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 track project profitability accurately, the company must implement a construction job costing system.
What is construction job costing?
Construction job costing is a way 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 a micro and macro level. Job costing helps construction business owners determine which projects, tasks, or crews are making money or bleeding money. With this level of information, a business owner can make any adjustments to ensure profitability of a project or develop a plan for sustainable growth.
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 tasks, such as finishing, is taking more labor hours than estimated, on future bids, the estimator can add in more labor hours.
Tips on improving construction job costing
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.
Implement a mobile time tracking solution
Paper time cards lends itself to a whole range of inefficiencies from manual data entry to inaccurate information. The growing popularity of mobile devices and applications deliver new capabilities for automating time tracking. With mobile time tracking solutions, employee can enter their time from their mobile device. No longer do project managers or business owners have to wait until time cards get manually entered and payroll gets processed to see how labor is progressing on a project. They get real-time labor information when reviewing projects.
Include change orders
Change orders have the tendency to throw project budgets for a loop. 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 budget. Materials and labor costs on change orders affect the overall, so tracking them closely will provide greater insight on overall project health.
Review projects and reports regularly
The worst time to see that a project went south is after the project. Whether on a weekly or monthly basis, reviewing job costing reports regularly allows you to make any adjustments as needed. 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.
Many construction companies implement job costing on a simplified basis in order bill customers on their specific projects. Cash is the lifeblood of any business. This rings truer in construction where many expenses are paid in advance of receiving payment for the time and material from the customer. In order to ensure payment received for completed work, companies must monitor their billings closely.
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 revenue to cover overhead expenses and direct costs.
Many contractors begin their business in the spirit of entrepreneurship and love of their trade. However, when the realities of running a business, albeit a successful one, begin to sink in, construction job costing should come to the forefront. Construction job costing will take some time and effort to implement and work through, but the benefits will pay off tenfold.