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, material price fluctuations, equipment downtime, 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 is why it is more important than ever to plan individual jobs effectively, looking at every element in detail through job costing.
In this article, you will learn everything you need to know about job costing for mechanical contractors, 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 make sure your construction jobs stay profitable.
What is Construction Job Costing?
Job costing accurately tracks all costs associated with a job, including labor, materials, and overhead. It gives you a detailed breakdown of an entire project so you can track expenses in real time and easily calculate future profitability.
Many contractors 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 are 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 is 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 potentially rectify the problem.
In most cases, you can predict problems before they arise, like when a job 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 overhead 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.
Direct Costs
Direct costs are costs that can be directly associated with a particular job, such as hours of labor, HVAC equipment, piping materials, sheet metal, ductwork, fittings, tools and equipment, or subcontractors.
Indirect Costs
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, estimating, costs of using owned equipment, shop overhead, fleet expenses, and indirect labor.
Committed Costs
Committed costs are costs that a company has agreed to buy via purchase order or contract. Examples include unposted payroll, open subcontractor agreements, and open purchase orders where you have committed to purchase material that you have not been billed for.
Direct, indirect, and committed costs are important in accurately depicting the total job cost. However, indirect costs are often overlooked as they are not directly associated with a particular job. It’s easy to forget the hours of work your project management team spends tracking projects and job expenses, or the cost of fuel and maintenance to run service vehicles and equipment. Factoring your overhead is essential for maximizing your job profitability and your overall financial health.
Key Construction Job Costing Terms You Need to Know
Below are some key terms you need to know.
Equipment Costing
Equipment costing includes all the machinery and tools needed to complete a job. Mechanical contractors often rely on expensive equipment such as lifts, welding equipment, threading machines, refrigeration tools, fabrication equipment, and service vehicles.
While it’s easy to calculate the cost of rented 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, repairs, 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: Fuel, overhead, maintenance, and repairs
Equipment and machinery are expensive assets, which is why it is important to determine accurate rates. You should also review your inventories regularly so you can assess the cost-to-own and determine whether equipment is still financially viable for your business.
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 essential 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 HVAC installation but only billed for 30%. If you don't bill for the missing 20%, this could affect your cash flow and leave you funding part of the project yourself.
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 will know who is where, doing what, and when. It also allows you to pull accurate data reports to help with financial reviews and planning.
Committed Costs
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 is left for additional costs and expenses across every open project.
Some examples of committed costs include:
- Open subcontractor agreements for specialty mechanical work
- Purchase orders for HVAC units, piping, ductwork, fittings, or controls
- Time from the field that has been reported but not yet processed through payroll
- Expenses from the field, such as emergency materials or rental equipment purchases
Mechanical contractors may forget to track committed costs, which affects the amount left to spend. In some cases, this means spending more than what’s available, putting your project in a deficit.
How to Calculate Job Costing
How do you calculate construction job costing? It comes down to a simple process based on a calculation of all individual costs. Your total construction job cost is the sum of all overhead.
Labor Cost
Labor is a huge portion of an overall job cost. You'll need to accurately determine the total cost of labor for field employees, installers, fabricators, service technicians, and anyone in-house, such as project managers and account managers.
In addition to actual labor costs for regular and overtime employees, you need to account for employer-based payroll taxes, union requirements where applicable, benefits, and labor burden.
Subcontractor Cost
If you are using subcontractors, their costs must also be included. Confirm their costs do not exceed the previously agreed-upon contract amount.
Materials Cost
Most jobs require new materials such as piping, ductwork, sheet metal, HVAC units, controls, insulation, valves, fittings, and refrigerant, so you will need to factor this into your total job cost.
Calculate how much you have spent toward new material in quantities, accounting for any surplus. Include committed costs for purchase orders you have written but not yet been invoiced for.
Equipment Cost
Most jobs will require the use of equipment. In some cases, you'll rent equipment, so you can include the direct fee in your overall job cost. However, many jobs also rely on owned equipment, including service trucks, fabrication tools, welding equipment, and lifts. You need to make sure you properly allocate costs to the job for the use of your own equipment.
Overhead Cost
Overhead costs for mechanical contractors are often trickier to determine. These indirect costs include expenses associated with running your business and managing jobs, such as rent, software, fleet management, warehouse costs, administration, utilities, and insurance.
While the total fee of each overhead cost is not directly associated with the job, some percentage of each amount contributes to each project. As a result, many businesses add a percentage to every job to account for overhead costs.
Key Job Costing Reports
Job costing software enables managers to pull key cost reports, which can be used for long-term budget and resource planning and to review overall business productivity.
- Job Cost Summary: Review the total cost of jobs and see how effectively budgets were allocated and whether projects were delivered within budget.
- Unit Productivity: Understand the cost of units for a specific project and determine output by assessing how much was produced per hour.
- Labor Analysis: Review workforce productivity by looking at actual and estimated labor costs, overtime, time spent on jobs, and output.
Key Benefits of Job Costing Software
Key benefits include:
- Manage Budgets in Real Time: Enter desired budgets for each job, with complete oversight of how projects are performing in real time.
- Price Jobs More Accurately: Better estimate the total cost of jobs by including accurate calculations for overhead.
- Improve Customer Expectations: Since you have a better understanding of your job as a whole, you can better manage customer expectations in terms of project schedules, installation phases, and service timelines.
- Gain Better Visibility into Cash Flow: See all ongoing projects at once, including profit and loss, billed costs, and to-be-billed fees.
- Compare Estimated and Actual Costs with Confidence: Keep track of how jobs are performing in relation to their actual and estimated costs.
- Keep Projects on Schedule and Track Progress: Track WIP and see how far along projects are, allowing you to predict delays before they happen.
- Understand Your True Profit Margins: Accurate job cost reports allow you to see your profit margins and adjust pricing accordingly.
- Reduce Manual Work with Automated Notifications: Most job costing software platforms send alerts for important job activities such as when budgets are nearing limits or projects are near completion.
- Identify Issues Early: Real-time visibility allows you to identify problems before they impact profitability, such as labor overruns or material shortages.
Put simply, job costing software streamlines the entire job costing process, giving mechanical contractors faster and more accurate insights into how much their construction jobs cost.
Construction Accounting Software and Training
As your mechanical contracting business grows, construction accounting software can support you in proactively managing jobs, obtaining financial assistance, maintaining a strong cash position, and staying compliant. Deltek offers free construction accounting training through Construction Accounting University.
