Best Ways to Manage Construction Cost Codes
There is no room for ambiguity or errors when it comes to tracking costs and expenses for a construction project. Everyone involved should be on the same page, which is where construction cost codes come into play. They are essentially a universal language everyone speaks (and should understand) in the construction industry regarding organizing, monitoring, and forecasting construction costs.
These all-important construction cost codes track specific construction activities, and at first glance, may seem a bit too complex and detailed. However, they are essential for project managers, as well as for electrical or mechanical subcontractors. Here’s how they work, and ways you can manage them to benefit your company.
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What Are Construction Cost Codes?
In construction, cost codes are a fixed set of numerical values that help companies organize expenses and simplify project management. They are assigned to different aspects and phases of construction to ensure construction documents can be easily interpreted. You can think of construction cost codes as a universal language that can be understood at all levels of a project. That includes project managers, accountants, general contractors, and more. This makes it possible to consistently and efficiently report, track, and manage costs, and associated profits throughout a project’s lifecycle.
Cost Code Categories and Types
Every aspect of a construction project can be categorized between direct, indirect, and overhead costs. These are also called parental cost categories that help facilitate budgeting and improve profitability with job costing control. Nested in them are child categories that track costs associated with the physical construction process, costs not tied to the construction site but still vital for project completion, and costs for running a business. Elements falling inside these child categories can be given construction cost codes, and they come in several types depending on the company’s requirements and the project’s scale. Below are some of the most common cost code types used today.
- Labor – tracks expenses associated with paying salaries, bonuses, and other benefits related to the workforce.
- Materials – tracks expenses associated with purchasing raw materials, components, and other physical items necessary for construction.
- Equipment – tracks expenses associated with purchasing, renting, operating, and maintaining construction machinery, tools, etc.
- Subcontractor – tracks expenses associated with hiring specialty services such as electricians, plumbers, and technicians.
- Administration – tracks expenses associated with administrative overheads such as legal fees, insurance payments, and other office-related expenses.
Best Ways to Manage Construction Cost Codes
How cost codes are managed determines whether a company produces the desired results. The following are some of the best practices for using construction cost codes.
1. Have a Well-Structured Framework From the Start
When it comes to using construction cost codes, there is no one-size-fits-all framework. Every company must adjust their list of codes based on their project requirements. Creating a robust code system may prove to be too time-consuming and cumbersome. On the other hand, scaling a framework to support a large-scale operation may prove quite challenging. It is best to strike a balance by creating an easily scalable structure. It should have enough detail to highlight critical information without creating an overly complex hierarchy of categories and elements.
2. Keep Things Simple
Just because some companies have created their own list of codes does not mean you should as well. Not every company needs a comprehensive code framework. There is no need to jump into complexities for the sake of it. Companies running small operations can adopt standardized code lists to make their jobs easier. Remember that the whole point of using code lists is to simplify project management.
3. Refrain From Using Too Many Codes
MasterFormat features hundreds of cost codes, but companies can get away without using all of them. Forcing more codes than needed creates clutter and unwanted confusion which can hamper communications. Hence, companies should stick to bare essential cost codes to avoid consolidating expenses that can be categorized together.
For example, assign a single code to everything associated with electrical work on a given project. This makes it easier to monitor. There is no need to assign individual cost codes to electricians, electrical supplies, components, etc.
4. Provide Just Enough Details to Empower Decisions
When creating a new list of cost codes, consider who will ultimately reference them. Involve stakeholders and project managers for their input because different teams will require different levels of detail. Having multiple categories of information may end up counter-productive. However, some teams might require high levels of detail to make real-time decisions. Hence, only provide enough information to cater to your business needs even if that means creating a new list of easy-to-understand codes.
5. Remember to Review the Data
Since cost codes offer valuable insights, companies should prioritize reviewing them regularly for informed decision-making. Utilizing them could highlight a financial bottleneck, for example, while budgeting. In addition, cost code frameworks should be fine-tuned to keep them updated and relevant according to industrial and operational standards.
6. Train Your Employees
Host training sessions and workshops to ensure everyone in your company understands the cost codes. While code frameworks are created with the intent of ease of use and understanding, there is no harm in training your junior staff to use them effectively as well.
7. Use Project Management Software
One of the biggest issues with cost codes, especially for large-scale projects, is that they are hard to memorize. You can imagine how difficult it can be to track dozens of numerals. You might have to keep a reference page, which only consumes time. Thankfully, construction management software can do the same job without involving the hassle. It stores cost codes in a centralized database that can be accessed remotely. You do not have to memorize hundreds of codes or refer to thick manuals.
How eSUB Makes Cost Code Management Easy
Between construction cost accounting or construction cost codes, your success is limited by the quality of the management software you use. You can empower your construction business with real-time insights by using eSUB, a market-leading construction management software.
It features dozens of tools that can be tailored to your needs to easily track labor and material costs, and manage budgets to maximize profitability. Its cloud-based support ensures everyone can access critical information anytime, anywhere, which is essential when managing construction cost codes.
FAQs for Managing Construction Cost Codes
Q: What are construction cost codes, and why are they important for subcontractors?
Construction cost codes are specific codes used to track labor activities and expenses on construction projects. They are crucial for subcontractors because they help break down project costs at a granular level, allowing for better budgeting, analysis, and forecasting. Subcontractors heavily rely on labor, making cost codes essential for managing profitability.
Q: How can subcontractors create a work breakdown structure (WBS) for managing construction cost codes?
A work breakdown structure (WBS) is a method used to break down large projects into smaller, manageable tasks. Subcontractors can create a WBS by identifying different systems and phases within a project. For example, a system could be a building, and a phase could be a floor or level. Each task within these phases can be assigned specific construction cost codes for tracking purposes.
Q: What are some key elements of construction cost codes and job costing for subcontractors?
Construction cost codes represent labor activities used to track productivity and project expenses. Job costing involves collecting real-time cost and labor-activity data for a specific project. Subcontractors use cost codes to track actual costs against estimates by individual cost codes for each project phase, helping them identify where projects may have gone over budget in detail.
Q: How do project management systems and construction cost codes benefit subcontractors?
Project management systems and construction cost codes are especially beneficial for subcontractors. They allow subcontractors to track labor hours, materials installed, and efficiency by cost code. This data helps project managers compare actual hours to estimated hours, identify performance issues, and make data-driven decisions.
Q: How can managing construction cost codes benefit subcontractors in terms of project health and cost control?
Managing construction cost codes provides subcontractors with real-time data on project health. By tracking costs at a detailed level, subcontractors can identify potential cost issues early and avoid last-minute surprises. It allows for better cost control, accurate budgeting, and improved profitability.
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