The do’s and don’ts of job costing in residential construction
Companies that model best practices, that model the most upstanding principles, end up as the most profitable.
As you probably know by now, job costing is an invaluable process for the financial health of both your projects and business. By implementing a job costing system, construction companies can make informed decisions about pricing, bidding, and profitability.
However, to ensure your job costing system is both useful and impactful, there are some do’s and don’ts that you’ll want to follow.
What are the best practices for job costing?
Accurately allocate costs
Construction companies should allocate all costs related to the job or project. This includes all direct costs, such as labor, equipment, and materials. It also covers indirect costs such as overhead, insurance, and taxes as well.
Use a standardized system
You don’t need to follow the MasterFormat, but either adopting or establishing a standard method for categorizing and tracking expenses is important for consistency and accuracy. By utilizing a standardized system, you can better compare expenses between jobs and identify areas for improvement.
Monitor job progress
Monitoring job progress is essential for accurate job costing. You should get in the habit of keeping track of your actual expenses and progress compared to your estimated budgets. This will enable you to quickly identify issues with cost overruns and make adjustments before they negatively impact your margins.
Using construction management software and accounting programs will greatly enhance job costing accuracy. Digital job costing programs make it easier to track and allocate costs, reducing the risk of mistakes and improving efficiency.
Continually review results
Reviewing job costing results helps identify areas for improvement and increases your profitability. By analyzing past performance and adjusting future estimates, budgets, and pricing, you will improve profitability and achieve greater success.
By following these best practices for job costing, construction companies can more accurately calculate expenses, make informed decisions, and maximize profitability.
What are the potential pitfalls to be aware of job costing?
While following the best practices above will make sure that your job costing system is both useful and impactful, there are also some potential pitfalls that need to be taken into account as well. Factors such as inaccurate or incomplete data, variations in material prices, and inaccurate labor costs can all have a major impact on the financial performance of your projects and business.
Here are a few pitfalls you should watch out for:
Lack of indirect cost allocation
One potential pitfall involves tracking and allocating indirect construction costs. These are costs that cannot be directly attributed to a particular construction project but are necessary to ensure that the project is completed. Some examples of these indirect costs include rent, utilities, and insurance.
Accurately tracking and allocating these costs can be challenging, and if not done correctly, they can skew the final cost of a construction project and impact your profitability.
Fluctuating material costs
Another potential issue is the unpredictability of material costs. The cost of construction materials can fluctuate dramatically over the course of a project, making it difficult to accurately keep your costs and estimates up to date.
In some cases, material costs can be impacted by external factors such as supply chain disruptions, making it almost impossible to accurately predict the final cost of a construction project.
Underestimating labor costs
Inaccuracies in labor costs can also impact the results of a job costing analysis. This can include things like under or overestimating the number of hours worked on a project, miscalculating payroll taxes, or failing to take into account the cost of benefits and other employee expenses. These types of inaccuracies can lead to significant differences between the estimated cost and the actual cost of a construction project.
Using incorrect items or cost codes
Not all cost codes, or items within, are created equal. So it’s important to always make sure you're using the right ones for your project.
As we covered in the previous chapters, there can be similar costs that are a part of different cost categories, and each cost code could potentially contain many items. Using a good naming convention, strong descriptions, and double-checking your estimates will all help to make sure that you’re using the correct items and cost codes.
Creating an organized mess
While your job costing system is designed to keep your costs organized and easy to track, your cost library can quickly become a chaotic mess without routine maintenance. When it comes to cost codes, less can often be more, at least as you’re getting started.
In order to keep your cost library clean, don’t add cost codes you don’t need. And, as more and more costs get added, you may need to get into a routine of cleaning up unnecessary items over time.
Paying careful attention to these potential pitfalls can help ensure that your job costing system has the greatest impact for your business.
What are the common methods for managing a job costing system?
When it comes time to create and manage your cost categories, cost codes, and cost library, choosing the method and tools you use can be just as important as the system itself. The good news is, there isn’t a right or wrong option for everyone; it’s a matter of what is the best option for you.
That said, none of the options are equal, and each has its own set of advantages and disadvantages.
Pen and paper
Believe it or not, many people in construction still like to run their projects on notepads. While it is certainly the riskiest and most time-consuming way to manage a job costing system, it’s also the cheapest and easiest method to learn.
Still, don't overlook the risks of using pen and paper. Not only can your data get easily lost, ruined, or thrown away, but it's also the most manual process that requires hand calculating costs.
This method leaves a lot of room for human error and can leave money on the table if costs are miscalculated.
Another common method is utilizing spreadsheet tools such as Microsoft Excel and Google Sheets. While it’s much less time-consuming than using pen and paper, a certain level of skill is required, and it’s not as convenient to access and use from anywhere other than an office setting.
The advantage of spreadsheets is that they are generally free to use, are capable of maintaining a good database, and often work well with other aspects of your business.
Protip: If this is your preferred method, be sure to download our free job costing template which walks you through each step of creating your cost categories, cost codes, and cost library.
Job costing software
Using software designed for construction management and job costing is the fastest, most accurate, and most efficient way to manage your costs.
With software, you’re not creating anything from scratch, which saves you an incredible amount of time. Even more, it integrates your costing system across all other aspects of your projects and business, so you can run everything from one place. Job costing software is accessible from anywhere.
While there are many benefits, the downside here is it’s not free to use and comes with a learning curve.
Choosing the best job costing software
Selecting the right software to track and manage your costs can have a huge impact on the overall success of your job costing system. The ideal platform should make the process of creating, managing, and implementing your system across your projects a breeze.
In the next and final chapter, we’ll explore the capabilities of job costing software and the benefits it can offer to your construction business.
Simple to use construction software that requires no training or experience to learn. You're only 5 minutes away from being up and running.