If you’re running a construction company, regardless of whether it is a general contractor subcontractor or something in between, you must win and complete jobs effectively. To achieve those goals, you need a job costing system to accurately bid and estimate projects. Proper job costing has tremendous effects on your business’s better profitability, project estimating, management decisions, and timely financial reporting.
What Is Job Costing?
Job costing is an accounting method that helps businesses calculate the budget and bidding for a construction project. You use the job costing formula to estimate the costs for labor, materials, and additional overhead costs required for a project, so the construction company can accurately keep track of every transaction and determine how much to charge. Additionally, you use this practice to have information for analysis and tax needs.
There are three different major cost categories in this methodology: labor, material, and overhead.
Labor
You will start figuring out how long a particular project is going to take, and calculate out how much it costs per day/hour that pays for employees who will work on the job. The number should not only include their hourly wages but also workers’ comp, overtime taxes, insurance, and any other related costs.
Next, you'll need to determine the same for subcontractor labor costs. You may need subcontractors for a particular project. So it's necessary to identify who and what you need for the project and their availability. But keep in mind that even when you evaluate the whole project, the estimate may not be as accurate as yours hopefully is. In that case, you should build in some contingencies in advance.
Material
The job costing must be able to track the cost of all the materials you’ll be using during the course of the job. The material costs include both direct and indirect. Direct materials include concrete, wood, steel, etc. Indirect material costs often are incidental stuff such as nails, crews, and fasteners. Equipment leasing should also be added to material costs. You’ll also include charges for material delivery and potential wastage.
Typically, materials charged to a specific project at that time are packaged in the warehouse. If any remainder materials are later returned to the storage, their cost is subtracted from the job.
Overhead
There are more costs than just what labor and materials will be used on the job, you’ll need to charge an overhead to account for the depreciation of equipment. You’ll also require a charge for infrastructure, taxes must be paid, or there’s rent to pay. Although all of these are indirect costs, you should take them into account when costing a particular job. Many contractors work out the overhead by adding 10% to each job, but the approximation depends on the difference of each business. So it’s best to hire an accountant to help you find out how you should calculate overheads.
How Construction Job Costing Affects Your Business
Construction job costing requires meticulous attention to detail and monitoring all costs associated with each unique job, but its benefits will pay off tenfold. By putting extra time and effort into job costing, you have a deeper understanding of your balance sheet and income statement, construction bookkeeping. You’ll identify problem areas, monitor your budget, and keep a close eye on cash flow.
Track budget
Proper job costing uses the costs recorded to compare original estimates with actual costs for each phase of a particular project. The information provides an accurate picture of exactly where money is going and whether costs are in line with the budget. Job costing also monitors where money will be going if there is a change order and scopes of work alter.
Track progress
A job cost system can track a particular project by phase, allowing relevant information of the progress of the project. If the project is taking longer and going above the projected budget, you can address some issues immediately. This also helps inform future similar jobs so you can understand what your costs will be and how you assign expenses for the job.
Track efficiency
By managing the costs of labor, materials, and overhead, you can know the exact margins. Sometimes the price of materials went up or a special area was needed from a subcontractor that cost more than expected. These things will threaten your business’s cash flow and profit and you need the information to adjust the estimating on similar jobs in the future and handle issues that may arise again.
Track cash flow
Cash flow is the key to any business. Especially, in the construction industry, you usually have to pay expenses in advance of being paid by your customers. Therefore, construction job costing helps you keep close attention on every single expense to maintain a healthy cash flow and profit margin.
In conclusion, this method provides valuable information that helps you more precisely bid on similar jobs in the future. Then you can maintain a healthy cash flow and protect your profit margins.
>> Read More: Job Costing Essentials for Contractors >> Read More: How to Create a Chart of Accounts for Construction Company and Contractor
If you want to carry out job costing for your business but don’t know where to start, Irvine Bookkeeping are here to help.
