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The Many Faces of Construction Job Costing

Why Does Job Costing Matter in Construction Companies?

What is Job Costing?

Job costing is a method used by businesses to allocate and track the costs associated with specific projects, jobs, or individual units of production. This approach is particularly useful in industries like construction, where each project or job is unique, and the costs associated with each need to be accurately determined for pricing, budgeting, and profitability analysis.

Here’s how job costing typically works:

Identification of Jobs or Projects

Each unique construction project, job, or unit of production is identified and treated as a separate cost entity. This could include entire construction projects or any other work that can be tracked individually.

Cost Accumulation

Costs related to materials, labor, and overhead are accumulated for each specific job or project. These costs can include direct costs (e.g., materials and labor directly related to the job) and indirect costs (e.g., overhead expenses that need to be allocated to the job).

Allocation of Overhead

Overhead costs, such as rent, utilities, and administrative expenses, are typically allocated to individual jobs using an appropriate allocation method (e.g., based on labor hours, machine hours, or square footage).

Job Cost Tracking

A job cost sheet or ledger is maintained for each job, summarizing all the costs associated with that particular job. This sheet includes details about direct costs, indirect costs, and the total cost incurred. QuickBooks is a great way to track job costs because, once the system is set up properly, all costs are automatically tracked and reported within the various QuickBooks reports.

Analysis and Reporting

The construction project job cost information is then used for various purposes, such as pricing decisions, budgeting, performance evaluation, and profitability analysis. It allows businesses to determine whether a particular job or project is profitable and helps in making informed decisions about resource allocation and pricing strategies.

Job costing provides detailed insights into the profitability of individual jobs, which can be crucial for businesses to make informed financial decisions.

One key element of job costing is that it is an important component that goes into the calculation of gross profit.

What is Gross Profit?

Your Gross Income minus the cost of producing that income equals Gross Profit. You might want to think of your Gross Profit as what you’ve “earned” from the individual projects you’ve decided to take on.

For example, you’ve built a $500,000 home or taken on a $500,000 remodeling project.

  • If you believe your costs to complete that project came to $400,000, you’ve earned $100,000 in Gross Profits – or achieved a 20% Gross Profit Margin.
  • If you believe your costs were $475,000, you’ve earned $25,000 (a 5% Gross Profit Margin).

Here are some typical questions many construction business owners initially ask about gross profits…

“Why is it important to know how much my gross profit is?”

You need to know this because your gross profit is the amount you use to run the “non-production” portion of your company AND to create your net (“take-home”) profit.

How do job costing reports help me?

Job costing is the process of tracking how much income you earn and the costs you incur to perform each of your jobs.

It’s how you get to see the gross profit (your scorecard) for what you’ve earned on each of your projects and the totals for your company.

You will be able to observe both the winners and the losers – so you can fix or minimize the losers and maximize your winning scores!

“Are all job costing systems and reports pretty much the same?”

Your perception of what you want to see from YOUR job costing system may be very different than another business owner’s concepts.

Why? Because there is no single prescription that fits everyone’s needs.

Why one job costing system won’t work for every construction firm

When considering your software customization, here are some facets that impact the type of system you’ll want to create:

1. What types of construction projects do you perform and want to track?

    • Simple: Small, quick jobs with few job stages that typically last a day or two, e.g., handyman, repairs, installations, roofing, etc.
    • Mid-level: Jobs with a medium number of job stages that may last for one or several weeks, e.g., small remodeling jobs, landscaping, HVAC with various stages, etc.
    • Complex: Projects with many different activities throughout its life. It may last from several weeks to even years, e.g., major remodeling or renovation jobs, custom homes, spec homes, land development.

2. What is the size of your company?

    • Are you a smaller (less than $500,000 gross revenue) construction company?

Even Small Construction Firms Need Job Costing

Business owners of smaller companies often believe that because they are deeply involved with the estimating, purchasing, and on-site management of each job, they don’t need job costing.

However, to survive the challenges of a smaller business, company owners – especially construction company owners – should insist on at least a simple job costing system! Basic job costing and company reports will reveal whether they are making or losing money for each job, as well as what’s happening with their bottom line.

Even basic reports will show if it’s time to modify prices or find ways to curtail costs. Owners will quickly see if they are making enough to stay in business AND if they are going to be able to bring home the profits they need.

Job Costing For Medium-sized Construction Companies

Are you running a mid-to-larger-sized construction company ($500,000 gross or above)?

Most companies implement a more extensive job costing system when they reach $500K or greater.

Why? As operations become more complex, owners and managers find that, without an accurate tracking system, it becomes nearly impossible to determine exactly where the company is:
> Making money
> Surviving but missing the mark, or
> Losing money.

These companies typically implement fairly detailed job costing systems.

3. Which software will you be using to create estimates and track job costs?

    • A stand-alone system such as Excel or another commercial package?
    • A fully integrated estimating and accounting system such as QuickBooks?
    • Accounting/estimating software designed specifically for construction companies?

How To Track Job Cost Information

Tracking Job Costs Using Spreadsheets

  • Trouble with spreadsheet for job costingPros:
    • Spreadsheets are inexpensive. Nearly everyone has access to some type of spreadsheet program.
    • If you know how to create formulas, there will be nothing complicated to learn. You’ll be able to subtract (simple) costs from income to see your gross profit dollars by job and add formulas to see your gross profit percentage by job.
  • Cons:
    • Spreadsheets can become very complicated very quickly. It may be fairly easy to track income and costs by job, but you’ll have to add subtotals to show those critical gross profits, calculations to show the gross profit margin percentage, as well as more rows and subtotals for other company costs.
    • Unless you’re a spreadsheet wizard, it’s easy to make mistakes or lose your data.
    • You likely won’t be able to “slice and dice” your information in various ways or easily summarize your information.
    • It will be very difficult to reconcile asset and liability accounts.
    • You will not be able to run standard financials (i.e., balance sheets and income statements) if you need them for lenders or investors.
    • Estimate vs. actual reports can become very complex and will require ongoing, manual, duplicate data entry.
    • In short, you’ll spend a lot of time creating a homegrown accounting system that won’t scale up as your company grows. (Note: Is this really where you want to invest your highly valuable time?)

Tracking Job Costs Through Software (QuickBooks)

A second option is to use software designed for standard accounting processes as well as job costing, like QuickBooks desktop products such as Pro, Premier, or Enterprise.

  • Pros:
    • This type of software is relatively inexpensive; various versions and licensing options are available.
      (NOTE: Be sure to contact us to obtain the best available pricing on QuickBooks products and services.)
    • In addition to using accounts to assign costs to jobs, it’s also easy to include your company overhead costs, keep track of other assets and liabilities, and perform reconciliations.
    • This type of software automatically yields standard company-wide balance sheet and income statement reports, as well as basic profit and loss by job info.
  • Cons:
    • Generic software such as QuickBooks will require customization to meet your construction company’s needs. (However, that customization is neither difficult nor costly to implement.)
    • You will need to learn basic as well as construction accounting concepts
    • You will need to learn how to use the software.
      Note: Most training can occur online via videos or direct computer-to-computer support.

Tracking Job Costs Through Software Designed For Construction Companies

A third option is to invest in software designed specifically for construction companies

  • Pros:
    • Software developers have designed this type of software with specific types of construction companies in mind. Thus, depending on the specific software, you will likely find prebuilt modules and reports designed to meet construction-company needs.
    • In addition to using accounts to assign costs to jobs, you should find it easy to include your company overhead costs, keep track of other assets and liabilities, and perform reconciliations.
    • This type of software typically yields standard company-wide balance sheet and income statement reports, as well as basic profit and loss by job info.
  • Cons:
    • This type of software is normally much more expensive.
      Why? Logistics. The costs of software development and support must be absorbed by a more limited user base. If you go “shopping” for this type of software, be sure to inquire about ALL applicable costs, including annual maintenance costs, as well as each of the various modules you may need to create a complete package.
    • Even though it has been designed for construction companies, the software will still require customization to meet your construction company’s specific needs.
    • You will need to learn basic as well as construction accounting concepts.
    • You will need to learn how to use the software. 
      Be sure to find out whether the training can occur online or whether it will require additional fees, travel, or time away from the office.

Four Familiar Job Costing FacesMany Faces of Job-Costing

  • Face 1: Basic Job Costing

Use a spreadsheet to track income and costs in rows, assign job results into columns, and use formulas to total up rows and columns.

This approach will provide basic information, but if you forget to enter any piece of data, there are no “proofing and balancing” checkpoints unless you build a more detailed “background” system.

  • Face 2: Tracking income and costs by account and by job (simple, but not very helpful):

Use accounting or job costing software to track income and costs by account and by job.

Enter your job-related income and costs into specific accounts (e.g., income, labor, contracted services, materials, etc.) for your jobs. You will be able to see a Profit & Loss by Job report that shows amounts for each job at a summarized account level.

  • Face 3: Tracking detailed job costs for job phases

Use your accounting software to also track detailed job phases, such as site prep, foundation, framing, etc., for labor, materials, subcontractors, and other job costs.

By tracking details (rather than just accounts), you will be able to see reports that show specific job-stage detail information for each phase of your job, as well as various aspects of income. This information shows exactly where your dollars are going!

  • Face 4: Tracking to also compare estimates to actual

Use accounting software to also enter and compare estimated income and costs to actual income and costs.

By entering both estimated and actual costs and income, you create a feedback system that lets you compare what you thought was going to happen with a job against what actually happened. When you are able to see estimated vs. actual income and cost reports (by job stage) for each of your jobs, you can use this information to tighten up on your estimating and pricing.

Which “face” of job costing is right for you?

As we stepped through Faces 1-4, you’ve likely already noted that each version was slightly more advanced. Each step in the progression provides additional tracking and feedback value.

Every construction company needs some type of job costing!

As a company owner, you are in the best position to decide which elements best reflect your company and which “face” will provide you with the information you need to help run your company most effectively, most efficiently, and most profitably.

Special Offer: Free eBook

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“A Tale of 4 Companies: A Job Cost & Gross-Profit Percentage Drama”

Enjoy this story about four construction companies that run their business processes (and info systems) in very different ways! “A quick, enjoyable read.”

This article by Diane Gilson is about gross profits and various construction job costing techniques. A preliminary version was initially published on Builder Partnerships’ website…

Customer Praise For Diane Gilson, Info Plus Accounting, and BuildYourNumbers.com

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