What is a cost library, and why is it essential to the success of your job costing system?
Now that you have an understanding of both cost codes and cost categories, their relationship to each other, and the roles they play in job costing, it’s time to introduce the final layer of the system.
Up to this point, we’ve created a system for grouping your costs into two layers as a way to help you identify from which division and classification a cost originates. However, a cost code could be associated with multiple costs, so an additional layer is necessary to truly create clarity in your finances. This is the role of your cost library.
What is a cost library?
A cost library, also known as a price book, is a database that contains a detailed breakdown of every one of your individual project costs, including materials, labor, equipment, and any other project expenses.
The cost library allows you to manage a list of items you can use repeatedly so your costs stay more consistent across estimates and projects without needing to recreate the wheel each time.
More than that, the cost library allows you to set your standard costs (labor rates, tax rates, markup rates, etc.) so that anyone in your company building estimates and project financials will be using the same rates.
What are the benefits of using a cost library?
A cost library is a necessary component within your job costing system, but it also brings many benefits to your projects and business. These benefits include:
Accurate cost estimation
One of the major benefits of using a cost library in construction is accurate cost estimation. Maintaining a library of all your costs allows you to plug in established items to estimates that are detailed, continually updated, and consistent with previous work. This helps to prevent oversight and human errors.
Using a cost library can also save time by eliminating the need to research the cost of materials, equipment, labor, and other expenses associated with every project. The library already contains this information, making it easier and quicker to estimate project costs.
Improved project planning
By having detailed information about the cost of materials and labor, you can better plan and adjust the project schedule to meet budgets. This helps ensure the project is completed within the set timeline and on budget.
A cost library can help determine the project's most cost-effective materials and equipment. By comparing the costs of different materials and equipment, you can select the best option that fits within the project budget.
All parties involved in a project, such as architects, engineers, and contractors, can access the same information and have a shared understanding of the costs associated with the project.
In general, a cost library gives you greater control over the profitability of projects and the overall financial health of your company.
Why do you need a cost library?
Aside from the benefits a cost library provides, the items within your cost library are essential to the success of your job costing system.
To help illustrate the importance, let’s imagine that you’re providing an estimate to complete an unfinished basement, which is similar in location and scope to one you’ve done previously. On the previous project, you see that code 01-001 (the code for permits under the category of general conditions) costs $1200. While you could assume the cost is the same, this code doesn’t tell you what this cost involves — number of permits, type of permits, etc.
The cost library would help you break down that $1200 cost into the individual items it includes, along with the details to know whether they are all necessary, or whether more are needed.
What you’d see in your cost library might be something like:
City Work Permit | 01-001 - Permits | Flat Fee | Quantity: 1 | $400
Electrical Permit | 01-001 - Permits | Flat Fee | Quantity: 1 | $300
Construction Permit | 01-001 - Permits | Flat Fee | Quantity: 1 | $500
Now seeing these items listed out, you can take better advantage of your cost code system and estimate the costs for permits on this new project with more detail and accuracy.
Another important takeaway from this example is seeing the relationship that itemized costs have within your cost codes. Since a cost code can contain any number of items, your cost library also serves as a way to keep all of these items categorized and grouped together.
How to create a cost library
Developing your cost library is actually quite simple since it’s essentially just an organized list of all of your individual and itemized costs. (And, it's even easier when you do it using our free cost library template.)
Since you can’t have a cost library without items in it, let’s start with understanding how to create a single item as a way to build your list.
Every item represents an individual product, material, service, fee, or expense within your projects. Each item needs to include some specific details, but anything beyond that is entirely up to you.
Here is a sample breakdown of the essential components:
Item Name: Project Management Labor
There isn’t a standard naming convention to follow. You just want to be descriptive enough so it’s easily understood.
Cost Code: 99-000 General
This should include the full numerical identification along with the name.
Specify what this item is (labor, materials, flat fee, selections, etc.).
What is the number of units included with this item? This will most likely vary for most items on every project.
What is the measurement of each unit included in this item? (Think about hours, days, weeks, months, cubic feet, cubic yards, gallons, linear feet, linear yards, pounds, square feet, square yards, squares, and tons.)
What is the price for each measured unit? In other words, price per (hour, foot, each unit, etc.).
If this item includes a markup, what is the percentage? If you don’t markup items, this component isn’t necessary.
If the item is taxable, what is the tax percentage being charged?
Description: Administrative cost of managing the project
Provide further clarification as to what this item is and what it includes.
The end result will be an item within your library that looks like this:
The do’s and don'ts of job costing
All things considered, a cost library is essential for any job costing system in order to maintain proper control over the financial health of your projects and business.
Now that you have learned about the three key components of job costing - cost categories, cost codes, and cost library - it’s time for you to continue to the next chapter and discover all of the best practices to follow and potential pitfalls to avoid as you begin to implement your job costing system.
Simple to use construction software that requires no training or experience to learn. You're only 5 minutes away from being up and running.