Guide to job costing
Everything you need to know about job costing.
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1 minute
August 1, 2024
Job costing is a common accounting practice used by many construction industry firms, helping them deliver projects on time and on budget.
In this blog post, we dive into job costing best practices so you can avoid common mistakes, track progress, and operate your construction firm more efficiently.
Let's dive in.
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Job costing is an accounting method construction companies use to ensure materials costs are assigned to the corresponding projects (jobs) they are used.
This is an understandable approach when considering every construction job has a different material, labor, and overhead cost combination. You can't use one nail to complete two separate jobs.
For example, the cost of fasteners purchased for a new school facility should be tracked to a specific job code assigned to that facility project. Why is this important?
Job costing allows managers to accurately compute the total cost of a project and ensure they are tracking well against allocated budgets. That is how construction companies make money, after all!
When contracting work, firms typically rely on a cost-plus model, quoting a price for service that is above the estimated cost for the firm to complete the project.
In other words, the entire construction business model is a balancing act between delivering high-quality work while maintaining bottom-line profitability.
Profit margins help pay for expansion, employee salaries, marketing, and other business-critical expenses, so it makes sense that firms use job costing to keep things running smoothly and avoid surprises.
There are three general cost categories that construction companies track.
Materials are the nails, lumber, cement, wires, and other physical materials required to complete a project.
Labor refers to the headcount – builders, architects, engineers, and others – assigned to complete a specific job. This figure can be calculated by multiplying each worker’s hourly rate and multiplying it by the time it takes to complete the job.
Overhead is everything else: Insurance, equipment costs and maintenance, marketing, administrative fees, and other ordinary costs of doing business. This can quickly get complex because two types of overhead are direct and indirect.
Direct overhead is the non-labor and non-material costs associated with specific projects, such as temporary, on-site office facilities. These costs can be directly traced to a project.
Indirect costs are associated with construction activities generally and are not trackable to a specific project.
Examples could be maintenance fees for a concrete paver used at multiple job sites or indirect materials (e.g., office equipment).
Indirect costs are allocated, often based on an activity level (machine hours, labor hours, units produced). For instance, consider a construction project involving the construction of a duplex.
Job costing is the practice of tracking expenses for each related project, from the cost of raw materials like cement and lumber (materials) to the hourly rate of construction workers (labor) and temporary office space (direct overhead costs).
Direct overhead is tracked to related job codes. To track indirect costs, construction companies have different approaches.
Some charge a blanket overhead fee for jobs, while others allocate a percentage of total indirect costs across jobs.
While it can be time-consuming, proper job costing offers a flurry of benefits to construction companies.
Accurate job costing provides transparency that can help project managers prevent project spending from ballooning and impacting company profit margins.
You need accurate, clear information from past projects to inform future projections and make informed decisions.
Accurate job costing plays a direct role in strengthening confidence in revenue forecast projections.
When a business owner is asked to bid on a project, job costing allows the owner to compute the total cost and a reasonable profit margin.
The business may reduce the project if the profit margin isn’t large enough.
Accurate historical data provides a level of quantitative information that can inform whether you bid for specific future projects.
Perhaps a type of job created unnecessary pricing pressures; proper job costing could help you uncover that insight and inform future strategy.
Job costing can help you gauge individual and team productivity levels when comparing actual costs to other measures like Work in Progress reports (more on later).
Labor costs for skilled tradespeople, such as plumbers and electricians, may be the largest component of a job’s cost.
To complete a job on budget, managers must estimate the hours required to complete each task. If workers aren’t productive, the job may generate a loss.
As we have written previously, construction companies often face several common finance problems. One is controlling and tracking job spending efficiently, directly tied to job costing practices.
Here are a few job costing issues firms face.
Many construction business owners “prefer the old way” of working. They prefer to print, sign, and mail checks. While this is comfortable, it causes many downstream problems.
These methods slow down proper expense reporting and month-end reconciliation that supports accurate job costing, slowing down your finance team.
Excel spreadsheets are one of the most important tools finance teams use. However, as your business scales, it’s important to complement this tool or risk errors made via manual data entry.
Complexities in managing labor, material, and subcontractor costs, paired with often outdated, manual processes, create a challenge in maintaining real-time visibility over spending.
This lack of ongoing visibility can disrupt accurate financial management and lead to unwelcome surprises.
The bane of every construction finance team’s existence. Since construction teams often move from job to job, it's common for receipts to get lost or submission to be delayed, making expense tracking challenging.
Automation can be a significant value add for construction firms that experience issues with tracking costs and manual data entry.
Whether it is managing expense receipts and coding expenses to the right job code or executing month-end close, the first step is to identify candidates with whom you can implement small but impactful changes.
As Rho controller Bryce Armbruster writes:
Segment automation-driven efficiency opportunities by impact level, the effort required, and relative priority. Once you have a clear view of your low-hanging fruit, this is usually the best place to start to build momentum for larger initiatives. As your team executes these quick-win scenarios, you can simultaneously use the experience and knowledge gained to map out more comprehensive wins in collaboration with your CFO.
Corporate cards aren’t just for earning cashback or points anymore.
Modern corporate cards today come with preset rules, restrictions, and auto-enforced spending limits customizable to each card, giving business leaders better control over company expenditures.
Paired with the finance automation platforms available today, you can issue virtual and physical corporate cards tied to specific project budgets with pre-set spend controls enabled.
As a result, management can prevent unnecessary spending, track costs at a granular level, and streamline operations.
As the owner of a construction company, you're probably aware of how much your teams are on the move. The last thing your on-site staff wants to worry about is managing and submitting receipts or monitoring their project expenditures.
Yet, these tasks are essential for maintaining your spend visibility. Embracing mobile technology can help alleviate these problems.
There are expense-tracking mobile apps that make it easy to purchase supplies, submit expense receipts, and sync data in your ERP in seconds.
Connecting your spending with your construction accounting software – whether it’s QuickBooks or NetSuite or a construction-specific ERP like Foundation – is crucial to managing finances effectively.
This software holds all your vendor payment information and provides a single source of truth for all your financial data – it makes sense that you want all your payment data flowing into your ERP.
A live data feed can help you deliver more accurate estimates, track progress, and pinpoint issues before they become major headaches.
This simplifies your financial reporting and empowers you to answer critical questions like “How are we tracking against X budget on Y project?” promptly and accurately.
This brings about streamlined operations, better budget management, and overall operational efficiency.
Effective job costing is key for a successful construction business.
Taking steps like those outlined above can help improve your construction firm’s operational efficiency, margins, and overall success.
Cost codes are strings of alphanumeric values assigned to jobs and used to track costs required to complete each project. For example, the job code, ‘3AX78A’, could be created in NetSuite to track expenses for a government building project.
Committed costs are cash outflows obligated to specific projects that can’t be recovered, such as materials expenses purchased for a job using a corporate card or purchase orders applied to a job.
A job cost report summarizes construction costs – materials, labor, and related overhead – incurred thus far for a specific job that helps companies understand how they are tracking against budgets.
Work in Progress (WIP) reporting is a detailed account of the current status, complete and incomplete tasks, and incurred costs of specific projects or jobs.
Backlog describes contracted work that has not yet begun, often used by firms to forecast future revenues.
Using job costing software, you can track expenses and manage change orders in real-time, effectively managing cost overruns.
Implementing a construction job costing system helps to track individual job expenses and provides essential insights for future work.
WIP reporting is pivotal in job costing as it provides a real-time snapshot of all ongoing projects, enabling improved project budget and timeline tracking.
By giving a real-time view of job costs, job costing software can help manage cash flow by providing upfront visibility into potential cost overruns.
Real-time tracking allows project managers to monitor project costs as they occur, making it easier to manage expenses and maintain budget control.
With job costing, managers can accurately track labor costs and hours, improving efficiency and productivity.