Most construction firms don’t go out of business overnight. They make small, unnoticeable mistakes over time that end up hurting their bottom line.
A few extra labor hours here, a material delivery that costs more than expected there, and before you know it, your profit margin has quietly disappeared.
That’s why construction job costing is so important.
But for many, job costing is a challenging task.
Most rely on spreadsheets or general accounting tools that weren’t built for construction. Information gets scattered. Field teams and office staff work in silos. And tracking actual costs against estimates turns into a time-consuming task.
The good news? Technology is finally catching up, and you’re about to find out what this means.
In this guide, we’ll walk you through what job costing in construction is, why it matters, and how the right tools can make job costing simpler, more accurate, and less stressful. Read on!
What is Construction Job Costing?
Job costing is an accounting concept that helps construction companies determine the cost of individual projects. It’s an efficient construction cost tracking method that spares you the stress of wondering where all your money went.
Job costing assigns individual expenses and revenues to every job, so when something goes wrong, you know exactly where the problem occurred. As a result, contractors always know if their projects are on budget, aligned with their expected costs, and profitable as planned.
This yields three major benefits:
- Ensures accurate project bidding
- Helps in making the right decisions (financially)
- Makes construction job costing management less of a mess
Construction Job Costing vs. Process Costing
Like job costing, process costing is also an accounting job cost tracking system that allows companies to monitor costs associated with a construction project.
The following differences will explain why job costing is the obvious and better choice:
Every Project is Different
Process costing is used when you’re making large quantities of the same thing over and over. On the other hand, job costing is used when you’re working on unique, individual projects.
Construction projects are not all the same, even if their nature is similar. Let’s say you’re renovating a kitchen for ten different clients.
Will you be requiring the same materials and labor for every kitchen? Nope. Since each client has a different vision, each project will have a different cost.
Since construction is not standardized, mass construction, job costing is the right way to go. Had it been the other way around, opting for process costing would be a smarter choice.
Allows Better Decision-Making
In construction, you need to be agile when making decisions. Changes happen frequently and daily on-site, so knowing where and why about the dollars you spend is incredibly important.
Since job costing tracks costs per project, it gives real-time, job-level insights that you can use to make smart decisions. If a job is running over budget, you find its root cause and make necessary adjustments.
While process costing is great for long-term cost control in mass production, it doesn’t help you respond to specific project needs.
This means that if your costs start to spiral on a job, you won’t know until it’s too late, and you’ll have no project-specific data to explain what happened.
Detailed Job Costing
With job costing, you track all involved expenses separately for each job.
This level of cost tracking allows you to compare estimated costs with actual ones so you can spot overruns and make adjustments early on.
On the other hand, process costing takes the total cost of a batch of production and divides it evenly. It doesn’t break down individual inputs per product or allow for job-specific tracking.
Only knowing the average cost across projects isn’t going to cut it because a lack of granularity can be a problem in construction. It’s important to know how each crew, material, and equipment impacts a specific job.
That said, it doesn’t mean process costing is useless for construction projects. It’s still the right choice for some areas, such as:
- Construction materials production
- Mixing concrete in large batches
- Land grading
- In-House Fabrication
Benefits of Construction Job Costing
Considering the complications of job costing, we understand it’s easier to run from it. But the benefits listed below will convince you that it’s ideal for construction project cost management.
Track Every Cent
With construction job cost reports it’s easier to continuously monitor your expenses.
At every point of the project, you’ll have an accurate report in hand to identify where every cent of your budget was spent.
Ensure Efficient Use of Resources
Is your team managing resources efficiently? The only way to know this is to track spending on each job.
In this case, you’ll be able to spot budget overruns if they’re likely to happen due to inefficient budget management.
Calculate Job Profit
You’ll have the profitability report of every job that you complete. Once you finish the project, it’s easier to calculate your total earned project more accurately.
This information can also be helpful in the future to help you choose the right projects to bid for.
Complete Financial Transparency
Since you’ll be tracking every dollar as you spend it, you’ll also notice its financial impact on your overall budget.
This means you can identify construction project budgeting overruns before they happen and pull the reins on spending as a preventative measure.
And if you use dashboards for cost tracking, you’ll also encourage transparency among your team.
Key Components of Job Costing
Job costing might look complicated, but if you simplify the concept, it’s not that scary.
Let’s start by understanding the key components of job costing in construction:
Direct Costs
All expenses that are incurred directly on your product or service are direct expenses. You can further divide direct costs into two categories:
- Direct Labor
- Direct Material
For example, the labor you use to paint the building is a direct labor cost. However, the money you paid to the truck driver to bring you the paint is not.
Likewise, the paint is the direct material, but the drop cloths used to protect the area from splatters don’t fall under this category.
Indirect Costs
Indirect costs are the ones you can’t avoid to ensure the project’s completion.
Yet, they are not directly related to the job. You can also divide indirect costs into the same categories as above:
- Indirect Material
- Indirect Labor
Now, refer to the previous example.
In this case, the truck driver’s payment falls under the indirect labor cost category. And as you can probably guess now, the drop cloths are a part of indirect material costs.
Committed Costs
The costs you agreed to pay but haven’t done so yet are part of committed costs. For example, supplier contracts, wages, or equipment lease agreements.
Overhead Costs
Overhead costs refer to the expenses needed to continue operations. This includes utilities, rent, and administrative expenses.
Now, since you can’t link all of it to a single project, you actually apply a percentage to each job to calculate the job cost accurately.
Essential Reports for Effective Construction Job Costing
If you’re wondering what makes job costing an efficient cost management system, it’s because of its organized data tracking ability. And this couldn’t be achieved without customizable construction cost reports.
Here are the top essential reports you must not overlook for efficient construction job costing:
Job Cost Summary
This report summarizes all your existing projects on a given period so you can see your total costs per job, revenue, and profitability.
It’s helpful when you have to compare the different jobs to determine which ones are demanding the most money.
Unit Productivity Report
A unit productivity report is needed when managers need to control costs. It shows the cost per unit of work and is calculated by measuring output against the time spent.
This report tells you if your workforce is performing as needed and if you need to adjust any processes. It’s also vital for better project planning, improved productivity, and informed decision-making.
Cost Variance Report
It’s hard to compare your estimated costs with actual ones without a structured and detailed cost variance report.
You must update and monitor this report regularly to keep an eye out for cost overruns.
Work in Progress (WIP) Report
WIP tracking for construction projects tells you about the progress of the project in terms of its value.
For example, imagine you had a budget of $100,000 to complete a project. The WIP report says your spending amounts to $25,000. This shows that you’re around 50% done.
WIP schedules also help you identify if you’re running behind while the expenses are piling up so you can make the necessary changes.
Labor Cost Report
Investigating your labor expenses is sometimes the best way to ensure maximum labor efficiency.
A labor cost report lets you examine these expenses in detail so you can identify calculations of wasted time and determine the cause of the declined productivity.
How to Implement Job Costing in Your Construction Project
Here’s a myth about job costing: It’s not something that your project manager can solely take care of.
A job costing system can only be effective if it is applied all across the firm. Yes, even at the office.
These steps can help you properly implement a system:
Define Job Cost Categories
For starters, break down all your project costs into major categories, such as materials, labor, and overhead. This way, you’ll be able to better organize and track costs.
Establish a Cost Coding System
Next, you need to establish cost codes to cover all levels of tracking. Construction cost coding consists of four tiers: job, phase, cost code, and cost type.
You don’t need to go into all four levels unless you’re working on a large-scale, complicated project. As long as your cost coding is understandable by everyone on the field, you’re golden.
Assign a unique number to each job so it’s easier to find all expenses related to a project. Make sure to create an outline for the coding system you use so it’s consistent and effective.
Assign Budgets to Each Category
For each category per job, assign a budget you’re willing to spare. This will serve as your baseline when you compare it with actual costs later on.
Monitor Expenses
Remember to record every cost as soon as it occurs. Using spreadsheets or a job costing software for construction can make this construction financial management less of a headache.
Compare Costs
It’s smart to compare your actual costs with expected costs to identify any patterns. This would allow you to spot any complications and take preventative measures..
Prepare Job Cost Reports
Prepare relevant job cost reports to check the overall performance. This step will help you pick apart profitable vs. unprofitable jobs.
Improve Using Data
Review the cost data after the job ends. Use the insights to improve estimates and adjust pricing to ensure future projects are more optimized.
How to Calculate Job Costing (With Example)
Calculating job costing is simpler than you think. In fact, the easiest way to do so involves just four steps.
- Calculate Direct Material
Think about all the materials that will directly go into building your project, such as cement, paint, bricks, wood, insulation, etc. Add their costs together to get an estimate of how much the direct materials will cost you.
- Calculate Direct Labor
Repeat the process above. Add up the costs of workers you will be paying for working on the project directly.
- Calculate Overhead Costs
Overhead costs can be a bit tricky to calculate as they can’t be divided by projects. Hence, you will have to calculate an overhead rate.
Simply divide your total overhead costs with an activity driver, i.e., labor hours or manufacturing hours to calculate an overhead rate.
For instance, if your utilities amounted to $8,000 and your labor worked a total of 800 hours past month. Your overhead rate would be $100 per labor hour.
Now, you just need to add this cost per labor hour when calculating the total labor cost to allocate overhead costs to the project.
- Sum It Up
Add all three costs above together, and you will have an estimate of the job’s cost.
Let’s apply this step-by-step process to an actual example to give you a better idea.
P.S.: We’ll assume we used only one material for the project for this example.
- Direct Materials Cost
- Quantity Required: 100 pieces
- Cost per Unit: $5
- Total Cost (100 x 5): $500
- Direct Labor Cost
- Worker 1: 25 hours @ $10 per hour
- Worker 2: 20 hours @ $12 per hour
- Total Cost: (25 x 10) + (20 x 12) = 250 + 240 = $490
- Overhead Costs
- Imagine the company had $5,000 in overhead costs last month, and total labor hours last month was 500 hours.
Overhead Rate = $5,000 ÷ 500 hours = $10/hour
Now, let’s apply this rate to the 45 hours worked in this project (20 + 25 hours).
Overhead Allocation = 45 × $10 = $450
- Total Costs
- Direct Material: $500
- Direct Labor: $490
- Overhead: $450
- Total Job Cost = $500 + $490 + $450 = $1440
Common Mistakes and How to Avoid Them
You could be doing all calculations correctly yet it might be yielding inefficient results. Why? Because job costing in construction involves more than just reports.
Here are some mistakes you should steer clear of:
Poor Communication
The team at the office and the team at the construction site need to collaborate for a job costing system to work.
If your team lacks communication, you will end up with delayed reports and inconsistencies.
Make sure everyone involved in the project is constantly updated. Using collaborative tools can be of major help in bridging communication gaps.
Inconsistent Data Entry
We get it; you have a lot on your plate. But failing to update data consistently can cost you more than you think. It results in delayed reports which leads to inaccurate budgeting.
Preventing this is simple. You should have accounting software for construction that enters data in real-time.
Neglecting Indirect Expenses
Many contractors overlook expenses that are not directly related to the project. This seemingly minor mistake can lead to lower and inaccurate project costs.
Make sure to correctly categorize all your costs and include them in the job costing calculations to get closer estimates.
Frequent Variations in Scope
If you frequently change the scope of the project, budget and timeline disruptions will be your constant companions.
Instead, use a structured method to manage change orders and keep your budget on track.
Construction Cost Coding and How to Use It
We briefly mentioned construction cost coding above, but let’s discuss it in detail here.
Think of construction cost codes like labels you use to organize and track your expenses on a project. They help you know exactly how much you’re spending on different aspects of the job.
Each cost code tells you what the money was used for. For example, it might show that you spent money on painting, buying paint, or renting scaffolding.
The codes follow a pattern of numbers and letters. As a result, they are super organized and easy to follow.
For example:
Let’s say you’re working on a home remodeling project.
You could have a cost code like:
05-120-MAT-H002
This tells you the money was spent on paint materials for interior walls on home project number 2.
Best Practices
The tips below will equip you to handle your job costing process more efficiently:
Balance Out the Details
Details are incredibly important to figure out where your money will be spent. At the same time, adding too much detail leads to confusion and excessive time-consumption.
Try to include just the right amount of information, i.e., enough to make smart decisions without making cost management a challenge.
Track Changes Clearly
Project changes are sometimes unavoidable. However, having a system in place to track them helps you avoid bumping into unexpected problems.
This helps you monitor your budget and project size. It’s also important legally in case there are questions or disagreements later.
Use Construction Job Costing Software & Tools
These software and tools for accurate job costing can significantly streamline the entire process and make it more accurate and quicker.
Add Office Work to the Budget
Just because your office staff isn’t present at the construction site, it doesn’t mean they won’t contribute to your project.
Keeping them in mind during the job costing process will prevent you from making mistakes that will eat away at your profits.
How Job Costing Software Can Help
You’re mistaken if you believe that job costing software is uncalled for. In fact, look at how helpful these cost management solutions for construction are.
Procore
Procore is ideal for those who need cost estimates, budget management, and expense tracking. Its selling features are the user-friendly interface and detailed reporting tools.
It’s also an all-in-one construction management software, which means you can oversee your entire project here, from conception to final handover.
AutoCAD Construction Cloud
AutoCAD Construction Cloud offers estimation tools with AutoCAD’s popular design features.
It’s particularly famous among civil engineers as they can use it to make 3D models and accurately estimate costs based on those models.
It’s cloud-based, which means your team can access it from anywhere anytime for updates. It guarantees reduced mistakes and the need for rework with its features like clash detection and model coordination.
CoConstruct
CoConstruct is an all-in-one software made for custom builders and remodelers. It helps users create detailed cost estimates and manage project budgets.
CoConstruct works with accounting tools like QuickBooks to make financial management easier and keep track of costs accurately.
The software also has features for project management, like scheduling, communicating with clients, and managing documents.
Knowify
Knowify is a complete software that helps with job costing, estimating, and customer relationship management (CRM).
It’s especially good for tracking material costs. It can also track small but important expenses that employees might pick up without getting your approval first.
Employees can just take pictures of their receipts for things they buy while on the job. Once they submit the photos, Knowify automatically uploads them to the cloud and assigns the costs to the right job to make sure the material cost calculations are accurate.
Knowify also gives you detailed insights to help you make smart decisions during estimating, mid-project, or after the project is finished.
Conclusion
Your business might not survive for long without construction job costing. You may think it’s unnecessary, but it can increase your company’s efficiency and profitability.
The good thing is that job costing in construction is not even a manual effort anymore. There are many tools and software out there to help you conduct the process with little to no challenges.
Remember, costing each job accurately is the only way to ensure your business beats the competition and thrives!
FAQs
How can contractors set up a construction job costing system?
A job costing system is easy to establish if contractors regularly monitor their labor, material, and overhead expenses. Creating detailed budgets for each project can help them understand the total cost for each project.
How does construction job costing impact project profitability?
Job costing determines your project’s profitability accurately by comparing revenue earned with actual costs incurred. This information significantly helps in ensuring your construction projects are highly profitable.
What are the key components of an effective job costing system?
An effective job costing system has three key components i.e.:
- Identifying direct and indirect costs
- Allocating overhead costs
- Collecting and analyzing data