They say money can’t buy happiness, but it can definitely help give you peace of mind when you’re running your business. While you might be more comfortable looking at construction plans than a spreadsheet, staying on top of the profitability of your jobs means spending less time worrying about your cash flow.
Job costing is what allows construction contractors to increase their overall profit margin and to maintain better cash flow. In a nutshell, job costing is the process of setting a budget for a job, tracking expenses against that job’s budget and then using the information gained once the job is complete to improve future bids. Instead of trying to track everything through one income statement, job costing gives you the level of detail you need to course correct and make adjustments so you’re not forced to blindly apply markups and hope a job is profitable. .
We talk more in-depth about what job costing is and why it’s necessary in another article here. In this guide, we’ll take things a step further and get into the process of how to do job costing the right way from the start.
Key Takeaways
- Job costing uncovers the profit margin of individual jobs and gives you the information needed to make future jobs more profitable.
- To start job costing, define your cost codes and cost types, create a budget, and gather your labor, material, and overhead expenses
- Investing in a construction accounting software can help streamline the job costing process.
How to Do Job Costing for Contractors
The good news is, you don’t need a degree in accounting to learn how to job cost. While it might seem complicated at first, we’ll make it easy for you to implement in your construction business.
Before we jump into different expenses and how to compare project budgets, let’s go over a couple things you’ll need to do beforehand.
Define Your Cost Codes
A solid job costing process includes defining your cost codes so you can consistently allocate expenses. Cost codes are unique numerical identifiers that help you keep track of specific costs within specific categories. A cost code might be laying cement, digging foundation, or setting manholes.
These codes allow you to track expense data in real time – a big advantage when it comes to making sure your projects don’t run over budget.
The Construction Specifications Institute’s (CSI) MasterFormat offers the most widely-used standard for cost coding. This format organizes by work sections, and is divided into different subgroups based on part of a project. For example, 01 is General Requirements, 02 is Existing Conditions, 03 is Concrete, and 04 is Masonry. Under each of these divisions are further subgroups (030100, for example, is Maintenance of Concrete).
Defining and reviewing your cost codes is one of the most important first steps you can take in building out your job costing system. The more consistent you can be in your coding structure, the better. This way, you’ll be able to measure estimated vs. actual costs for any project you’re currently working on or have completed in the past – a must-have if you want to give more accurate estimates in the future.
Here are a few more best practices to help you build the right system for your team:
- Don’t use more codes than you need. The less you have to work with, the easier your system will be to work with.
- Create a detailed outline of your cost code system. A well organized guideline will help ensure your cost codes are used effectively and consistently.
- If you notice that a code isn’t being used, drop it. Don’t hold onto something unless it’s creating meaningful value in your job costing process.
Create a Chart of Accounts
Once you’ve set your cost codes, you’ll want to create a chart of accounts. This is a tool you’ll use to organize all of your company’s financial transactions by category and line item for a specific accounting period. Think of this as a full overview of your company’s financial health.
Contractors use a chart of accounts to keep all of their financial information organized in one easy-to-view place. If you’re working with other shareholders like investors, a COA can be a valuable tool to help them gain a clear understanding of your company’s standing – and will also make sure all of your financial statements are compliant with reporting standards.
Lastly, your COA should be broken down by the five cost types:
- Direct labor costs
- Direct material costs
- Direct equipment costs
- Direct subcontractor costs
- Direct other costs
Being consistent with your COA over your business’s lifetime will give you the most accurate period-to-period and year-to-year comparisons when it’s time to review your financial data.
Sharing Your Data Effectively
There’s nothing worse than being halfway into a project and realizing that not everyone is on the same page. When it comes to job costing in particular, transparency is incredibly necessary.
Whether you’re communicating with stakeholders or your team on the job site, making sure your project data and documentation is available and accessible is crucial. Fortunately, there are plenty of cloud-based tools out there that make it simple to centralize your data storage so you can access job costing data anytime, anywhere.
An Overview of Expenses
The goal of job costing is to give you as much information on the costs associated with a job as you need, from mile-in-the-sky overviews to micro-level details. For that reason, your job costing should include any and all expenses associated with each project, including indirect ones. Leave no stone unturned – the more detail here the better.
Your expenses will almost always fall into one of these five categories:
Labor
Labor is often the biggest single expense you’ll incur on a job, which is why it’s crucial to accurately track hours and productivity. True labor costs are often underestimated, so it’s important to consider fully-burdened expenses by accounting for items like overtime, employee insurance, and other labor-related costs.If you’re still using paper timecards, it might be time for an upgrade. New digital time-tracking apps and software offer more accurate data and less errors than payroll processing.
Subcontractors
Many different subcontractors might come together to finish one construction project. This means you’ll have to manage those contracts and factor the costs into his overall expenses.
A subcontractors cost is usually predictable as they often provide a lump sum estimate for a defined scope of work. This means they’re taking on the risk to complete it for that price. Keep in mind, however, that many factors can change this estimate. Delays and changing weather conditions can impact a subcontractor’s estimated timeline and cost, ultimately adding to your costs.
Material Management
Of course, every project needs materials. Keep track of everything you use, from direct costs like wood and cement, to indirect costs that you’ll use in more than one job, like safety equipment.
To prevent losing money on wasted or lost materials, keep a close eye on your inventory and make a point to estimate material requirements as accurately as possible (use data from past projects to help compare your estimates).
Don’t forget to also monitor billing and any change orders you receive. Depending on your contract, you may be able to bill your client for certain expenses, like extra materials needed for a change order.
Equipment
Construction equipment will vary depending on the type of trade contractor you are, the type of projects you work on, and whether or not you rent or own your equipment. If your company owns equipment, for example, you may factor in a percentage of it across all of your jobs.
Overhead Expenses
Now that you’ve got a handle on your direct costs, let’s talk about your indirect costs. Overhead expenses are the costs you incur to operate your business (outside of specific job costs).Examples of overhead costs include administrative salaries, office and warehouse leases, office supplies, and utilities.
Not accounting for these expenses when job costing usually leads to inaccurate cost data, negative cash flow, and can ultimately have a negative impact on your project’s overall profitability.
Example of How Cost Codes and Chart of Accounts Work Together
Now let’s walk through an example of how all of this works together.
You are a HVAC Contractor and need to set up a cost code for installing duct into a building. The Master CSI code for this would be 23 07 13. Then, you’d apply the proper cost types in your accounting system to this and accurately track it over multiple jobs so you can tell how much this cost type usually costs you to complete on average.
Next, you’ll use this data to estimate a specific job and then track actual costs against the amounts you budgeted. Say it’s going to take you 50 hours of install time by a journeyman at a fully burdened rate of $70 an hour with material of $1000 on site and the rental of a lift for a week at $750. Simplified, your budget would look like this:
23 07 13- Duct Installation : Total Budgeted Cost $5,250
| Cost Type | Budget |
| Labor | $3,500 |
| Material | $1,000 |
| Equipment | $750 |
As the expenses come in, you’ll track them against each cost type within that job. Not only will you see the total job cost against what you budgeted, but you’ll see which cost type exceeded your budgeted amount, allowing you to further hone in your estimates for the future.
Job Costing with CrewCost
Accurate job costing is one of the best tools a contractor can have under their belt. Still, we see a lot of businesses neglecting this crucial accounting process – and we can’t blame anyone either. Most accounting software just simply isn’t built for the construction industry.
To solve that problem, we’ve built an accounting and job costing software that’s made specifically for contractors at construction companies. CrewCost accounting software is purpose-built by construction industry professionals to assist with every step in a solid job costing system. With our job costing software, you can streamline the entire process, connecting the back office with the job site and allowing your team to spend more time on construction and less time on the paperwork.
Further Reading: Mastering Job Costing: How to Enhance Profitability With the Builder’s Feeback Loop
Interested? Be the first to know when we release CrewCost.