Job costing is a fundamental construction accounting process for tracking costs. Without it, contractors and construction companies are leaving every job up to chance without any way to measure how successful or truly profitable they are.
Whether new to job costing or not, optimizing job costing systems is vital for running a more successful business. This has become increasingly more important as material costs continue to increase; 2022 alone saw material costs increase by 10%.
According to the AGC business and outlook report, 70% of contractors have experienced project delays or cancellations, with the main culprit resting on the rising costs of overall construction, financing, and insurance, amongst other factors.
This article will give contractors need to know for better cost management and real-time decision-making to accelerate profitability. To get a full rundown on how to do job costing for both beginners and industry vets, check out our essential guide to construction job costing.
Understanding job costing in construction
Job costing is the window through which contractors can view the actual effectiveness and profitability of every job. As such, it’s the foundation to improve nearly every aspect of your business, from creating better bids to improved scheduling to healthier profit margins.
Job costing will provide a clear path to profitability. If you use job costing consistently, you’ll find pragmatic solutions to systemic issues that you might’ve not even known were there!
At a basic level, job costing will track the following:
- Labor
- Materials
- Equipment
- Subcontractor costs
- Additional expenses
Most effective when used alongside a budget, job costing provides detailed cost information on major project costs, such as labor and materials, which you can then compare to your starting budget to assess the profitability of individual jobs.
In addition, you should compare cost figures to the actual revenue you brought in from the job. Comparing total project costs to expenses and revenue will, at the very least, reveal where and how you made money for a given job.
Meticulously tracking all project costs will reveal not only overall performance but the effectiveness of individual tasks within the job as well. For example, you may discover that you need to spend more on labor and materials when pouring concrete.
However, you might find that actual costs are consistently under budget for specific phases like during rough-ins. These seemingly small bits of information carry a massive amount of insight that you can use to improve your estimates, reduce overspending on materials and overhead, and overall job performance.
Knowing where you made money on a construction project is crucial for determining the strengths of your business.
This is helpful for improving scheduling, addressing cash flow issues, and, most importantly, it shows you the jobs you should pursue on a regular basis–since you’ll be able to tell the project types that are the most profitable for your business.
Construction job costing tips
#1 Start with a budget
As mentioned before, contractors must start with a budget to get the most out of job costing. The good news is that contractors should already have a head start on this, as most contractors are likely to develop an estimate as part of the bidding process.
Don’t let your estimate fall to the wayside once project delivery begins. Instead, look to take the estimating process seriously. Develop your estimate with extreme attention to detail. A basic lump sum of what you think the job will cost won’t do here. Instead, it’s recommended to create as granular a budget as possible by breaking the job out by phase, with a budget for each phase.
For example, let’s look at a kitchen remodel broken down into eight phases, with cost estimates for each phase:
| Phase | Labor | Materials | Equipment | Subs | Misc. | Total |
|---|---|---|---|---|---|---|
| 1. Tear down and disposal | $1,500 | $300 | $200 | $0 | $250 | $2,250 |
| 2. Structural repairs Additional work outside of your expertise required drywall subcontractors to complete the job | $1.000 | $500 | $300 | $2,000 | $0 | $3,800 |
| 3. Assess the electrical and mechanical systems | $350 | $50 | $0 | $0 | $0 | $400 |
| 4. Assess the plumbing | $350 | $50 | $0 | $0 | $0 | $400 |
| 5. Flooring installation | $5,500 | $3,000 | $200 | $0 | $150 | $8,850 |
| 6. Install counters | $3,500 | $1,100 | $250 | $0 | $200 | $5,050 |
| 7. Backsplash installation | $850 | $250 | $0 | $0 | $75 | $1,175 |
| 8. Appliance installation | $650 | $50 | $0 | $0 | $0 | $700 |
| TOTAL | $22,625 |
With each phase broken out, this contractor has eight different mini budgets they can use to assess the performance of each phase. For example, if phase 8 ends up incurring a total cost of $2,500, this contractor will be able to not only know where exactly the cost overrun occurred but will now be able to assess where, during this specific phase, costs exceeded budget.
Put another way, what specific tasks in this phase caused costs to exceed budget? With this information in mind, the next remodel (or any projects in the future similar in scope to this one) can be strategically approached to put you in a better position to avoid cost overruns.
#2 Don’t forget to include labor burden
No matter the trade, labor will account for a significant portion of all project costs. In some trades, where material and equipment costs are typically disproportionately low, such as commercial painters, labor costs can account for as much as 50% of total project costs. Tracking labor is important for any construction business, but you must track it accurately with “all-in” costs included.
You must ensure that they include the full labor burden of each employee when estimating and tracking labor costs. Not including labor burden can make or break the profitability of a job. When estimating a job, contractors must account for the full spectrum of costs that an employee costs a business that is outside of earnings.
In other words, wages alone do not accurately reflect the total cost of employing a worker. This is where labor burden comes into play, as labor burden is the term used to refer to all the additional costs an employee incurs on a business.
These costs include insurance, FICA (payroll tax), workers comp, and retirement contributions. Combined, these costs will drastically affect labor costs on both individual projects and company-wide levels. Therefore, the next time you calculate job costing numbers or future estimates, make sure you factor in fully burdened labor costs into your numbers.
Labor burden is not a set it and forget matter. It needs to be assessed on a yearly basis. You and your accountant should spend the time to recalculate labor burden rates every 6-12 months. This ensures your cost estimates are as accurate as possible.
#3 Track and review data in real-time
While evaluating cost data at the end of every job is mandatory for making better decisions regarding future jobs, job costing can be used to better manage ongoing jobs. By tracking expenses in real-time, contractors can keep a close eye on the cost of materials, labor, and other expenses so that the job’s financial standing is clear and evident at any given moment.
Up-to-date cost tracking means that informed decisions can be made to better allocate resources or manage cash flow to steer projects in the right direction. If you notice that costs are outpacing the budget, you can take immediate action to reduce costs before they end up eating into your bottom line.
Additionally, this can help identify potential delays or issues before they actually start impacting the job. Allowing contractors to mitigate these issues to ensure deadlines are hit. Do whatever it takes to track costs as they happen.
Even if it means creating an excel sheet in which you manually input numbers. However, there is a much better way which leads us to our next tip.
#4 Use construction management software
Using technology designed specifically for trades contractors will drastically reduce the time, effort, and expertise needed to account for job costs properly. As a result, those in the construction industry embracing technology are saving thousands of dollars in delays and rework and finding that they can do otherwise laborious tasks that used to take hours in just a few minutes.
Additionally, as our last tip detailed, real-time tracking is crucial for making informed decisions to mitigate project issues. This is a larger issue within the construction industry–studies have shown that one of the most significant factors impacting job productivity is a lack of information on site. Construction management software will track and record costs in real-time, allowing contractors to have the information they need precisely when needed.
Every contractor knows that each project brings its fair share of unexpected construction costs, mistakes, and unforeseen obstacles.
Without the help of job costing software on your side to capture, organize, and present data in an actionable way, identifying and alleviating these obstacles can be nearly impossible; catching mistakes early can be the difference between a year of growth and a year of financial hardship.
Use Knowify to optimize job costing
Knowify is one such construction management software built specifically for specialty contractors who want to get the most out of their job costing.
We bring everything together by helping contractors manage job costing from beginning to end through the entire lifecycle of projects without clunky spreadsheets.
Whether estimating, timekeeping, budgeting, WIP reports, or change orders, Knowify keeps everything organized and accurate in one easy-to-use location.
Once the job is completed, we don’t stop there. Knowify delivers intuitive job costing reports based on the revenue and expenses incurred through robust reporting tools, so you can evaluate every job.
This puts the most crucial data up front and center so you can take immediate action, identify cost overruns, track progress, and elevate job-level profitability. Furthermore, Knowify integrates with the most trusted accounting software platforms, such as QuickBooks, meaning you can easily sync cost data with existing systems.
Know your numbers, organize your numbers, and use your numbers with Knowify to build your business with confidence.
To see for yourself, book a 30-minute demo we’ll show you a powerful digital future for your business.