This is a guest post from Knowify, a Billd partner. Knowify empowers subcontractors with insights to manage their finances, teams, and projects more effectively. With Knowify, you can handle your budgeting, bidding, job costing, invoicing, and much more – all in one place.
Job costing is an essential component of any contractor’s business. Critical to success in the construction industry, but often done incorrectly, job costing allows you to track the costs associated with a particular job, from materials and labor to overhead costs.
By accurately tracking these costs, you can ensure that you are making the most profit possible on each job, prepare yourself for tax season, and gain detailed insight into business finances so you can make more informed decisions going forward.
In this article, we’ll look at the basics of job costing and how it can help contractors improve the financial health of their businesses. We’ll cover developing an accurate job costing process, tips for keeping costs down, common pitfalls to avoid, and how to choose the right job costing tools and software.
Table of Contents
Understanding Job Costing Basics
What exactly is job costing?
Job costing is a method of accounting for all of the costs associated with a particular job or project. To do job costing well, you’ll want to track:
- Labor cost, including labor burden
- Direct material costs and indirect material costs
- Subcontractor costs
- Equipment costs
- Miscellaneous expenses like travel, meal stipends, etc.
These categories are tracked separately from general business expenses like office rent or business insurance so that you can see where your capital is going on each individual job or construction project.
Accurately capturing these costs allows you to easily calculate the amount of profit you’re making on a per job basis, get ahead of potential cost overruns, and improve customer service by helping you head off any potential disputes over invoices and payments. It will also help you ensure you have the cash flow needed to work on future projects.
Developing an Accurate Job Costing Process
Now that we’ve reviewed the basics, let’s take a look at a typical job costing. process that’s applicable for the vast majority of contractors and subcontractors.
- Build a project plan and budget. Break this down by project phase and cost type.
- Apply markup to each cost type to calculate your final quoted price for the project.
- After you win the job, track the costs for each of the buckets we covered (labor, materials, buying or renting equipment, etc.) against your budget. Be diligent about cost tracking!
- Monitor your invoicing schedule. Throughout the life of the project, you should always know what’s outstanding vs. what’s already been paid.
- Account for change orders. Nothing can kill a project’s profitability faster than a change order that isn’t properly captured and accounted for in your project budget.
- Review your budget against actual costs regularly throughout the life of a project. A good rule of thumb is to review budget vs. actuals any time you spend money or receive payment. This allows you to see where you were over or under-budgeted, as well as which aspects of the project influenced your profitability the most.
While seemingly straightforward, job costing isn’t without its twists and turns. To help you apply the above process to your next project, let’s review some best practices as well as common issues related to job costing.
Job Costing Best Practices
When it comes to effective job costing, there are several best practices that contractors and should follow to ensure they’re getting the most from job costing.
- Routinely review the accuracy of your estimates. Job costing offers an unbiased litmus test you can use to grade yourself. This helps you understand whether outside factors caused a project to exceed budget, or that your estimate had flaws from the jump.
- Break down job costs by phase and cost category. This extra step gives you the detailed insight that can turn job costing into a powerful force for your business. Imagine being able to pinpoint the specific cost category, like materials or equipment, that routinely causes overruns. Similarly, what if you knew that you need to nail pre-construction otherwise your profitability is likely shot? This knowledge is essential to helping you build a long term business.
- Consider including the cost of financing when job costing. If you are waiting 60 to 90 days for payment, financing can be used strategically to protect your cash flow. And with a proactive approach, the cost does not have to affect your margin. Instead, factor the cost into your overhead. The cost of financial tools like material or invoice financing are likely less than 1% of your total project cost, so a slight increase in your bid to protect your cash flow won’t have a large effect on your win rates. This will support your cash flow long term and reduce risk while maintaining your target margins.
- Regularly monitor your progress against budgeted amounts. The key to getting the most out of job costing is diligently tracking actuals against your budget. Always keep receipts and maintain records of all project expenses.
- Distribute data collection responsibilities across your team by using the right tools. There’s nothing worse than having your bookkeeper try to assign a crumpled receipt to a job after the fact. Use job costing software so your team can upload receipts for material purchases from their phones. The cost gets captured immediately and assigned to the right job, preventing errors. Similarly, use time tracking tools that let your team clock-in and out right from their phone. This gives you a real time look at how labor is affecting the profitability of a particular project.
By implementing these best practices into their daily operations, contractors will be able to better control their finances while also improving customer experience through increased transparency, ultimately leading them towards more success.
Common Job Costing Pitfalls to Avoid
On the other hand, you’ll want to avoid letting these common mistakes get in the way of proper job costing.
1. Not accounting for fully-loaded labor burden
One of the biggest mistakes contractors make is not accounting for fully-loaded labor burden when calculating project finances. Labor burden is a way of accounting for the true cost of a particular employee by including things like benefits, PTO, training, etc. in addition to wages.
Limiting your labor costs to just an employee’s wage drastically underestimates what it actually costs your business to employ that worker. Because of this, your job costing will be inaccurate and you won’t have a true picture of a project’s cost to you. This cuts into profitability and cash flow. It also makes it generally more difficult to run a successful business in the long run.
2. Inaccurate estimates
Estimating inaccurately is one of the most common mistakes that contractors make. This results in either leaving money on the table or even overcharging customers. To ensure accuracy, take into account all costs associated with a job from beginning to end, including labor, materials, overhead expenses, and any possible change orders that could arise. Turn to historical job costing data to understand where you might run into issues.
3. Not implementing real-time cost tracking
Not tracking construction project costs in real-time can throw a wrench in your job costing efforts. To do job costing well, you need to monitor costs and adjust your budget accordingly as the job progresses.
This is an area where dedicated job costing software can help. Tracking costs manually, especially when a project involves change orders, can get complicated quickly. With a thousand other things on your plate, diligent recordkeeping is likely to be one of the first things that falls to the wayside.
4. Improper allocation for overhead costs
Another pitfall involves incorrectly allocating overhead expenses such as rent, administrative fees, marketing costs etc., as these can quickly add up if not accounted for properly. It’s important for contractors to determine which overhead expenses should be allocated to each job so they don’t end up undercharging customers due to incorrect cost projections.
On the other side of the coin, there are some approaches to job costing that would have you ignore overhead costs like rent, insurance, marketing, etc. when budgeting for a job. Ultimately the approach is up to you and what’s right for your construction company. The important thing is consistency. Pick an approach and stick with it.
5. Undercharging and overcharging for materials
Finally, it’s important for contractors and subcontractors to charge the right amount for materials used on a job. Contractors should always factor in market prices when purchasing materials so they don’t overcharge or lose money due to misjudging the cost of supplies needed for a job.
6. Not integrating job costing software and accounting software
If you’ve invested in job costing software, it’s all but essential to integrate it with an accounting platform like QuickBooks Online. Job costing software brings a construction-first approach to accounting, but you won’t get the full benefit unless you use it alongside your regular accounting software.
With these two tools integrated, project finances are automatically pushed into your accounting tool, and vice versa. This makes life significantly easier for your bookkeeper and accountant by eliminating double data entry and preventing errors with manual data input. It also gives you, the business owner, a near-immediate look at the P&L for a project.
By understanding common pitfalls like these and taking steps to avoid them, contractors can ensure their job costing process is accurate and efficient while maximizing profits without sacrificing customer experience.
Choosing the Right Job Costing Software and Tools
If you want to make job costing a central part of your business operations, the next step is considering the right job costing software and tools to help you on your journey. It might be enticing to attempt to manage job costing using spreadsheets and manual data entry. However, manual job costing can get out of hand quickly, especially if you’re working on even moderately complex projects.
With the right technology, contractors can track expenses, process payments quickly, identify areas of potential cost overruns, generate detailed invoices, and review project costs, all while ensuring accuracy and efficiency.
When evaluating job costing software, there are several factors to consider. First and foremost is understanding the specific needs of your business and selecting a tool accordingly. It’s important to look at features offered by the software such as cost tracking capabilities, ease-of-use, scalability, compatibility with existing systems (such as accounting software), reporting options, and pricing models.
Additionally, be sure to consult user reviews and ratings before making a purchase decision to ensure that you are selecting a solution that offers the customer support and overall quality your business needs.
Finally, when it comes to choosing the right job costing software for your business it’s important to take into account the resources (time & money) you have available. Make sure the solution you choose is easy to learn and use. The last thing you want is to buy a tool that you end up hating to use. Then it’s just money wasted.
Accurate job costing is an art, and refining it pays off. By strategically, methodically improving your job costing process, you can optimize how your project financials and ultimately grow your bottom line.