Job costing is essential to any business’ bottom line, but it’s especially crucial in the construction industry. The ability to effectively and accurately estimate your job costs on a project can set you up for success or put you on a course for disaster.
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What is job costing?
Job costing is a method of calculating the actual costs of working on a construction project. It takes the overall project and breaks it down into smaller, more specific tasks. This is helpful throughout the lifecycle of the project – from estimating and bidding, to dealing with change orders, to closing out the punch list.
Change orders are particularly notorious for throwing off a budget. Be sure to detail all the additional labor and materials costs once a change is made. Close tracking of change orders can provide a better understanding of the cost impacts of each change, how they’ll fit into the overall budget, and avoid cost overruns.
Why is job costing so important?
Without proper job costing, construction businesses are flying blind.
Breaking down the project
The process for job costing starts with breaking down the project. Start with each main phase like foundation or framework. Now those will be broken down to the tasks required to finish the phase. Most construction companies implement a coding system to keep these organized. Each company’s costs codes are unique, depending on the amount of detail or size of the company. Lastly, once there is a complete list of tasks, it is time to divide them into the Big 3; labor, materials, and overhead.
Construction businesses should have a clear picture of how much their direct crew costs them. Take how much it costs per day to have them on a job. Figure out how long the job is going to take, and multiply that number by employee costs. This should include not only their hourly-wages but also taxes, insurance, worker’s comp, overtime, and any other associated costs.
Subcontractor labor costs also need to be taken into account. Identify who and what you need for the project and their availability. Take their estimates into account when evaluating the whole project. But keep in mind, their estimate may not be as accurate as yours hopefully is. This is the time to build in some contingencies in case their estimates are off.
Material costs will include both direct and indirect materials. Direct materials being stuff like wood, concrete, and steel. Indirect costs are more incidental – like nails, screws, and fasteners. Equipment leasing should also factor in material costs. Some of the more discerning contractors also include charges for material delivery and potential wastage.
Don’t forget – there are more costs than just what labor and materials will be used on the job, itself. Businesses require infrastructure, taxes must be paid, and unless you’re running the business out of your truck, there’s rent to pay. These costs and more should be taken into account when costing a particular job. If a job will require extra attention or administration, it might be a good idea to allocate more overhead costs to the job. But regardless – overhead must be taken into account when job costing.
Tips for improving accuracy
Planning is great, but unless job costing is done accurately, a construction business won’t get a clear picture of a project’s costs. Without that, it’s impossible to predict margins. Running out of cash is a construction business’ worst nightmare, so it’s important to understand how every penny goes out.
Never underestimate the importance of working capital
Job costing software can crank the accuracy level up to 11. Calculations and changes can be easily dealt with. This can help churn out estimates and bids, so they can be submitted quicker. Another benefit is the ability to track costs in real-time. As the project progresses, the software can instantly compare actual costs to estimated costs. This is useful to identify any problem areas where costs are escalating. Which is helpful to keep the client informed and avoid sticker shock when the final bill is sent out.
Reviewing your cost reports regularly can help you keep a finger on the pulse of your project. This can identify which areas of work are bleeding cash, and where the profit margins are better. And when a certain cost code gets too high, they company can make adjustments accordingly. Keeping an up to date job costing throughout the project helps identify issues before they become full grown problems. Finding out there is little to no profit margin at the end of the project can be devastating.
Job costing is the key to cash flow
It might be possible to skate by without knowing exact margins or accurately projecting cash flow. But no one should be content with merely “skating by”. By putting a little extra time and effort into job costing, construction business can understand where every penny goes (or will go), and that’s enormously important for keeping safe margins. Healthy cash flow should be priority number 1 for construction businesses, and without proper job costing, it’s tough to keep score.