When you get to the end of a project most contractors are happy to close the books, except of course, if you finish a job and review the numbers only to realize that somehow you made less than you expected, or even worse, you lost money entirely. Integrating job costing into your everyday processes is the best way to know where you stand on any job. If you have transparency about your numbers, you can more easily identify issues before they become problems. In this guide to construction job costing, we’ll walk you through practical steps you can implement right away.
Set Up a Job Costing System Before the Work Starts
Tracking costs is the foundation of a successful construction business, but many contractors don’t review job costs until it’s too late to make positive changes. Ideally, job costing should start at the estimate stage so that you always have budgeted numbers to compare your actuals against.
Don’t wait to break your projects into phases or cost codes. You should assign cost categories at the same time you create your estimate and set a budget for each category so you will have something to measure against once the project is underway. Every project should be assigned a unique job number, which is the backbone of job cost accounting.
Tip: Keep your cost code structure consistent across all jobs so you can compare oranges to oranges over time.
Labor Cost Tracking Done the Right Way
Labor is your biggest variable, which makes labor cost your biggest risk. Typically, labor accounts for 25% to 40% of any construction project’s total cost. It’s also the most difficult cost to control because there are multiple variables that affect how your labor costs accumulate on a job.
Do job codes matter? The answer is yes. If you have an employee who regularly submits their hours under an incorrect job code, it’s difficult to maintain an accurate picture of your jobs in progress. If an employee logs their hours Job A instead of Job B, the first job looks under budget while the second job appears over budget because it’s carrying hours it shouldn’t. Any decisions you make based on incorrect figures is going to be wrong. Also, your future estimates could also be based on incorrect data. Your payroll will cost you the same no matter which job your employee submits their hours, but your visibility is clouded. And visibility is the entire point of job costing.
The fix is simple in principle: make it easy for field staff to log to the right code (mobile apps, like JP Mobile help a lot here), and review time entries before they’re finalized, not months later.
Have you included the total cost of your labor? That cost labor is more than simply totaling up wages. Labor costs should always include the labor burden. These are the costs like payroll taxes, workers’ compensation, and benefits like paid time off and insurance. Many small contactors underestimate labor burden, sometimes by as much as 20%.
How can you spot labor job cost overruns early? Check your job costs weekly, not just when you complete a project. A weekly check of estimated hours compared with actual hours will alert you if labor costs are heading for an overrun. Mobile time tracking can also help you better manage labor hours, especially for small crews in the field. Employees who log their hours from the job site provide more accurate data that’s up to date, which enables you to stay on top of your actual construction job costs.
Tip: Set a weekly “labor check” routine. Even 15 minutes spent reviewing labor actuals against your budget can save you thousands of dollars.
Getting a Handle on Material Costs
Material costs can be a significant source of lost profit if you aren’t careful. Here’s where a good system and regular, diligent checks can save you from headaches later on. Material cost management is a no brainer for keeping your margins healthy.
The PO habit feels like extra paperwork at first, but it’s really just creating the paper trail that protects you at invoice time. Suppliers may make billing errors, and without a PO, you have no documented record of what you agreed to pay. If you’re double billed or billed for materials that were back ordered and never arrived, the PO provides your check. Finally, POs let you flat committed costs, so your cost to complete picture is realistic.
When shipments arrive, spend the time to match invoices to your purchase orders. If you’re strict about following this process, you can catch billing errors and overshipments early, before they impact your bottom line.
Handling shared inventory (materials that get used across multiple jobs) can be time consuming, but it’s time well spent, as accounting for all your material costs helps you avoid attributing materials to the incorrect project.
One hidden cost of managing your materials budget is waste or theft. While accuracy is key to healthy material cost management strategies, it’s also important to build a realistic waste factor into your estimates. You should also track variance because it’s the best way to prove whether your estimates for waste are realistic or not. Variance tracking can also uncover a site management problem. If there is a high waste amount on a specific job, this can be a sign that materials aren’t stored properly or handled carefully.
Tip: When a supplier invoice doesn’t match your purchase order, don’t just approve it and move on. That gap represents money out of your pocket.
Managing Subcontractor Costs Without Surprises
Some contractors treat subs as a fixed cost once the contract is signed, but they are not. The best way to keep subcontractor costs visible is to add them as a separate cost category in your job costing system. When you receive a change order from a subcontractor, you should log it immediately, because your margins can disappear quickly if there is scope creep. When you receive invoices from your subcontractors, you should verify the work has been completed and matches the contract scope before you approve payment.
Tip: Keep a simple subcontractor log for each job. It should include contract value, approved, changes, amount billed to date, and amount remaining. Keep your log up to date so you can easily see the status of your subcontractor cost centre.
Reading Your Job Cost Reports (& Actually Using Them)
Reporting is the best ways to keep track of your construction job costs. But no report will help if it sits in your inbox unread. By providing real time visibility into every job, this is where construction accounting with job costing pays off. Regularly reviewing construction financial reports helps you focus on areas that need attention.
The key report you should review every week is your cost to complete report, which reveals how much you have spent compared to how much is left to spend to complete the job. Here’s what to look for: pay attention to any cost category where actuals run more than 10% over budget.
Tip: Use your job cost history to sharpen future estimates, because your past jobs are the best estimating database you have.
When Spreadsheets Stop Working: The Case for Construction Job Costing Software
Many contractors start out by managing their business with spreadsheets. This makes complete sense for small businesses with a smaller number of jobs. Spreadsheets are inexpensive and they make it easy to track multiple project variables. But as the number of projects increases and your crew size grows, manual tracking can create gaps like data entry errors and information delays. More important, spreadsheets don’t provide real time visibility into your projects.
At some point, the tools need to match the business. Construction job costing software is made to help construction companies avoid those gaps. It automatically ties payroll, POs, and invoices to the correct job code. It provides live cost reports without manual data entry, and it provides the transparency to identify issues mid job, rather than after the project is finished. Software that is made for contractors also helps tighten overall cost accounting practices in addition to job costing.
Tip: Construction accounting software like JOBPOWER connects job costing, reporting, and accounting capabilities in an integrated system that’s made for contractors of any size.
Conclusion
Construction job costing is more than simple accounting. It’s how you protect your margins and run your business more confidently. To improve your visibility into your business, you can choose one of the job costing suggestions from our post and implement it this week.
Tip: If you’re ready to stop chasing numbers and creating workarounds on your spreadsheets, see how JOBPOWER makes job costing simple for contractors like you.