What is Job Costing, and Why Does it Matter?
Construction Job Costing is the fancy term for knowing how much profit was made (or lost) on a specific job. This is essential to your company’s success because projects can easily go over budget. You need to know if that happens so that you can take action to adjust accordingly. No construction business can survive by losing money repeatedly on projects and with over half construction businesses failing after 5 years (some estimates as high as 64%!), it’s important to have this information available. Without proper job costing, construction businesses are flying blind.
In this blog, I’ll outline the basics of Construction Job Costing and give you some ways to quickly start tracking costs so you have the insights you need to be successful.
How to Job Cost Construction Projects
The Basics of Construction Job Costing
The basic idea of job costing is tracking the expenses for both labor and materials for a specific job. This is sometimes easier said than done. Each job should have a name and/or number and all your workers need to use the appropriate job names/numbers on their timecards. As labor and material costs are collected, the costs needs to be applied to each job. This can be done different ways from low tech to high tech.
Manila Folders:
The most basic way to track project costs is by simply creating a manila folder for each job and putting receipts, invoices, time sheets and any other project related costs in there. At the end of the job, you can simply add up the materials and receipts, add up the hours worked and do the math. The problem with this technique is that most contractors don’t have the time to do the math and therefore they never actually get any insights.
Spreadsheets:
A step up from the Manila folders is to enter the information into a spreadsheet as they get collected. This can be done daily, weekly or as frequently as you can. The huge benefit of this is that now you can get insights into the profitability of the project before it is complete. If you want to go with this option, I highly recommend using Google Sheets. It’s simple, free, easy to share and available anywhere…even on your phone.
Cloud Software:
The best way to track job costing is by using a construction application that collects and tracks these costs. Cloud based software allows you to see in real time what is happening on each project. Apps like buildcenter.com allow you to collect time spent on each job and even break down the hours by cost code.
Tracking Labor Costs
Let’s look at tracking expenses for labor. Labor is typically the most expensive part of construction and it’s the easiest one to go over budget. In order to properly job cost labor, each worker needs to turn in a timecard that allocates the hours worked to specific jobs. Getting accurate time cards from workers is the first step. Unfortunately, messy cards that are missing information makes it near impossible to track time accurately. Once you collect the hours worked, you need to use a true cost rate for those hours. It should be more than their hourly rate because of other labor related costs such as insurance, taxes, uniforms, vehicle usage and all the other benefits provided. This true cost rate can be averaged for various workers to make it easier to calculate. For example, if you are paying a worker $25/hr plus health care, company truck, workers comp, etc. you may use a true cost rate of $35/hr since that is closer to the true cost with benefits. When you add up the hours worked for that project, use this true cost rate to get the cost of having that labor performed.
Tracking Material Costs
Materials costs can come in so many different ways. Supplier costs for materials is the going to be the largest costs. What about all those incidental costs of fasteners and drill bits and all those trips to Home Depot for blue tape and bottled water. You need to track all expenses and make sure they are expensed to the correct job.
Total Labor Costs (using True Cost Rate) + Total Material Costs = Total Project Costs
Once you are able to do the math, you will know how much it costs to do this job. Now, let’s compare that to our estimate. Depending on how you did your estimate, you should have some break down of costs….at least a total on labor and a total on materials. Hopefully your estimates are broken down into phases or tasks. We call these cost codes.
Cost Codes
In construction, we use cost codes to break down tasks and/or phases of work. This allows us to to better estimate the project and to better understand how the project performed when looking at the job costing. Here’s an example: an electrical contractor might use the following cost codes: demo, rough in, lighting, trim out. Those four phases of the project can be estimated and tracked to determine if they did better or worse than what was estimated. Another example is a concrete company. They might use: demo, site prep, forming, finishing. If you are a general contractor that does lots of trades, then using standard CSI codes like demo, rough carpentry, electrical, plumbing, etc. is probably better. In either case, you want to select cost codes that allow you to match your estimating to your actual costs so you can see how you did and then make adjustments as needed.
Summary
In construction, it’s critical to know which jobs are profitable and which ones are not. This information is key to making adjustments to a project to get it on track or to future estimates so that cost overruns are avoided. Once you start job costing, your entire business will be running with insights that you never had before allowing you to elevate your construction company and your profit.
Resources
- Download the “Perfect Construction Timecard Template” to get your workers tracking time so you can start job costing
- Try BuildCenter for free to see how you can track workers time and automatically apply to jobs
