What is Job Costing and Why Does it Matter in Construction Accounting
Construction job costing is how contractors track the cumulative total of costs on a particular project.
Job cost accounting is the process of assigning expenses to specific projects so that actual costs can be compared to the project’s budgeted costs. Construction companies must keep a close eye on construction job costs to ensure that there’s adequate cash flow for the company’s operations and that there’s a healthy profit margin for the job.
To ensure they stay profitable, construction companies and contractors must be able to control expenses. The ability to track actual job costs helps construction companies focus on their day to day financial health. Without careful attention to construction job costs, your construction accounting is missing crucial information. If you wait until the final project numbers come in, it will be too late to make corrections.
What is Cash Flow in Construction?
Cash flow is the amount when you subtract expenses from income. Tracking cash flow is important in construction accounting because construction jobs are often paid progressively as stages of the project are completed. Accurate construction job costing can tell you where every penny goes, and that’s the safest way to keep your margins and your contracting business healthy.
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What is Process Costing?
Process costing is different from job costing. Process costing is a method of building a job budget by determining the stages required to complete the job, assigning a cost to each stage, and adding up the costs to produce a budget. Process costing is most useful for companies that mass produce very similar units. It’s more common in industries like manufacturing and consumer products.
How to Calculate Job Costing for Construction
The formula for job costing includes labor, materials, equipment, and overhead.
Materials
Materials costs include raw project materials like cement, steel, lumber, wiring, and plumbing fittings as well as indirect materials like fasteners and transportation to the site. Materials costs should also include a margin to account for wastage.
Labor
Labor costs are a calculation of the hourly rate or day rate for all of your direct employees for the duration of the project. Your labor costs should also include any subcontractors you hire to finish the project. Include your own crew plus subcontractors plus worker’s comp, overtime, and any other relevant expenses.
Equipment
Equipment costs are a total of the equipment rental costs used on a project or an allocated equipment charge to the project for equipment the company may own.
Overhead
Overhead is the total cost for operating your business, including rent on offices, warehouses, salaries for your administrative staff, and labor overhead like tax, insurance, and unemployment, etc.
Why Track Job Costs?
Tracking job costs provides a method for identifying problem areas such as an unexpected increase in worker hours or higher than expected materials costs. You may be able to identify when a job is over budget, but job cost accounting can show you exactly where the cost overrun originates. Job costing also helps you to run a more efficient business by spotlighting the ways your team uses resources efficiently, or not. With good job cost accounting software, you can identify trends and examine how your projects stack up against one another.
Construction Job Costing Software
Calculating construction job costs manually or using a spreadsheet can take many hours and the risk of errors is very high. Construction job costing software is more accurate and automates the calculations so that you’ll be able to instantly identify when a project has exceeded its budget.
How Do you Keep Track of Construction Projects?
There are many different types of data that make up a complete job cost including payroll, WIP reports, and production reports. New project expenses are triggered by change orders, so it’s critical to include change orders as part of your job cost accounting.
8 Ways Contractors Can Simplify Construction Job Costing to Get Ahead
1. Implement Paperless Time Tracking
When possible, use software or automated, mobile enabled time tracking software for more accurate tracking and approval of labor hours and more efficient payroll processing.
2. Review Cost Codes Regularly to Ensure Costs Are Allocated Properly
Use cost codes to efficiently group similar types of expenses. Streamlining your cost codes can also help you compare historic performance against similar jobs.
3. Track Change Orders
Manage unexpected costs carefully so that you can review any potential negative impact on your project budget. Including change orders within your job cost accounting means you can make any necessary adjustments sooner rather than later.
4. Review KPIs Frequently
Successful companies always know where they are spending, and how efficiently their team is working. Use dashboards to keep your focus on your KPIs.
5. Compare Estimates to Actuals
You can identify discrepancies between your expected costs and actual costs more easily when you employ a thorough reporting strategy.
6. Don’t Forget Your Overhead Costs
Job costing includes your overhead costs such as taxes and insurance, salaries for your office staff, and professional services like your accountant. Often overhead is calculated as a percentage of the total labor, materials, and equipment.
7. Track Labor Costs
Labor is generally the largest cost on any project. Be sure your labor calculations include overtime, insurance, and any subcontractor labor.
8. Choose Construction Accounting Software to Simplify and Automate the Job Costing Process
It’s important to choose the right construction accounting software to simplify and automate your job costing process. Job costing is complex. It can be overwhelming to track every expense on a job by manually entering figures into a spreadsheet program. Specialized construction accounting software offers better control over construction job expenses. It’s easier to distribute costs to the job while recording your daily accounting transactions.
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