What Is Construction Job Costing? Everything a Contractor Needs To Know
Tracking project costs at a construction company can be difficult for a construction project manager or independent contractor. It’s often overwhelming to have to calculate and track all of the costs associated with each of your jobs, particularly if you’re juggling multiple projects at once.
A construction company that can properly utilize construction job costing to its full potential is more likely to see higher profit margins per project and fewer unexpected costs or inefficiencies in its processes than one that does not.
What is construction job costing?
Construction job costing is how a contractor or construction manager in the construction industry calculates all costs associated with a job, including labor cost, overhead, and material costs.
A well-costed job gives a breakdown of your project so you can measure and track all expenses necessary to complete it in order to make sure your margins are good so that you receive a higher profit margin per job.
Think of it almost like a real-time audit of each job you work on. If you are up-to-date on what your costs are, you can identify and track parts of a job that can bite into your profits and budget.
Planning construction job costing effectively not only helps you maintain a higher profit margin throughout a project, but it also helps you stay on budget which can lead to greater customer satisfaction because you don’t have to go back to your client to ask for more money because of unforeseen complications.
Types of construction job costing
We don’t need to tell you that every single job you take is different. That’s why creating a template that neatly fits every expense that each job will have is complicated and nearly impossible. Still, it’s important to understand the different types of construction job costing so that you are best prepared for what comes your way.
Direct cost: Often the easiest job cost to track, these are directly associated with your hours, labor cost, construction cost, tools, equipment costs, and subcontracts. These are going to be finite, set costs that you can easily identify and track when costing out a job. You can determine direct costs by using estimation software that pulls in material costs from your area. You can also determine labor costs using historical data.
Indirect cost: Harder to identify and account for during planning, these costs are things like project management fees, costs of using owned equipment, and more indirect labor costs. Indirect costs include things like how much you pay your salaried employees or project managers as well as any ongoing payments you might have on things like tools, equipment, or vehicles. These should all be factored into the cost of your quote.
Committed cost: These costs are associated with items that you know you’re going to be billed for but haven’t yet paid. These can include unposted payroll, open contract and subcontractor agreements, and/or purchase orders for material costs that you haven’t received yet but know you will have to pay for. To determine committed costs, track how much things like disposal, equipment rental, or subcontractors are going to cost. Use historical data about how much you’ve paid subcontractors on similar projects to determine how much you should plug in for committed costs.
Understanding what portions of your job costing estimate are direct, indirect, and committed is crucial to coming up with a total job cost for your project for resource allocation. By calculating all three types into the job cost, you’re more likely to come up with a number that leaves more room for revenue once the construction project is completed.
Top 3 benefits of construction job costing
The more meticulous you are with your construction job costing, the greater your business's financial health will be because you will be able to generate more profit per project.
Benefit #1: You can better track your overall budget
Construction job costing helps compare costs to determine the actual cost for not only the entire project but also each individual phase of the project. Accurate job costing takes account of every single cost associated with the job and documents and tracks those costs to give you a complete picture of your overall budget.
Using a tool like construction accounting software can help you more easily track your overall budget as well as budgets for each ongoing project.
By using construction accounting software over something more generic like QuickBooks or manual methods, you’ll have better visibility and insight into the profitability of individual projects which means better revenue for your company as a whole. Because the software is designed from the ground up with construction companies in mind, you’ll have better reporting tools to look at historical data for your job costing to improve your ability to provide accurate estimates.
You can use this information for not only that job in order to make the most profit, but also for future jobs that are similar to help provide more accurate estimates.
Benefits #2: You can track your project’s progress
When you’re tracking every single cost on your project, you can more easily compare actual costs with projected costs in order to make adjustments more easily. By identifying complications and seeing where costs might increase unexpectedly, you can adjust mid-project and address issues before they become serious problems.
Tracking this information using traditional manual methods can be complicated, so having a good construction management software suite can be crucial.
With construction management software, construction companies have improved accountability with document control and virtual paper trails for plans, RFIs, change orders, and work submittals. All your documentation will be stored in a centralized place which makes tracking easier to do.
Specific job costing software exists as well, but job costing software is often built into construction management software from the get-go. You might need to integrate construction accounting software to get more robust features. It's a matter of finding the right software solution for your budget and construction business needs.
You also get more financial visibility with budgeting and job cost control features in place in order to project profitability. Your project managers can track actual costs relative to estimates and can set up notifications to alert them if a project is in danger of exceeding the budget.
Benefit #3: You can measure how efficient you are on a project
By tracking and managing construction job costing, you can monitor how efficiently you and your teams are managing labor costs, material costs, and overhead. It might be hard to tell if you’re consistently going over budget on materials in every project if you aren’t meticulously monitoring and tracking your costs for each project.
Using something like construction estimating software can help make the overall job costing process more efficient because it helps calculate total material, labor, subcontractor, and equipment costs all in one place instead of having to spend time tracking each of those things down yourself. It helps automate a lot of the tedious work of searching through different business websites for material costs and can help by pulling updated prices on materials and equipment in your area.
With proper construction job cost processes in place, you can take a birds-eye view of your monthly, quarterly, or yearly budgets to tell where your inefficiencies lie. You might consistently be underbudgeting for labor cost which can eat into your net profit in the long run. You might find that you’re underestimating how much specific material costs are for each project which can also bite into your bottom line.
By tracking each expense, you can become more efficient with each project which can improve the overall financial health of your construction business.
Track construction job costing more efficiently with software
If shoring up your construction job costing processes sounds like something your construction company needs, you should seriously consider upgrading your existing software or finding software specifically designed with cost tracking in mind.
That’s where our advisors come in. Through one-on-one conversation and personalized recommendations, Software Advice guides you through your software search. In as little as 15 minutes, our software advisors can help you pick the right software for your business needs, so you can feel confident in your choice. Click here to chat with an advisor or schedule a call.
For more tips and advice about how to increase revenue by being smarter with budgeting and estimating, check out these resources: