Dig Deeper: Construction Industry Job Costing in Uncertain Times

Job costing is a best practice that identifies the time and costs associated with each construction job. When not done correctly, job costing can create risk to the bottom line, particularly when supply chains struggle and economics falter.

The construction industry should re-evaluate its job costing practices to significantly improve business operations and the bottom line.

What Questions Does Job Costing Answer?

Construction job costing is an industry best practice that often gets sidelined. Daily job and business-related tasks, such as invoice fulfillment, paying vendors, safety, labor, and more often take priority.

Job costing can provide insights into your profitability and identify the most and least profitable processes within a project. Job costing can serve as a report card for current projects and help you plan for the future by answering:

• What is the total cost of a project?
  Job costing gives you a breakdown of all expenses associated with a construction job, allowing project managers and stakeholders to determine cost and profit.
• How much did each phase of the project cost?
  Construction industry job costing tracks expenses for different tasks or stages within the project. It’s a continuous improvement process where you can spot workflows that create a cost overrun or project delay.
• What are the indirect and direct costs of a project?
  Job costing separates costs by direct expenses (materials, labor, project-specific equipment usage) and indirect expenses (overhead, admin, general). The process helps to allocate these costs to a specific job.
• How does the actual cost (outcome and deliverable) compare to the estimated cost (bid or quote)?
  Job costing in the construction industry is beneficial for pinpointing the accuracy of your cost estimates.
• Are there cost deviations from the quote or budget?
  This process provides insight into cost variances by matching actual expenditures against budgeted amounts. This data is critical for monitoring and controlling project costs.
• What job-related activities are driving up my costs?
  While you can’t control raw material costs, you can change the workflows that aren’t adding value. Job costing allows you to focus on cost-saving measures to make informed decisions about resource allocation and job site best practices.
• How profitable is the project?
  Determining total costs and comparing them with the revenue generated from the project is critical for determining the true profitability of each type of construction project. This information is highly valuable for strategic business line decisions and determining whether you bid on specific projects.

Ultimately, construction industry job costing answers the question: Am I really making a profit?

Best Practices for Job Costing in the Construction Industry?

Job costing is an incredibly effective snapshot of your business’s true cost drivers and profit centers — if done with these best practices in mind.

Project Type

Ensure you are seeking the right projects for your construction business. Razor-thin margins leave little room for errors or inefficiencies. Your team can analyze the resulting data to determine profitability trends if appropriate job costing processes were applied to current and previous contracts.

• What size contracts are most profitable? Do you struggle to perform on contracts greater than $5 million?
• Are contracts aligned with your industry expertise more profitable than those requiring subcontracted work?
• Should you seek to expand your relationship with a general contractor you’ve successfully worked with in the past?
• Do you perform better on projects requiring a greater proportion of labor versus equipment or vice versa?

The answers to these questions should drive bidding efforts; however, without appropriate job costing data, it’s easy to venture down an unprofitable path.

Bidding

Once you focus on the most profitable projects, adequate job cost information can support project bids. While you must also consider market factors, the availability of accurate and timely job cost information will result in your ability to hedge against unfavorable surprises when it comes time to perform on the contract.

However, it’s important to note that simply bidding based on estimated total job costs isn’t always an appropriate response. Depending on the circumstance, bidding a contract at an overall loss may be advantageous to keep crews busy and provide marginal profits to cover overhead costs.

Change Orders

The ability to price change orders can make or break a project. Understanding the marginal costs associated with a proposed change can shape your ability to price the additional work appropriately and avoid accepting a change order when doing so would unfavorably affect contract performance and profitability.

Flexibility

Change is often unavoidable. Certain projects get delayed or canceled and others get modified. If all affected parties understand the effect of these changes on profitability, you can seek to minimize the negative impacts and pursue the best overall outcomes.

How Do I Use the Results of Job Costing?

As a business leader, ensuring your involvement in the construction job costing process requires just a few simple steps:

• Analyze Current Costing Processes:
  Determine whether current job costing processes sufficiently capture timely information relative to each job.

• Allocate Indirect Costs to Projects:
  Indirect costs matter. Determine how to allocate these costs to jobs to see the complete picture of job performance. Ensure that allocation methods are appropriate and consistent given the nature of the cost being allocated.

  For example, costs incurred for equipment repairs and maintenance likely correlate with the time the equipment was used on the job rather than labor hours. Therefore, using equipment hours as an allocation base is likely to result in a better measure of repairs and maintenance costs incurred relative to a given project.

• Communicate:
  Seek regular input from field and management employees on the status of jobs, the costs incurred to date, and costs expected to be incurred through project completion. Make data transparent and encourage real-time updates.

What’s Holding You Back from Construction Job Costing?

Many smaller construction companies leverage generalized accounting software not geared for the rigors of job costing analysis. Or, the construction firm follows traditional approaches, relying on historical cost estimation methods and project management. Whatever the reason, today’s market volatility calls for new ways to understand the actual costs of your construction business.