Job Costing 101 for Construction Accounting
The success or failure of any construction job is based on profit. Profit margins are razor-thin in construction. Job costing helps you project job expenses to identify problems before they affect profit. Can work be completed with the money and budget available? What are the risk factors on the job? What do you need to do to succeed?
With job costing, you can accurately predict, record and control the cost of each job. Your materials, labor, subcontractors and equipment expenses are tracked and monitored during the job. You can see where the money is going as work is completed so that you can more accurately predict future costs.
Since job costing is critically important, you should implement construction-specific software that supports it. With standard accounting software, you’re not going to have a true, robust job-costing system. Your risk will increase as well because you don’t have a good tool in place to manage your costs. But a construction-based software system brings all job-costing functions together, so everything is integrated.
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Three Important Job Costing Terms
1. Committed Costs
Many contractors still do not track committed costs, which can lead to double billing and mistakes. A committed cost is an obligation that needs to be tracked. Examples of committed costs could include an open subcontractor agreement, purchase orders, or labor and equipment hours from the field. Using job costing to monitor committed costs is important because it allows you to see all the costs associated with every project to give you a complete and accurate picture of the health of your projects. That enables you to determine, with certainty, the remaining budget you have available for additional costs.
2. Work-in-Progress (WIP) Reporting
Some contractors create a WIP report only when necessary, out of an obligation to a bank or a bonding agent. However, WIP reports should be generated and reviewed frequently and viewed as valuable tools for running your business. That’s because WIP reports allow you to manage work proactively to enable smarter decisions mid-project and to deploy resources more knowledgeably by using actual job data. A contractor’s financial statement is meaningless without a WIP statement.
There are three common calculation methods to use when calculating WIP and they are the following:
- Units Complete – Units completed in conjunction with the percentage of budget spent.
- Percent Complete – When you don’t have a measurable unit, track progress in comparison to the estimated budget.
- Cost to Complete – Cost to date + cost to finish = your revised estimate.
However, the biggest challenge contractors face when implementing WIP is getting their organization to think differently about projects. WIP is more than just math; it is a culture. Your team shouldn’t only use WIP to find out what happened on a job, but rather to plan for what will happen. That requires a way of thinking where everyone is analyzing and frequently meeting to catch potential cost overruns throughout the job so that changes can be made to maintain profitability.
3. Equipment Costing
Equipment needs to be costed appropriately to understand the true cost of a given job. Charging the cost of rented equipment to a job is pretty straightforward, but many contractors struggle to accurately charge for the cost of the equipment they own. The best practice is to charge a standard rate that you would pay to rent the equipment and evaluate your actual cost against that rate. How do you evaluate the total cost of the equipment that you own? Sometimes it can feel like a guessing game with little real data to help you make your equipment-management decisions. To start, contractors need to track and manage additional costs as a part of their job costs, such as costs-to-own (e.g., depreciation, insurance) and costs-to-operate (e.g., maintenance, fuel, etc.).
Some contractors use a spreadsheet or standard accounting software to track equipment use. But this requires manual work, which is time-intensive and prone to errors. Plus, the data is not real-time and never centrally located in a system built to handle equipment costing. “In my 34 years of doing construction accounting, I have seen very few instances where the spreadsheet method worked,” said John Stenger, CPA, owner and managing member of Stenger & Company a construction-focused CPA firm.
To learn more about how Deltek + ComputerEase helps contractors power job success and master construction accounting, contact one of our team members today.
About the Author
John is the Vice President and General Manager of Deltek + ComputerEase, the leading provider of accounting, project management and field-to-office software for the construction industry. In today’s rapidly changing and fast paced world, a big part of John’s role is to ensure that ComputerEase equips clients with the most cutting-edge technology. Prior to joining ComputerEase 22 years ago, John spent a decade working for a large mechanical contractor.