Construction job costing is a detailed pricing method used to accurately calculate project expenses by looking at all the granular costs for each project. This level of specificity helps you more precisely bid similar projects in the future and improve budgeting by monitoring the many individual costs that go into a large construction project. Job costing also helps construction businesses manage their cash flow and protect their profit margins, especially when new requests and changes occur while a project is in progress.
What Is Construction Job Costing?
Construction businesses use job costing to calculate project expenses. Job costing gives you a complete picture of all costs associated with a specific job and looks at labor, materials and overhead. The more detailed the breakdown, the more accurately a business can track expenses and identify issues that could affect its profitability — for example, an unexpected expense or ballooning worker hours.
Job costing vs. process costing
Job costing and process costing are two common accounting methods companies use to track spending on their projects. It breaks down and accounts for all costs — from each bolt, screw and nail, to the worker hours and overhead needed to complete a project. Process costing involves adding all costs for long production runs for similar products. It’s commonly used in manufacturing industries when making lots of like goods, such as consumer products, chemicals and component parts for appliances and other items. Process costing usually examines all costs related to how many units are produced.
The main difference between job costing and process costing lies in their level of specificity. Job costing is a more detailed method of calculating costs and is best used for unique projects. It requires fastidious record keeping and accounting for every item, worker hour and overhead expense to be assigned to a specific project. It’s a popular accounting approach in construction. Process costing is a standard pricing approach principally used by manufacturers that mass-produce large volumes of similar goods where the cost to create one product is indistinguishable from the other hundreds or thousands of products.
- Construction job costing is a detailed accounting method used to calculate track and assign expenses to specific projects and monitor budgets.
- Costs typically fall into one of three categories: labor, materials and overhead. Costs can be either direct or indirect.
- Construction job costing is inherently complex. Financial management software can perform the heavy lifting.
Construction Job Costing Explained
Let’s start with an analogy: a household budget. You notice your monthly utility expenses are starting to go up, but how do you know whether it’s because you’re running your air conditioner more, or Junior is leaving on too many lights? To answer that question, you’d look at the specifics of your utility bills and make adjustments as needed. Construction job costing provides a similar, albeit more complex, level of granularity because every single cost is budgeted for and tracked during and after with job costing. Its power lies in its accuracy. By carefully enumerating each cost associated with a project, you can more accurately bill customers and make better estimates for similar jobs in the future.
Change orders can be particularly problematic for construction companies. Closely monitor added labor and materials costs so you can understand the full financial impact of each alteration and how it affects your project budget. Oversight with job costing also helps a construction business maintain its cash flow and overall profitability.
How Do You Calculate Job Costing?
Job costing, also known as project-based accounting, is calculated by adding together costs for all the individual items categorized under three major areas of a project: labor, materials and overhead. The overall formula for calculating the cost of a job is:
Total job cost = Materials + labor + overhead
Material costs are calculated by summing all raw project materials, such as lumber, steel and concrete, plus material-related costs, such as their delivery to a job site. Labor costs are calculated by multiplying each worker’s day or hourly rate by how long the job takes. Overhead is the cost of doing business and includes administrative fees, advertising and marketing and insurance premiums, among others. It can be difficult to assign overhead costs to specific jobs, so some construction companies apply a blanket overhead fee that may be a percentage of the other project costs or some other predetermined amount.
What Should You Include in Construction Job Costing?
In short, all expenses associated with the particular job you’re tracking should be included. Job costing is designed to give you micro-level cost details, as well as a macro-level overview. Every expense from managing payroll to site excavation, pouring a foundation and each step until the project is complete should be included. Expenses typically fall into one of three overarching categories.
Labor: Labor costs are generally the largest expense for most construction businesses, so tracking expenses for crew members and subcontractors is crucial. In addition to hourly or day rates, labor costs include worker’s comp, overtime hours and any other relevant expenditures.
Materials: Material costs can be direct or indirect. Direct materials or parts include wood, concrete, steel, electric wiring and other materials used in the construction of your project. Indirect materials are often purchased in large quantities and may be purchased to complete more than one job — for example, fasteners and fittings, safety equipment like gloves and helmets, glue, tape and lubricants.
Overhead: There’s more to a job than labor and materials. Like materials, overhead can be direct or indirect. Direct overhead relates to a particular project and changes with every job. Examples include temporary office space on a construction site, job-specific salaries for supervisors, permits, equipment rental like cranes and bulldozers, and sanitation facilities. Indirect overhead expenses are the costs of running a business. They’re not related to a particular job but are costs a construction business incurs on a regular basis such as marketing, office supplies and other operating expenses.
Benefits of Construction Job Costing
Construction job costing requires a meticulous attention to detail and monitoring all costs associated with each unique job, but its benefits make the endeavor worth the time. The information provided is much more in depth than summary data from your financial statements, such as your balance sheet and income statement, and job costing opens opportunities to identify problem areas, monitor your budget and keep an eye on cash flow. Among its advantages, construction job costing helps a construction company do the following.
Track budget: Construction job costing makes it easy to compare estimates with actual costs for each phase of a project, providing an accurate picture about exactly where money is going and whether costs are in line with the budget. Job costing can also monitor new expenses if there is a change order and scopes of work alter.
Track progress: As jobs progress, you can keep an eye on how your actual costs are measuring up against expected expenses. If a particular task or area is taking longer or going above projected budget, you can address some issues mid-project. Financial management software can help assign expenses to specific jobs and areas (labor, materials and overhead) as they occur. This also helps inform future similar jobs so you can better understand what your costs will be and when they’ll occur.
Track efficiency: How well are you and your teams managing resources? By monitoring labor, materials and overhead, you can more easily see when there are cost overruns or perhaps mismanagement of materials that can affect the bottom line. Identify trends and compare how projects compare to one another to identify areas where you could make improvements.
Track cash flow: In the construction industry, businesses pay many expenses in advance of being paid by their customers. Billing and payments may also hinge on completing different stages of a job. Construction job costing helps businesses keep close tabs on every single expense in order to maintain a healthy cash flow and profit margin.
Tips to Improve Construction Job Costing
One of the most important accounting tips is to keep accurate and updated records of all expenses. Good accounting software can help make it quicker, easier and more accurate. Aside from software, here are some tips to help sharpen the construction job costing process.
Implement time-tracking: Paper timecards are not only outmoded, they’re also prone to inaccuracies. Using automated time-tracking job costing applications on mobile phones and devices, a construction business can capture labor hours without the time lag and errors often imposed by manual entries or payroll processing.
Review cost codes: With job costing, each task has an associated cost code for pricing and tracking expenses. The number of cost codes construction companies use varies. What matters most is that every item aligns with a cost code and also helps automate billing and invoicing. These cost codes help you group different expenses to compare against similar jobs and historical performance.
Monitor billing closely: Depending on the terms of your contract, you may be able to bill your customer for expenses. Closely tracking all costs helps you produce accurate invoices and improve cash flow. .
Track and include change orders: Change orders are notorious for derailing a budget and diminishing profitability. Job costing can track extra, unexpected costs, show how they impact a budget and inform decisions about budget reallocation.
Review projects frequently: The most successful construction businesses monitor their costs throughout the project. Job costing helps companies stay on top of their expenses, get a read on worker productivity and make appropriate adjustments as needed.
Include overhead costs: Overhead costs can escalate quickly and eat into a company’s profit margins. They include taxes, administrative costs and professional services like lawyers and accountants. These expenses don’t apply to just one job. It’s often added as a percentage of the total sum of labor, material and equipment.
Track labor costs: Labor comprises the biggest expense for many construction companies. Track all labor costs for daily crews and subcontractors and factor in overtime and insurance.
Job costing over process costing: For construction companies, job costing is typically the better choice for its level of detail. Job costing takes into consideration all costs involved in a construction project, which helps you make more accurate estimates in the future and identify areas where you could make improvements. Process costing is more appropriate for companies that manufacture items in mass quantity.
Double-check the math: A job costing best practice is to double-check calculations. Consider having a knowledgeable second party verify tabulations. Double-checking the math also applies to estimates from subcontractors. Check revenue against estimates for each project and project area (labor, materials and overhead).
Invest in construction accounting software: Tracking and recording the cost of every material, all labor and overhead is no small undertaking. Construction accounting software helps you accurately and quickly assign costs to specific codes and jobs. You’ll see which expenses are not assigned to jobs and you can review macro-level views of job costs, as well as drill down into specific areas and see exactly when and where money was spent. Additionally, the historical record kept in the software can inform future bidding on similar jobs.
Optimize Job Costing With Construction Accounting Software
If done manually, job costing involves hour after hour of working with detailed spreadsheets, opening room for errors. Financial management software makes the entire process manageable and more accurate. As expenses are recorded, they can be assigned to specific projects with pre-determined job codes. Additionally, the software can help you monitor progress in real time. You don’t have to wait until the project is finished or to find time to start plugging numbers into your spreadsheet to see when expenses aren’t meeting projections. And with easy access to historic costs, you can make quicker and better estimates for future jobs.
Construction job costing is a detailed pricing method that aims to accurately calculate construction project costs. Expenses are categorized by labor, materials and overhead costs. Construction job costing tracks a project’s progress and efficiency and financial management software helps simplify the process, while providing more accurate and real-time data. Job costing helps businesses make informed decisions that ultimately ensure profitability.
Construction Job Costing FAQs
What does a construction accountant do?
With the variables of an ever-changing labor crew and different types of contracts, accountings who work in the construction industry ensure all construction costs are recorded and tracked. They work with project managers to review costs and help submit bids on new projects. Construction accountants also review cost and budget reports and closely monitor cash flow.
What are job costing systems?
A job costing system is a tool for job pricing. It accumulates and tracks the costs for a particular project’s materials, labor and overhead, and it’s used as a basis for estimating the cost of a future job. Job costing systems are particularly useful in industries like construction where each project entails many variables. They can also include specialized rules and be adapted to particular customer requirements.