Construction Job Costing: The Complete Guide For Contractors
Job costing is an essential component of construction accounting. With so much to keep track of, it’s easy to let construction projects get out of control—potentially facing expensive surprises further down the line, whether that is due to extra labor, faulty equipment, or simply a loss of potential profits when a project exceeds your original budget.
To maximize your profit and the success of your projects, you need an accurate view of all ongoing work, teams, and individual jobs. Even one small oversight can disrupt the entire project workflow and chip away at your profits. That’s why it’s more important than ever to plan individual jobs effectively, looking at every element in detail through job costing.
In this article, you'll learn everything you need to know about construction job costing, from the basics of what it is, to a breakdown of all the costs you need to track, and how job costing software can help to make sure your construction jobs stay profitable.
What is Construction Job Costing?
Construction job costing accurately tracks all costs associated with a job, including labor, materials, and overheads. It gives you a detailed breakdown of an entire project so you can track expenses in real-time and easily calculate future profitability.
Many companies rely on the general ledger to record project expenditure, but it can be difficult to precisely track the ins and outs of a construction job this way. General ledgers are designed to provide a complete overview of your business’s financial health. This means they consider all financial transactions, including accounts payable, accounts receivable, and payroll, rather than just transactions for one job. As a result, tracking and recording individual job costs can be difficult because you're looking at your business's overall revenue and expenditure, rather than that project alone.
With job costing, you can quickly identify extra expenses that bite into your profit because there’s an up-to-date audit trail of all receipts, income, and expenditures on any specific job. If any cost exceeds what you planned, you can immediately identify and rectify the problem.
In most cases, you can predict problems before they arise, like when a project is nearing its maximum budget. In this way, job costing helps you make better operational efficiency and financial health decisions.
Job costing simply adds another layer of tracking. It still forms part of your general ledger, meaning all transactions will be recorded there, too. With construction job costing, however, your project managers can focus on the profit and loss relating to one specific job.
Different Types of Costs and Their Role in Job Costing
In construction, it’s rare that two projects look the same. Every job is different, which means costs for labor, materials, and overheads also vary. However, regardless of the job you’re working on, expenses can be grouped into three categories: direct costs, indirect costs, and committed costs.
Let’s look at them in detail:
- Direct costs are costs that can be directly associated with a particular job, such as hours of labor, tools and equipment, or subcontracts
- Indirect costs are costs that can’t be directly associated with a job, but are needed to support the overall job management and completion of the contract. This can include project management fees, costs of using owned equipment, and indirect labor
- Committed costs are costs that a company has agreed to buy via purchase order or contract. Examples include unposted payroll, open contract or subcontractor agreements, and purchase orders where you're waiting for delivery of the bill for materials that have not been paid yet
Direct, indirect and committed costs are important in accurately depicting the total job cost. However, indirect costs are often overlooked as they’re not directly associated with a particular job. It’s easy to forget the hours of work your project management team needs to track projects and job expenses, or the cost of fuel to run an important piece of machinery. Factoring these costs into your overheads is essential for maximizing your job profitability and your overall financial health.
Key Construction Job Costing Terms You Need to Know
Committed costs are anything you’re committed to paying within a project. Job costing software like Deltek ComputerEase will tell you your committed costs and subtract these from your budget, so you can see what’s left for additional costs and expenses across every open project.
Some examples of committed costs include:
- Open subcontractor agreements: Costs to cover subcontractors, which may not have been paid yet
- Purchase orders: Open purchase orders for materials, equipment, and other items that you may or may not have ordered yet, but will pay for
- Time from the field: Payroll to cover labor for workers on the field for time that has been reported but not processed through payroll
- Expenses from the field: Purchases made while on-site, such as for materials or other equipment. These are offset against the overall project budget
Businesses may forget to track committed costs, which affects the amount you have left to spend. In some cases, this means you spend more than what’s available, putting your project in a deficit.
Equipment costing includes all the machinery and tools needed to complete a job. Remember, some equipment and tools may be purchased, rented, or owned already.
While it’s easy to calculate the cost of bought or loaned equipment, pre-owned tools are more difficult because there are no direct costs. Best practice for equipment costing involves charging a standard rate you would expect to pay for renting the equipment, then calculating your total cost based on your rate.
It’s also important to track equipment beyond the initial purchase price. You’ll need to consider the cost of running and owning the machine, plus fuel and depreciation costs.
To identify equipment costs, you need to consider:
- Revenue: Use, transportation, and costs when left idle
- Cost-to-own: Depreciation, insurance, and interest
- Cost-to-operate: Maintenance and repairs
Equipment and machinery are expensive assets, which is why it is important to determine accurate rates. You should also take steps to review your inventories regularly so you can assess the cost to own and determine whether it’s viable for your business. In addition, create ongoing maintenance schedules to ensure all equipment is in good working order and minimize overheads from faulty machinery.
Work in Progress (WIP) Reporting
Work in progress (WIP) reporting is a key part of project management. It allows you to calculate the percentage of work completed to date and compare this with the total amount spent, so you can accurately predict the remaining and final cost of a job.
WIP reporting is also important for overbilling and underbilling purposes. Overbilling occurs when you've charged more than needed for the work completed, while underbilling means you've charged for less than what was earned. For example, you may have completed 50% of the work but only billed for 30%. If you don't bill for the missing 20%, this could affect your job revenue and leave you liable to fund the rest of the job. Using WIP reporting is crucial, not just to understand how a job is progressing, but for managing budgets effectively.
Calculating WIP requires five important pieces of data:
- The contract price for the job
- The total cost estimate for the job
- The cost-to-date
- The billed-to-date
- The projected cost to finish the job
With WIP data, you can better predict your job’s outcome. You'll know who’s where, doing what, and when. It also allows you to pull accurate data reports to help with financial reviews and planning, as you're able to quantify all past, ongoing, and future work, and allocate budgets accordingly. Use this data to help grow your bottom-line profits.
How to Calculate Job Costing
How do you calculate construction job costing? It comes down to a simple job costing process based on a calculation of all individual costs. Your total construction job cost is the sum of all materials, labor, equipment, subcontractor costs, and overheads. Each category also has its own job costing formula to allow you to determine the overall cost of the job accurately.
In addition to actual labor costs for regular and overtime employees you need to account for employer-based payroll taxes (burden) as well as cost for providing benefits to employees (fringes).
It's also important to calculate indirect labor costs for in-house workers, such as project managers, account managers, or those in charge of purchasing equipment. Usually, these employees are paid an annual salary, so you’ll need to work out their hourly or daily rate, inclusive of other costs like insurance and tax.
While the total fee of each overhead cost isn’t directly associated with the job, some percentage of each amount will contribute to each job. As a result, many businesses add a percentage to every job to account for overhead costs. For the most accurate job costing, you’ll need to make sure that all of the overhead is accounted for.
How Job Costing Software Can Help
While construction job costing can be completed manually, it’s time-consuming. Manual entry is also likely to lead to mistakes and errors, which, if not rectified, can significantly affect the productivity and profitability of jobs. Thankfully, businesses can make use of job costing software to streamline processes and improve overall project management.
Key Job Costing Reports
Job costing software also enables managers to pull key cost reports, which can be used for long-term budget and resource planning and to review overall business productivity. These reports include:
- Job cost summary: Companies can review the total cost of jobs and see how effectively budgets were allocated and whether projects were delivered within budget. Job cost summary reports can also help review profit margins and identify potential inefficiencies, such as excessive equipment costs
- Unit productivity: Reports can help business managers understand the cost of units for a specific construction project, which allows them to determine output by assessing how much was produced per hour. This data is important for analyzing the productivity of a workforce and for future project estimations
- Labor analysis: As well as overall costs, job costing software can pull labor analysis reports to help review the effectiveness and productivity of a workforce. Businesses can look at important data such as actual and estimated labor costs, time spent on jobs, expenses, overtime, and output
What Are the Benefits of Job Costing Software?
So, what are the benefits of job costing software? Aside from removing manual entry and tracking, job costing software offers heaps of benefits for the construction industry:
Put simply, job costing in construction accounting software like Deltek ComputerEase streamlines the entire job costing process, giving you faster and more accurate insights into how much your construction jobs cost.
How Deltek Supports the Construction Industry
Deltek ComputerEase is the leading construction software provider of job costing accounting, project management, and payroll services—delivering solutions that help customers connect and automate the project lifecycle that fuels their business. We offer job costing software as part of our base system, ensuring that you will always have an easy way to track your job costs, whether it’s through work in progress reporting, labor analysis, projected costs, unit production, or all of the above. Our robust job costing helps you project how profitable your jobs will be, all while tracking costs and managing inventory and equipment for each job.
If you are currently using a generic accounting solution that’s built for standard accounting processes, you will undoubtedly benefit from switching to a dedicated construction accounting solution. Contact us today to learn how Deltek ComputerEase can help you to boost your profitability.