Job costing is one of the most critical aspects of any trade contracting business.
“Proper job costing has tremendous effects on your business’s better profitability, project estimating, management decisions, and timely financial reporting,” writes Hannah Nguyen at Irvine Bookkeeping. That’s why “construction job costing requires meticulous attention to detail and monitoring all costs associated with each unique job.”
Accurate job costing can be extremely difficult to achieve if project data is scattered about in different spreadsheets, binders, and software programs. Essentially, decentralized data is one of the driving factors behind job cost miscalculations in the construction industry.
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Why Decentralized Data is So Destructive to Accurate Construction Job Costing
The cornerstone of job costing is accuracy. If the data you are working with isn’t reliable or accurate, you will miscalculate job costs and your profitability will suffer. In fact, a QuickBooks and QuickBooks Time survey found that 25 percent of construction companies would go out of business if they made just two or three inaccurate estimates.
Unfortunately, job cost miscalculations are a common problem in the industry. Many companies still have disconnected data collection processes that leave information siloed with the teams that own it instead of visible to all project stakeholders.
For example, many trade contractors still use Excel spreadsheets to track finances and build project estimates. While they are an improvement on paper-and-pencil tracking, spreadsheets still don’t centralize data.
“There is an inherent lack of visibility across multiple spreadsheets, creating disparate data sets that contain high levels of inaccuracy from manual data input and the risk of human error that naturally accompanies this,” writes Kenny Ingram, vice president of engineering, construction and infrastructure at IFS Corp. It also means nobody has access to the most up-to-date information.
Using bad or outdated data in job costing inevitably leads to miscalculations and profit loss. A 2021 study by Autodesk and FMI shows that bad data caused an estimated $1.8 trillion in construction industry project losses worldwide in 2020.
Critical Job Cost Problems Caused by Decentralized Data
Knowing your project numbers is key not only to the success of individual projects but also the long-term viability of your company. “Job costing can serve as a report card for current projects and help you plan for the future,” explains the team at EideBailly. But only if the data you are using is complete and reliable.
When data is decentralized, it is inherently unreliable due to poor cost tracking, lack of historical data, and miscoding tasks. It can be difficult to paint an accurate financial picture of a project or forecast the future using that data.
Poor Tracking of Actual Project Costs
Actual costs are one of the key pillars of job costing, yet a surprising number of construction companies lack that information. “Most contractors know their pricing but don’t really know their actual direct costs,” writes Daniel Quindemil, CEO of I AM Builders. This is a problem because without those actual costs you have no way of knowing whether your projects are operating within budget.
In order to assess the financial standings of a project, you have to monitor actual costs throughout the project so you can predict future costs. You can’t simply work with single data points from random moments. Decentralized data makes it exponentially more difficult to collect that comprehensive data on actual costs so you can accurately predict if the project will stay on budget.
Inaccurate Project Estimates and Bids
Uncertainty makes estimating nearly impossible. You need accurate historical data in order to estimate costs on future projects and submit competitive, yet realistic bids that will deliver a profit. It becomes extremely difficult to forecast when there is no central repository of historical data to inform estimates.
For example, when labor data is decentralized, accurately forecasting labor costs gets complicated. How do you know how many hours workers are spending on specific tasks? You have to understand your workforce’s productivity capabilities to be able to estimate the required hours for a project, explains the team at CBIZ, a financial services and consulting company. Without data, you don’t have insights to provide that understanding.
Cost Overruns Due to Change Orders
Change orders are an unavoidable part of the construction process, but can create chaos on projects.
“Not only do change orders disrupt your timeline, they can cause errors in the budget and wreak havoc on your bottom line,” writes the team at accounting firm SME CPA.
Mitigating those financial impacts requires constant monitoring of progress, budgets, and schedules. When project data isn’t centralized, it is nearly impossible to access accurate, real-time data needed to gain those insights and maintain control of project costs.
Improperly Coded Tasks
It matters how your workers code their time spent on tasks. If everyone is using different cost codes for the same work, you will not be working with accurate data when tracking job costs. This miscoding happens when there isn’t a streamlined process for data entry that makes it easy for everyone to allocate their labor hours correctly.
Imprecise job costing was an issue with which Geauga Mechanical Subcontractors struggled. “There was always a bit of confusion in the field as to task codes,” says company CEO Craig Berman. “A lot of stuff got dumped into ‘duct installation’ even if it was something else. It was all going into one big bucket.” This made it impossible to accurately assess job costs.
The solution to all these job costing problems is centralizing project data.
Construction Project Management Software Centralizes Data for Better Job Costing
Bringing project data together is easier with the right tool.
Construction project management software, like eSUB, enables everyone associated with a project to easily input data which is stored in a central location so all stakeholders can access the most up-to-date information at any time. This means more accurate job costing and better financial management of current projects, as well as better bidding on future projects.
That’s because when data is centralized, there is a reduced risk of errors and inaccuracies that would lead to job cost problems and miscalculations.
More Accurate Tracking of Actual Project Costs
When data is centralized, you can more accurately track actual costs associated with projects.
Consider labor costs. This is one of the most difficult project expenses to track because it requires discipline on the part of employees to accurately log the hours they spend on specific tasks on a daily basis. Using standardized cost codes ensures consistency and accuracy in the data entry of time spent on tasks. Also, a mobile time tracking system makes it easier and more convenient for workers to log their hours from the job site.
Then there’s the cost of materials. Those costs are always fluctuating which makes it difficult to track actual costs. The job costing capabilities of construction project management software allow you to automate materials cost tracking so you can anticipate those fluctuations.
Through a centralized system like eSUB, you have the actual costs available at any one time. Those insights make a big difference in project profitability and job costing accuracy.
In Geauga Mechanical’s case, the software made labor productivity tracking more precise. Berman details how following the software could have prevented a significant cost overrun on labor for a project. “We got to the end of the job and we were about 15% over,” he says. “Had we trusted eSUB, we could have done a few things differently to improve the outcome.”
Improved Forecasting for Better Bidding
You have to win bids to get work, but you also need that work to be profitable. In order to achieve both ends, you require access to historical data. “Cost estimates often require the consideration of historical data on construction costs to accurately estimate costs of future projects,” explains construction industry attorney Trent Cotney.
Construction project management software streamlines the process for inputting data so it’s more consistent. That means you can be confident your bids are based on accurate data and will deliver profitable results.
“Having a single, go-to source of the truth will provide the data at your fingertips so you can better prepare for future bids and jobs,” writes Mark Fly, director of customer experience at risk management information system Terra. “With one location, you can find all the accurate estimating information you need to win more profitable projects.”
Better Change Order Management
Data is key to understanding the potential financial impact of change orders. When you have accurate data, you have the ability to predict how additional labor and material costs associated with a change order will affect project profitability. With that information, you can make better business decisions about resource allocation based on change order requirements.
Essentially, when your data isn’t centralized, you run the risk of miscalculating job costs. This impacts many different aspects of your projects and business. Construction project management software is the solution to the problem.
Schedule a demo of eSUB Cloud today to learn more about how the user-friendly software centralizes your project data so you can avoid job cost inaccuracies and better monitor the financial health of your projects.
Images used under license from Shutterstock.com.