Job costing is an essential part of a business’s bottom line, especially for construction companies. Construction projects have many moving pieces and job costs can quickly escalate. Job costing for construction is designed to make accurate bids and turn a profit.
The construction business is known for skyrocketing job costs. Many times, original job costs will start to change, getting in the way of a completed job. Read on for more information about what construction job costing entails, estimated costs, and job costing software.
What is construction job costing?
A construction company will use job costing as a way to track, assign, and estimate project expenses on a project-by-project basis. Typically, construction job costing will estimate two different project costs: indirect costs and direct costs. These include labor hours, materials, equipment and other overhead costs.
Construction job costing is a substitute for process costing. With process costing, the idea is the same, but the basics are different. Process costing calls on prior knowledge to make a determination of upcoming project costs. For example, if a large project costs the company $2,000, it can be assumed something half the size would be $1,000.
In the construction industry such an assumption cannot exist. Labor, materials, and equipment are broken down quite differently and a job cost is more accurate. As an example, say the use of equipment for either large or small projects will always cost $1,000—there is no use in taking on a project which pays less.
According to Inside Advisor Pro, this approach ensures that contractors can effectively allocate resources and make informed decisions about the projects they undertake, ultimately leading to increased profitability and long-term success.
How to calculate construction job costs
Breaking down job expenses into specific categories is the first step to accomplishing correct job costing. Let’s take a look at the example below.
Though the above information is useful, construction job costing should be as detailed as possible. A further breakdown of the labor costs, material costs, and equipment costs provides more accurate job cost reports.
With a more detailed budget in hand, project managers can better prepare for a construction project, track progress, and stay within the projected costs. Calculating and tracking the total cost will help the company keep a healthy cash flow and allow for future jobs.
How to estimate project expenses: Breaking down the project
Job costing starts with breaking down the expected costs. Begin with each of the main phases of the project by reviewing the tasks required to finish the work. Construction companies will implement a cost code system to keep all of this organized. These then get separated out into three main expense types.
Thousands of dollars are lost every year by companies in the construction industry because of labor costs. Inaccurate reporting, mistakes during payroll, and scheduling issues all contribute toward rising costs and are notoriously hard to predict during the job costing process.
Materials costs can be broken down into indirect materials and direct materials cost. Direct costs include items such as wood, concrete, and steel. Indirect costs include items such as nails or screws. To calculate an accurate project budget, it’s best to estimate the job cost per project, rather than using information from the past. Allow room for the cost to grow by as much as 10% to 20%.
Equipment costs are some of the most straightforward with some room for a company to save. Rather than purchasing equipment, leasing might prove the best route, and vice versa. More expensive equipment could save money down the road in higher productivity and less overtime.
How to improve construction job costing
Accurate job costing starts with construction accounting software. A well-rounded accounting software will help track costs, making the entire job costing process easier and more accurate.
Implement an automated time-tracking system since manual time cards are often inaccurate.
Review cost codes for pricing and expensing to ensure there is proper alignment assisting with automated billing.
Depending on the contract, a company could bill customers for construction costs, which need to be monitored closely for accuracy.
If you’re still receiving paper receipts, Shoeboxed‘s Magic Envelope service provides a postage-prepaid envelope for receipt and invoice digitization, so you can closely monitor costs and track down all expenses. Keep the envelope on the dashboard of your company vehicle, and stuff receipts in it as you go. Send in the envelope once it’s full and get all your receipts digitized and viewable from your Shoeboxed account. Customized tags allow you to filter expenses by project so that you can track any number of projects within the Shoeboxed dashboard.
Track or change orders
Job costing with the right accounting software will track any unexpected changes, providing information about budget impact.
Construction job costing software helps maintain information about overhead costs such as taxes, administrative costs, and professional services. The expenses don’t apply toward just one construction job, but should still get included into the budget.
Frequently asked questions
Construction job costing is the most accurate job costing process. Process costing uses data from past projects to determine potential job costs for a current construction job. A construction company should use construction job costing because it will use current data based on the materials, labor, and equipment needed to complete the project in order to determine the job cost.
Job costing is the key to maintaining cash flow. Construction jobs have many moving pieces causing costs, prices, and budgets to skyrocket. An accurate job costing process provides a target budget, allowing for various overhead and unexpected costs along the way without breaking the bank.
Construction businesses use job costing software as a way to automate most of the job costing process and keep accurate estimates. Such accounting software will house the cost code for each expense needed to complete a project, allowing for accurate cost reports. Check out our Construction Bookkeeping: 8 Top Tips for Contractors for more pointers.
Job costing for construction companies is the key to maintaining an adequate cash flow and will help you stay within the agreed-upon final cost. Going through a job costing procedure will disclose all expected expenses including indirect costs and direct costs. Material costs, labor costs, and equipment expenses are the biggest groups of expenses a construction business will run up against.
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Masters Degree in Accounting and Finance.
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