America thrives on the entrepreneurial spirit of its citizens. However, half of all businesses no longer exist after five years. Construction companies have it even worse. Only 36.4% reach the fifth year of business. One of the major reasons is the inability to protect their profits. In order to accurately track and sustain project profitability, the company must implement a construction job costing system.
Below, I’ll share what you need to know about construction job costing, highlight the best tips for improved budget tracking, and unveil the secret to making the process as fast and easy as possible.
What is construction job costing?
One sentence, Construction job costing is a method to track expenses to projects. It breaks down the entire project into smaller pieces so you can track expenses to specific areas of the project. This can help a contractor view expenses at both the micro and macro level. Job costing helps construction business owners determine which projects, tasks, or crews are making money or worse, bleeding money. With this level of information, a business owner or contractor can make adjustments to ensure the profitability of a project and develop a profit plan to drive future projects and drive major business decisions. For example, if profit margins on residential projects are higher than commercial projects, construction business owners can make the decision to focus strictly on residential projects. Or if a certain task like finishing is taking more labor hours than estimated, the estimator can add in more labor hours on future bids.
Tips for improving construction job costing
1) Review cost codes
Different organizations track expenses in different ways. Some companies operate with a handful of cost codes to make things as easy as possible for tracking purposes. On the other hand, some companies have hundreds of cost codes to track items with more granular detail. It is important to do what makes the most sense for your business and the different departments.
2) Implement a mobile time tracking solution
Paper time cards lead to a whole range of inefficiencies from manual and duplicate data entry to inaccurate information being entered into the pay system. The growing popularity of mobile devices and applications deliver new capabilities for automating time tracking. With mobile time tracking solutions, employees can enter their time from their mobile device.
Project managers and business owners no longer have to wait for time cards to get manually entered and payroll to get processed to see how labor is progressing on a project. They get real-time labor information when reviewing projects on a daily basis.
3) Include change orders
Change orders have the tendency to throw project budgets off track. Job costing and cost code best practices still apply. Detailing the additional material and labor costs on change orders can help you understand the effect they will have on the budget. Materials and labor costs on change orders affect the overall project profitability, so tracking them closely will provide greater insight on overall project health.
4) Review projects and reports regularly
The worst time to see that a project went south is after the work is finished. Whether on a daily, weekly or monthly basis, regularly reviewing job costing reports allows you to make adjustments and quicker decisions. Sample job costing reports include cost-to-complete, budgets versus actuals, labor productivity reports and cost code summary reports. When expenses in one cost code grow higher than estimated, you can find ways to scale back in other areas to ensure the overall project remains profitable.
5) Monitor billings
Many construction companies implement job costing on a simplified basis in order to bill customers on their specific projects. Cash flow is the lifeblood of any business. This is especially true in construction where many expenses are paid in advance of receiving payment from the customer. In order to ensure payment is received for completed work, companies must monitor their billings closely.
6) Don’t forget overhead and indirect costs
While certain costs are not billable, there still must be a system to account for those job costs. Overhead and indirect costs for construction companies usually include administrative expenses, travel costs, or even equipment. Tracking these costs allows construction companies to determine how much it should add to an overall bid. When submitting bids based on direct costs alone, a company runs into the danger of not having enough cash to cover overhead expenses and direct costs.
7) Pay extra attention to labor
It’s no secret that there are a ton of costs associated with construction projects, but no cost is more important to keep track of than labor. Not only is labor the most expensive project cost, but it is also the hardest cost to estimate. When job costing for labor, begin by calculating how much it costs to have each direct employee on the job per day. Once that is worked out, multiply it by the expected project duration.
8) Job costing, not process costing
Job costing and process costing are similar in function, but their methods are actually very different in determining the project budget. When you process cost, first you identify the steps required to complete each job, then price the job based on average costs from previous experiences, then add the total averages to determine the overall budget. Job costing is much more detailed, where you determine specific labor and materials costs, then add another charge to cover all possible overhead.
9) Take charge of your project
If you hire a subcontractor or partner on part of your project, they will likely do their own estimates and calculations for their part. Even if the partner is a trusted source, it’s still a good idea to do your own calculations to ensure there are not any errors in their work. The last thing you want to face during your project is taking on an unexpected budget deficit because you didn’t check someone else’s work. Always double-check plans before the actual work begins, especially if it is your first time working with the firm.
Why using the software is a smart business decision
While the above tips offer advice, there is no better option for job costing than to use computer software to assist with the process. Traditional job costing methods using spreadsheets take too much time and leave a lot of room for critical error. Using a software program automates the process, making it much faster and easier to complete tasks.
Using software allows you to price jobs more accurately, making for better final estimates. The more accurate your estimates are, the lower the chances you will have to deal with customer conflicts if costs change. This part is crucial because customer satisfaction is the key to getting good referrals and repeat work.
Using software also allows you to let the application do the hard work for you. Instead of having to figure out calculations manually, you can just plug in the numbers, making it easier to determine important metrics, including profit margins.
Another benefit software brings is real-time tracking of project progress and costs. As the project progresses, you can enter actual costs to see how they align with estimated costs. Seeing these costs in real-time enables you to monitor the budget more closely, and facilitates better communication among key project stakeholders.
Many contractors begin their business in the spirit of entrepreneurship and love of their trade. However, when the realities of running a business begin to sink in, construction job costing should be at the forefront. Construction job costing will take some time and effort to implement and work through, but the benefits will pay off tenfold.