Updated: Jan 5
The best way to track job expenses in commercial construction is with job costing, a system of accounting where you break down the specific labor and materials required for the job. It is also necessary to add an additional fee to cover your overhead costs.
Ways to track costs
There are two ways that construction projects are priced: process costing and job costing.
Process costing – You assign a cost to each step of the job based on what you have done in the past. Then you add an average of each cost to come up with a budget.
Job costing – You break down the specific costs of every detail of the job. Then you add an additional fee to cover overhead costs.
Pros and cons
Process costing is a lot simpler. You don’t need all of the details, just a rough overview. You leave more room for error though with this approach. However, you are saving a lot of time. You end up winning some and losing some.
Job costing is significantly more time consuming. You want to be as specific as possible to come to a real number of what you’re spending and how much time you’re using as well. When you have the right construction accounting software, this process can be a lot easier though.
What is job costing?
Let’s break it down a little bit more. Job costing starts with breaking down each piece of the project. Start with the bottom of the project, like the groundwork or foundation. Those costs can be broken down into the specific tasks required to finish the job. Most contractors have a code system in place to keep track of everything. Once you have a complete list of task, you break them down into labor, materials and overhead.
The big three
Labor – Labor is one of the biggest expenses you have, so it must be accurate. For job costing, calculate the number of people required to complete the job and how much it costs per day. Then multiply that by the number of days it will take to complete the job. Make sure you include taxes, insurance, worker’s comp, overtime and any other miscellaneous costs as well.
You also have to include any subcontractors you are going to use. Take into consideration that their estimates may not be as accurate as they should be and leave some room for adjustments.
Materials – You materials list should include direct materials (like wood, concrete, etc.) and indirect (screws, fasteners, etc.). You should build in some room for waste as well. Also include any equipment that you’re leasing and all associated costs.
Overhead – There are more costs for you than just labor and materials. You also have to consider your office space and everything down to the light bulbs. Every project should have some room for overhead costs to be included.
How to improve the accuracy of your job costing
Job costing can be really monotonous, especially if you’re planning a large project that spans many months or years even. Your final cost is only as good as the information you put in at the start of the project.
The best way to improve your job costing is with the right construction accounting software. A good construction accounting software program will have a lot of the features that you need automated and make your job a thousand times easier. Your bids will be more accurate, and you will have the ability to track the costs of the project in real time. The software will keep you up to date every single day automatically.
The right kind of software will help you keep track of areas of the project that are over budget and will help you get more accurate budgets on future projects. Reviewing these costs frequently will help you stay on top of changes and make sure your projects and your business are staying profitable consistently.
Having a software program to automate the process will take so many questions out of the process and help you when you run into a problem. When you run into a claim you’ll have all the information you need right in front of you with just a few clicks.