What is job costing and why is it critical for the financial health of your company.
Have you ever had a project go over budget?
Or, have you ever underestimated your costs on a bid?
Has an oversight ever dug into your profits on a project?
If you said yes, or fear having to answer yes in the future, you need job costing.
At the end of the day, job costing helps you to figure out exactly what areas of your business are profitable & which aren't.
With job costing, you can track all of your costs with precision giving you total visibility and financial control. Instead of having to spend countless hours tracking down where projects have gone over budget, job costing allows you to quickly identify where you’ve spent too much, where you can save the most, and how best to increase your profitability and improve project efficiency.
A brief history of job costing in construction
The origins of job costing in construction dates back to the early 1900s when the manufacturing sector began to adopt cost accounting techniques. However, it wasn't until the 1950s and 1960s that job costing gained popularity in the construction industry. This was primarily due to the growing complexity of construction projects, which required more accurate and detailed cost tracking.
One of the earliest examples was the "unit cost method," developed by John Woollett in the 1920s. This method involved breaking down a construction project into smaller units, such as building blocks or cubic yards of concrete, and assigning a cost to each unit. This allowed for more accurate cost tracking and better control over project budgets.
Today, job costing continues to evolve with the introduction of new techniques and innovative technologies. These tools have enabled construction companies to streamline their job costing processes and achieve greater accuracy and efficiency in managing project costs.
Overall, the history of job costing in construction is a testament to the industry's ongoing commitment to improving cost management and maximizing project profitability. Through ongoing innovation and the adoption of new technologies, construction companies can continue to refine their job costing practices and stay ahead of the competition in today's fast-paced marketplace.
What are the benefits of job costing?
While job costing is a method of accounting, you don’t need to be a certified CPA to understand the process and implement the practice in your business.
But the simplicity of job costing isn’t the only benefit.
Aside from keeping all of your costs organized, easy to access, and aligned with your accounting, job costing also gives you real-time financial visibility during projects.
With the ability to easily identify and track expenses that occur at any given time within a project, you can make quick adjustments to minimize additional costs without jeopardizing profit margins. Additionally, these discoveries can inform your decisions on projects moving forward.
Lastly, by unifying your costs through this method, you build consistency in your estimating process, project profitability, and financial projections. When all of your costs are organized and accessible, there more clarity throughout your business and is less room for human error.
What are the basic components of job costing?
Now that you’re familiar with some of the benefits of job costing, let’s discuss what exactly it entails.
Generally speaking, the details tracked within job costing will include labor costs, material costs, subcontractor costs, management fees/markup, and overhead expenses. While you’re probably already familiar with everything that job costing tracks, the method is really more about how it’s being tracked.
There are three key components that make up the job costing method:
These are individual divisions that serve as the parent grouping for cost codes (more on that in a minute). Each cost category is represented both by name and numerically. Organizing cost codes within cost categories provides the ability to separate and track common costs, such as labor, at a more granular level in financial reporting.
These are individual classifications for costs within a cost category. Similar to their parent, cost codes are defined by both a name and numerical value. However, all cost codes within the same cost category contain numerical alignment with the category they are a part of.
The cost library, also known as a price book, is a list that contains all of the costs for items, products, and services offered within your business. Your library includes and is organized by both your cost categories and cost codes.
When used together, these three components will provide the clarity you need to control the profitability of your projects and the financial health of your business.
Getting started with job costing
Implementing job costing best practices is crucial for accurately assessing project expenses and ensuring financial success.
The first step in this process begins with systematically breaking down each project into specific tasks, further streamlining the allocation of resources and labor. By employing precise labor time tracking and material usage monitoring, project managers can efficiently trace the costs for each job. This means they can facilitate timely and informed decision-making.
Equally vital is integrating a robust job costing software that enables seamless tracking of the project pipeline and enhances the overall cost management process.
Incorporating direct and overhead costs in the estimate fosters a comprehensive job cost assessment, enabling construction companies to determine profitable projects from the outset. Cultivating regular and thorough cost analysis allows for the swift identification and rectification of inaccuracies, paving the way for higher operational efficiency.
By adhering to these job costing best practices, construction companies can confidently maximize profits and optimize their project management capabilities, ultimately forging the path toward sustainable business growth.
How to create a job costing system
We’ve created this series to simplify the process of implementing a successful job costing system into your business.
In the following chapters, we break down and explain each of the three components and walk you through how to create each one along the way. By the end of this series, you’ll know how to create a job costing system, which tools to use, and how to optimize it to maximize the profits of your business.
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