The net profit margin for a construction business typically ranges from 3% to 7%, with the average sitting at right around 6%. Without strict oversight, those numbers can quickly drop closer to zero. That’s where job costing comes in.
A comprehensive tracking system can help you control costs so that you can maintain as high a profit margin as possible.
Learn about the best practices that can take your construction job costing to the next level and keep your business building toward success.
Key Takeaways
- Construction job costing is the process of tracking and allocating all direct and indirect costs associated with a specific construction project.
- Construction job costing is important because it allows you to determine the true cost of a project, monitor profitability in real time, and identify areas for cost savings and operational efficiency.
- To improve your construction job costing, take the time to understand all the costs associated with a project (i.e., direct, indirect, and overhead), track everything, stay organized with cost codes, take advantage of technology and automation, conduct variance analyses, keep a close eye on change orders, train your team to help, and review projects when they’re complete.
What Is Construction Job Costing?
Construction job costing is a detailed accounting method used in the construction industry to track and manage all expenses associated with a specific project.
Construction businesses may have multiple projects going on at the same time, so they’ll use a combination of job costing to track the profitability of each project and general accounting to track the profitability of the business as a whole.
The primary goal of construction accounting in general is to provide an accurate, real-time picture of a project’s financial performance.
This allows construction managers to monitor budgets, address cost overruns before they get out of control, protect profit margins, analyze performance, and improve future bidding and estimating.
Construction Job Costing Best Practices
Construction job costing is unique because it must take into account factors like long-term (often irregular) projects, decentralized teams, frequent change orders, retainage, and progress billing.
By making the below best practices part of your regular construction accounting, you’ll be able to streamline how you track and manage the rising costs of each project.
Understand Your Direct, Indirect, And Overhead Costs
Direct, indirect, and overhead are categories of costs that apply to specific projects and your business as a whole.
Direct costs include expenses necessary for the actual work, such as materials, labor, equipment, and subcontractors. Indirect costs include things like administration, site security, and material transport.
Overhead costs are what keep your business running, such as rent, utilities, salaries, insurance, and tools and small equipment that move from one project to the next.
Understanding which costs go in which categories can help you keep spending under control and ensure that you’re charging enough to keep projects moving.
Failing to account for these costs can lead to tax compliance issues, reduced job profitability, inaccurate reporting, and financial instability.
Track Everything
Implement daily reports, purchase order and receipt collection, time cards, and equipment logs so that you have as accurate a picture as possible of what your business is spending on each project in progress.
The tracking we’re talking about goes beyond simply recording expenses in a ledger. Done correctly, it provides a granular view of a project’s financial performance.
With that information, you’ll be better positioned to make informed decisions, improve profitability, and maintain a competitive edge.
Stay Organized With Cost Codes
Cost codes are like labels for everything you spend. They help you categorize expenses according to project for more accurate accounting. For example, you may choose to create a cost code for concrete, another for framing labor, and another for electrical materials.
Dividing expenses into unique categories helps you quickly see how much you’re spending on each part of the project and how that spending compares to the estimates you produced at the beginning of the job.
While some companies create their own custom cost codes, many use industry-standard systems to ensure consistency and easy communication with clients, subcontractors, and architects.
The most widely used system in the United States is the Construction Specifications Institute (CSI) MasterFormat, which organizes construction tasks into a series of numbered divisions, suich as:
- Division 03: Concrete
- Division 04: Masonry
- Division 05: Metals
- Division 06: Wood, Plastics, and Composites
- Division 07: Thermal and Moisture Protection
- Division 08: Openings (Doors and Windows)
- Division 09: Finishes (e.g., drywall, paint, flooring)
- Division 22: Plumbing
- Division 23: Heating, Ventilating, and Air Conditioning (HVAC)
- Division 26: Electrical
Utilize Technology
Construction job costing and accounting can be very labor-intensive without the right tools. Specialized construction software allows you to enter and organize all costs, generate spending reports, compare estimated and actual costs, and track project changes.
Pair that with a spending platform like Coast that also integrates with your accounting software, and you’ve got a streamlined channel to monitor expenses from start to finish.
Conduct Variance Analyses
A variance analysis is an in-depth look at how much you thought you would spend versus what you’ve spent so far.
How often you run this type of analysis depends on the size, complexity, and risk level of the project.
A general rule of thumb is to conduct a variance analysis at least once a month and when a project reaches key milestones such as foundation completion, structural framing, and interior/exterior finishes.
For more high-risk phases of a project, it can be useful to conduct more frequent variance analysis (e.g., every other week or once a week) to avoid cost overruns.
Keep Track Of Change Orders
When a client asks for something different from what was initially planned, you’ll need to fill out a change order. Keeping track of these change orders is essential for controlling costs and staying within your budget.
Without a robust tracking system, your business may experience undocumented costs, inaccurate estimates, payment disputes, resource allocation issues, inaccurate reporting, contractual disputes, damaged client relationships, increased legal risks, and more.
Train Your Team
Everyone on the team needs to understand the importance of job costing and how to fill out reports correctly. Train them to do so as accurately as possible.
Beyond just filling out the reports correctly, make sure everyone understands why job costing is important. When they understand the why and not just the how, they’ll be more motivated to make an effort, and the information you receive will be more accurate.
Review Projects When They’re Finished
When a project is finished, take time to review all the cost data that you’ve compiled. As you do, ask yourself, “What could we have done better? Where did we spend more than expected? Where did we save money?”
Once you’ve answered those questions for the finished project(s), make adjustments in your next project’s planning, estimating, and execution.
Build Strong Job Costing With Coast
Coast offers a smarter way to handle all your construction spending, be it for fuel, materials, supplies, vehicle rental, whatever.
Coast brings everything onto one platform so you can do away with all the uncertainty of running a construction project.
- Tag expenses by job code: Every purchase, from fuel to materials, can be labeled by project or phase and synced directly to your accounting system. This makes variance analyses and project reviews more accurate.
- Real-time receipt capture: Field crews snap photos of receipts at the pump or supply store, so you never lose track of costs that impact profitability.
- Spending controls: Set limits by card, user, merchant, or even vehicle, so unauthorized or out-of-scope purchases never hit your job budget.
- Accounting and field service management integrations: Coast connects with QuickBooks, NetSuite, Sage Intacct, and BuildOps, making WIP reporting and reconciliation faster and less error-prone.
Coast can help you streamline your job costing process, stay on budget, and keep your construction project humming along nicely, all without slowing down your crews in the field.
For more information on how Coast can improve your business’s efficiency, visit CoastPay.com today.
Frequently Asked Questions [FAQs]
How can I allocate costs more accurately?
One of the best ways to allocate costs more accurately is by implementing a consistent categorization system. Create job codes, categories, and tags for each project, and then use them to track labor, materials, and spending as they occur.
Categorizing costs every day, rather than once a month or every few months, reduces the workload and gives you a more accurate picture of your spending.
It can also be helpful to break down all costs by task or phase to control the razor-thin margins that are often the norm in construction accounting.
What common pitfalls should I avoid in job costing?
Common pitfalls in construction job costing include working around incomplete data, ignoring indirect costs, underestimating what you’re going to spend, and relying on manual data entry that’s prone to errors and inefficiencies.
If you’re having trouble with any of these areas, talk to an accountant or CPA who specializes in the construction industry.
They understand the nuances of the construction industry that a general accountant might miss and can help you overcome your construction job costing problems.
How often should I update job costing data?
Ideally, you want to update job costing data in real-time or at least once a day. If that’s a challenge, common practice for many businesses is updating things a minimum of once a week or every two weeks.
With more frequent updates, you’ll get a much clearer and more accurate picture of the project’s financial status.
How can technology improve my job costing?
Technology (such as construction management software) can improve your job costing by leaps and bounds. Many software platforms come with tools such as automated data collection, real-time visibility, improved accuracy, workflow simplification, and deep project analysis.
Couple that with an expense management platform like Coast that also integrates with regular accounting software like QuickBooks, NetSuite, and Sage Intacct, and you’ve got a powerful suite of tools that make construction accounting and job costing much easier.
