keep reading to learn what cost codes are, how to implement them in your business, and why they’re helpful in the first place.

Key Takeaways

• Construction cost codes are a set of standardized categories contractors use to track and manage project cost related to a specific construction project.
• CSI’s MasterFormat offers the industry standard in cost codes, and is what you’ll encounter most often when collaborating with project stakeholders.
• Leverage cost codes to streamline your accounting process and improve your businesses cost tracking ability.
• Boost profit margins with more precise comparisons of cost to revenue as you monitor project budgets and analyze trends in categories from one project to the next.

What are Construction Cost Codes?

Put simply, construction cost codes are a set of standardized categories (generally numeric values with a specific number of digits) that allow contractors to categorize specific costs of a job. The Construction Specifications Institute (CSI) offers a standard cost code list widely used across most construction companies, although some businesses might choose to create their own codes to augment this list. And while using CSI’s code list isn’t required by any means, it offers an easy way to make sure both you and all project stakeholders can ‘speak the same language.

Ultimately, construction cost codes allow you to standardize each project’s financials and align them to your accounting system, giving you the ability to align reporting from project to project. Over time, this means you’ll be able to spot trends, track historic job data, and make sure you’re not overrunning any budgets.

How to Read and Structure Cost Codes

Using CSI’s MasterFormat as the standard, cost codes are read from left to right, starting with the two-digit primary division code (for example, 04 – Masonry). This indicates the trade/category of work, and is followed by a four-digit activity code that specifies the unique task type being performed under that category.

Here’s an example of what one of these codes could like: 04 22 00 Concrete Unit Masonry

If you’re a new contractor or simply starting from scratch when it comes to cost codes, CSI’s MasterFormat list is the best place to start. We recommend using their newest version rather than the old MasterFormat 1995 because it a) offers more division codes to work with and is b) generally more inclusive of various industries and sectors.

Key takeaway here: follow CSI’s lead and you should have no trouble getting started with construction cost codes.

One big callout we want to mention: While CSI’s upgraded MasterFormat is an excellent place to start, it doesn’t include a set way to track any overhead costs or details on general conditions. You’ll need a way to keep up with these, which could mean creating your own subcodes (many contractors choose to use the 01 or 00 subdivision for this purpose). When it comes to certain markups like tax, or insurance, we recommend choosing numeric codes that will never be utilized otherwise (like 99, instead of 01, 02, etc). By putting these codes at the end, you’ll have an easier time finding and tracking them. Just remember that ideally, any type of work that has a cost will also have a cost code. 

Depending on how detailed you’re looking to track your financial performance, it might even be helpful to assign cost codes to financial line items that don’t strictly have a cost, such as any fees you might impose for services.

Implementing a Cost Code System

Implementing construction cost codes starts from the moment you begin a job. If you’re a contractor, the architect or design team will hand you a set of design documents from which you will want to consider your Work Breakdown Structure. That is to say, you will need to decide how the elements of the plans should be broken into work packages to plan construction. The design documents should include a specifications book that breaks things out into specification numbers, which should align with your Cost Breakdown Structure and more specifically with your cost codes. From there, you can use this to start building out a loose estimate based on those cost codes.

🚧 One word of caution: don’t feel the need to be too rigid here until you actually have a contract. Even once you have a finalized contract in hand, keep in mind that not everything in the schedule of values will fall neatly into a cost code.

When implementing your cost codes, stay flexible, and be thoughtful of the level of detail that you need for actionable insights. For example, if you are a commercial general contractor focusing on tenant fit outs, then masonry on your jobs might be relatively uncommon, so you might have a 04 00 00 code for all masonry. On the other hand, a residential contractor might need to track brickwork (04 21 00) separate from stone masonry (04 43 00) as the cost of those can vary drastically and tracking historical pricing could really help you build a more accurate estimate on the next project. At the end of the day, use your best judgment and stay flexible and revisit your cost codes semi-regularly to ensure they are allowing for useful reports based on the type of work you’re doing.

Whatever coding system you’ve chosen to use, it’s important to stick to it. Once a job is underway and you’ve transitioned from estimate to bid packages/subcontracts, you’ll lock in your codes and use them to measure costs against your estimate. It all goes back to the idea of wanting your costs to align with the budget you’ve set out to achieve.

One more note: Sometimes you might find that certain clients have their own cost code structure that they want you to use on invoices, etc. On your end though, make sure you’re staying true to your own coding structure so you can monitor financial trends and reporting across all your jobs. You can always include the client codes as part of the line item descriptions as opposed to change your internal coding structure. We don’t want to lose the benefits of using construction cost codes by changing from project to project.

👉🏻 Read Foundations of Construction Management

Why Should You Use Cost Codes?

Along with offering you a standardized system to track project expenses, cost codes provide several project management benefits that are hard to ignore.

Improved Efficiency

This might seem counterintuitive, but hear us out. While you might get pushback from people annoyed that they have to code every cost, using cost codes will actually make things quicker in the long term. Without cost codes, moving accounting reviews and approvals along becomes a lot more tedious.

Think of implementing your cost codes like building scaffolding to do work along an exterior facade. It definitely can be cumbersome to do the setup, but once in place allows for a much smoother flow of work

At the end of the day, cost coding might not feel super efficient at the individual level. Zoom out to the company level though, and you’ll quickly see just how much of an impact it can have on speeding up your accounting processes and bolstering the growth and scalability of your business.

Improved Profitability

Like we mentioned earlier, cost codes play a crucial role in tracking your historic data over time. By being able to quickly and transparently see each job’s expenses broken down by code, you can get a good idea of where you’re overspending, and where you’re saving money. When you’re able to do this in real-time, you can quickly correct cost overruns so you can stay on budget.

As you complete more and more jobs, this continuity of data will allow you to see where any problem areas are before they drastically impact your bottom line. Eventually, they can even help inform your forecasting so you can better predict how future projects will impact cash flow. Imagine being able to quickly give a client budgetary for costs for a different type of roofing material, or determining if it’s more efficient to hire a drywall subcontractor versus self-performing the work in house. This data dramatically improves decision-making within an organization.

Streamlined Accounting

From the moment you incur a cost to the moment you’re paid for it, having a consistent coding structure makes it easy to get all the necessary approvals along the way. No matter how many levels there are in the chain of command for a given job, standardized cost codes allow easy sharing and visibility throughout the funnel. And if anomalies do pop up, you’ll easily be able to spot and correct them.

Anything you can do to speed up your construction accounting process is a win in our books.

Standard Construction Cost Code List

If you’d like to bookmark this article for easy reference, here are all the primary cost codes as laid out by CSI:

Just like the Dewey Decimal System makes it easy to find your favorite authors at the library, construction cost codes make it easy to track, monitor, and report on your company’s financials – so you can stay one step ahead of the game.

Further Reading: Learn how cost codes play a role in job costing.

💥 If you’re looking for construction accounting software that is built to solve the unique problems your construction business faces, check out CrewCost. It makes tracking cost codes from the company level down to each job easy. Best of all, you can try it for free, no credit card required.