10 Construction Job Costing Methods & Tips for Improved Budget Tracking

The term job costing is an essential cog in the construction industry. It is an accounting method to easily track every single penny spent on a job. From the smallest of nails to items as large as heavy machinery, every expense must be accounted for based on a precise method. This is how construction companies can stop bleeding money and maximize their profits by accurately viewing all ongoing work.

The following article will help you understand construction job costing in more depth alongside tips to improve the accounting method for your company.

What’s Construction Job Costing?

Every construction project manager has the responsibility of managing a financial budget. To that end, they must adhere to construction job costing which defines a method to accurately track all expenses related to a job. This can include materials, equipment, labor, rental fees, overheads, etc.

That said, construction job costing methods require more than just jotting down expenses. The entire project is broken down into smaller pieces to add great detail, allowing project managers to monitor expenses for specific activities at both the micro and macro levels in real-time. This makes it easier to calculate future profitability and keep an eye on how the project is faring against its financial limits.

Do note that construction job costing is fairly different from a general ledger that many companies tend to rely on. The latter provides a financial overview of an entire business, meaning that it can be difficult to track individual jobs. With the level of information given by job costing, a business owner or contractor can make calculated adjustments to ensure the profitability of a project and develop a profit plan to drive future projects and major business decisions.

For example, if profit margins on residential projects are higher than on commercial projects, construction business owners can decide to focus strictly on residential projects. If a certain task like finishing is taking more labor hours than estimated, the estimator can add in more labor hours on future bids.

Methods and Tips for Improving Construction Job Costing

Even when done right, construction job costing is difficult and sometimes tricky to pull off. The whole point is to accurately track all spending, so missing even one item or a day ends up misrepresenting the amount of spending done. There are several ways to improve your job costing reports to ensure accuracy. Here are a few of the common ones.

1. Review Cost Codes

Different organizations track expenses in different ways. Some companies operate with a handful of cost codes that group multiple items to make things as easy as possible for tracking purposes. On the other hand, some companies have hundreds of cost codes to track each item with more granular detail. It is important to do what makes the most sense for your business and the different departments.

2. Double-Check the Numbers

One of the best job costing tips is to go through all the numbers to confirm the maths is correct. A simple human error can ruin an entire column and set you on the wrong track. Hence, double-check every calculation, ensure the estimates from subcontractors are correct, etc. This is vital when it comes to calculating the cost of a project down the road.

3. Implement a Mobile Time-Tracking Solution

Using paper time cards to track labor hours is inefficient because they are prone to inaccuracies. This can lead to duplicate data entries or wrong hours manually entered into the payroll system.

The growing popularity of mobile devices and applications delivers new capabilities for automating time tracking. With mobile time-tracking solutions, employees can enter their time from their mobile devices. This is also lighter on the expense sheet.

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 daily.

4. Don’t Forget About Change Orders

Change orders tend to throw project budgets off track and reduce profitability. Construction job costing can help track unexpected expenses and show how they can impact the budget to let project managers make informed decisions. For example, detailing the additional material and labor costs on change orders can affect the overall project profitability, so tracking them closely will provide greater insight into the project’s financial health to reallocate the budget.

5. Review Projects and Reports Regularly

Reviewing projects in the final stages or after they have been derailed is of no use. This adds to overheads and causes financial bleeding for something that could have been addressed in advance. 

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.

6. Monitor Your Bills

Many construction companies implement job costing on a simplified basis to bill customers for their specific projects. Cash flow is the lifeblood of any business. This is especially true in construction where many expenses are paid before receiving payment for the job from the customer. Hence, companies must closely monitor their billings to ensure payment is received for completed work.

7. Overhead and Indirect Costs Can Create Issues

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, legal fees, 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 overheads and direct costs. If not checked, overheads can easily start piling up to eat into your profit margins.

8. Estimating Labor Costs Can Be Tricky

Labor is one of the biggest expenses of a construction project, and also one of the trickiest costs to track. When job costing for labor, multiplying labor cost incurred per day with the expected project duration is only one step. To accurately calculate your labor expenses, you must also factor in overtime, insurance, and other related aspects. If not, your job costing spreadsheet will be an inaccurate representation of your labor burden and negatively impact future projects because you will spend significantly more than you think in overhead.

9. Don’t Confuse Job Costing With Process Costing

Both accounting methods are quite similar in function and used by construction companies to track expenses. The main difference between job costing and process costing lies in the scale at which companies operate.

Job costing, as already pointed out, is a detailed cost breakdown for every account that includes spending done on the tiniest of materials such as bolts and screws. This provides project managers with a complete picture of all costs associated with a specific job.

Process costing, on the other hand, is commonly used on the industrial scale where similar products are mass-produced in large quantities. Here, all costs for production runs of similar products are added together.

10. There Should Be Room for Contingencies

It is not always easy to anticipate the market. Costs for specific items or services can rise all of a sudden, prompting you to reallocate your budget. Since job costing reports help with accurate estimations, they can be used to predict possible delays to mitigate financial risks. Hence, it is always good to create contingencies early by securing alternative materials, for example, if the primary materials are becoming too expensive. This is how project managers can keep their project budget on track.

Use the Right Software for Efficient Construction Job Costing

While the above tips offer advice, there is no better way for job costing than to use cloud-based construction software like eSUB to assist with the process. Traditional job costing methods using spreadsheets take too much time and leave much room for critical error. A software program automates the process, making it much faster and easier to complete tasks.

Using software lets you 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.

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.