Benefits of Job Costing Systems for Construction

In construction, job costing is much more than adding up the total cost of a job. To truly maximize profits and avoid project delays, effective job costing should look at every aspect of a project—from labor hours and material costs to the expense of running existing machinery and funding project management. Cutting corners is not an option in construction job costing, especially when profit margins are already thin.

This article covers the benefits of job costing, why it's essential to your business and how using job costing software can help to grow your profits.

Job costing is a project-based method for tracking a job's total costs and revenue. It monitors and records all income and expenditures, including overheads, direct and indirect expenses, labor, materials, and equipment.

Job costing software is part of construction accounting and is used to help companies accurately price and keep track of job progress, budgets, and cash flow. It provides a detailed breakdown of an entire project, so that you can track expenses in real time. You can use ongoing reports to inform wider business decisions and monitor the overall financial health of your construction business.

Although you could keep track of job costs manually, it is time-consuming and the potential for errors is high. For example, suppose you're collecting receipts for materials but haven't yet had time to input expenses, or you miss a receipt. In that case, this could provide an incorrect assumption of your remaining budget. 

Job costing software tracks everything for you and streamlines the process by automatically calculating budgets, estimating job costs, creating regular financial reports, and updating you on job progress. From your side, you only need to input the numbers, and the software does the rest.

It compiles everything into one place, so you're not managing multiple spreadsheets simultaneously. Importantly, it separates project expenses into key areas, including labor, materials, and equipment. Every project is given its own set of work breakdown structures (WBS), totaling the revenue and expenses during various phases. This provides project managers greater visibility into how much is being spent and where over the entire project lifecycle. 

Job costing allows contractors and project managers to easily adjust projects and budgets before problems arise. This helps to better understand cash flow, minimize disruptions, and, most importantly, gives future visibility into how profitable your jobs will be.

It's important to understand that job costing software is separate from a company's general ledger—although they do work together. The general ledger reports on a business's overall revenue and expenditure, not individual projects. General ledgers are used to review overall financial and business health, but not the success and profits of specific projects. With the correct job costing system, you can focus on individual projects, which are seamlessly tied to the general ledger for greater visibility of your total business performance.

Job costing software is essential for the construction industry because businesses need to track the costs of their projects accurately to make a profit. Ultimately, the success or failure of any project is based on profit. With job costing software, construction firms can predict problems before they arise, taking actions to minimize project delays and the impact on cash flow.

Job costing allows construction businesses to accurately record all expenses associated with a job, in real-time, with a true representation of the entire project cost at every stage. However, the construction industry is unique. The types of costs businesses need to record aren't found in traditional accounting software, which means expenses may not be recorded correctly or at all. 

There are also further complexities regarding how the industry works and where. If these are not accurately recorded, it can leave construction firms at risk of non-compliance, regulatory fines, and smaller profits. Therefore, using job costing software is critical for ensuring the success of your projects.

Let's look at how construction job costing differs and why you need specific software. 

Cost Categories

Accurate job costing in construction means recording all committed costs, direct costs, and indirect costs, separated into categories such as labor, materials, equipment and overhead costs.

But most general accounting software does not include these categories. Without them, construction firms risk making mistakes and incorrectly reporting on project progress and profit margins. Ultimately, your firm is at risk because you don't have the tools to manage cash flow correctly. Job costing software, however, includes all the categories needed to price jobs accurately and keep track of spending as projects progress.

Payroll Changes

In the construction industry, payroll requirements are different. Construction labor often has specific requirements, such as prevailing wage, unions, and local taxes, all of which need to be considered when pricing jobs. Using job costing software, you can accurately record and automatically incorporate this data within overall project scopes. This reduces the impact on profit margins further down the line if, for example, you're forced to pay additional taxes.

Job costing software also allows firms to track unposted payroll. This provides further visibility into budgets, as they can monitor these costs in real time and see how employee hours affect cash flow without processing payroll.

Mobile Workforce

In most cases, construction firms have a mobile workforce. Instead of a fixed location where goods are purchased, a contractor's work is based on the location of a customer's job. As a result, this adds further complexities to tracking labor costs, time, and expenses among contractors, which most accounting software isn't equipped to handle.

With job costing software, construction firms can track employees working on multiple sites and jobs and easily capture the correct payroll information depending on the type of job and location. Job costing software lets you record time and expenses in real time while contractors are out in the field, and this helps to ensure your revenue and expenditure are consistently up to date.

Progress Reports

In construction, jobs often occur over a long duration of time. For complete project transparency and budget oversight, construction firms must report on job progress effectively. Just because you've spent 80% of the budget doesn't mean the project is 80% complete. This is where job costing can help by providing Work in Progress (WIP) reports.

WIP reports capture the amount of work completed, the current costs of the job, and how much has been billed to date. This provides a clear picture of future profits and the current status of project progress. This gives firms greater visibility over projects and individual jobs, helping to identify budget problems, productivity challenges, and other issues before they become serious.

Construction job costing is complex, and it requires careful tracking of every cost during each stage of a job to maximize bottom-line profits. Smaller businesses may have relied on traditional accounting software or manual tracking to price jobs, but as a construction company grows, so does the number and complexity of jobs. This brings new challenges, particularly in processing billing, generating WIP reports, and managing payroll.

If businesses don't equip themselves with the software needed, it can lead to inefficiencies and challenges that can drastically drive down profit.

Job costing software brings many benefits to growing construction firms. In particular, it allows businesses to:

1. Manage budgets: Enter desired budgets for each job, with complete oversight of how projects are performing as they develop. Job costing software automatically deducts expenses and committed costs, so you can see the remaining budget and allocate resources as needed.
2. Accurately price jobs: Better estimate the total cost of jobs by including accurate calculations for each element, like labor, equipment, and overhead costs. With a complete breakdown of every cost involved, job costing software ensures you've covered all avenues and don't fall short.
3. Manage customer expectations: Since you can schedule jobs more accurately, you can better manage their expectations regarding how long jobs will take to complete.
4. Estimate cash flow: Job costing software lets you see all ongoing projects at once, including profit and loss, billed costs, and to-be-billed fees. This allows for better financial planning, as you can monitor expected revenue as projects progress.
5. Compare estimated and actual costs: Keep track of how projects perform in relation to their actual and estimated costs. Job costing software lets you quickly see the remaining budgets to determine whether projects are on track. Usually, the software can separate this into cost categories, including labor, overhead costs, equipment costs, and anything else you've customized.
6. Track progress: Job costing software gives you complete oversight of projects so you can track WIP and see how far along projects are. This also allows you to predict any possible delays and put contingencies in place before problems arise.
7. Create profit margins: Accurate job cost reports allow you to see your profit margins, so you can review and amend prices as necessary to ensure you stay profitable.
8. Receive automated notifications: Most job costing software platforms send alerts for important job activities, such as when payments are sent, budgets are near exceeding, or projects are near completion.
9. Identify issues: Job costing software allows you to keep track of all jobs in real time, so you can identify problems before they arise. For example, if you've nearly exhausted all labor costs for a particular job, you can take steps to review your budget and allocate resources accordingly.

By automating processes and accurately tracking every element of individual projects, job costing software better prepares businesses for expansion.

Deltek ComputerEase gives project managers the visibility they need to drive projects, profits, and the overall business forward, with accurate tracking every step of the way.

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