Job Costing
Any Construction project hinges on effective job costing
The profitability of any construction project hinges on effective job costing. Given the narrow profit margins in the industry, understanding and managing expenses is crucial. Job costing enables you to forecast costs, allowing you to identify potential issues before they impact your bottom line. Questions such as whether the work can be completed within the available budget, what risks may arise, and what steps are necessary for success become clearer.
With a robust job costing approach, you can precisely predict, record, and manage the costs associated with each project. By tracking expenses related to materials, labor, subcontractors, and equipment throughout the job, you gain a real-time view of your spending, facilitating more accurate future cost estimates.
Using the Right Tools
Given the critical nature of job costing, it’s essential to utilize construction-specific software designed to support these processes. Standard accounting software often lacks the comprehensive job costing capabilities needed in construction, increasing your financial risks. As Meibers notes, “A construction-focused software system integrates all job-costing functions, providing a unified approach to managing your costs effectively.”
THREE IMPORTANT JOB COSTING TERMS
Committed Costs
Many contractors overlook the importance of tracking committed costs, which can lead to issues like double billing and costly errors. Committed costs refer to financial obligations that must be monitored, such as active subcontractor agreements, purchase orders, or the hours worked by labor and equipment on-site.
Utilizing job costing to keep tabs on committed costs is essential, as it provides a comprehensive view of all expenses linked to each project. This clarity allows you to assess the overall financial health of your projects and accurately determine the remaining budget available for any additional costs. By doing so, you can make informed decisions and maintain better control over your project finances.
Work-in-Progress (WIP) Reporting
Many contractors prepare Work-in-Progress (WIP) reports only when required by banks or bonding agents. However, WIP reports should be generated and reviewed regularly, as they are invaluable tools for effective business management. These reports enable proactive oversight of ongoing projects, allowing you to make informed decisions mid-project and allocate resources more effectively based on real-time job data.
A contractor’s financial statement is incomplete without a WIP statement. By embracing WIP reporting as a core practice, you can enhance your project management and overall financial insight.
Equipment Costing
Accurate equipment costing is essential for understanding the true expenses of a project. While allocating costs for rented equipment is relatively straightforward, many contractors find it challenging to accurately account for the costs of owned equipment.
A best practice is to charge a standard rental rate for your equipment and compare your actual costs against this benchmark. Evaluating the total cost of owned equipment can often feel like guesswork, particularly when you lack reliable data for informed decision-making. To address this, contractors should track and manage all associated costs, including costs-to-own (such as depreciation and insurance) and costs-to-operate (like maintenance and fuel).
While some contractors rely on spreadsheets or standard accounting software to monitor equipment usage, this approach can be labor-intensive and error-prone, as it lacks real-time data and centralized management. A system specifically designed for equipment costing can provide the accuracy and efficiency needed to optimize your equipment management.
“Job costing without frequent
WIP reports is like looking at
the rearview mirror in a car. It
only tells you where you were,
and not how to stay on track
moving forward.”
— John Stenger, CPA, Owner, Managing
Member at Stenger & Company, specializing
in construction accounting
There are three common calculation methods to use when
calculating WIP and they are the following:
1. Units Complete – Units completed in conjunction with the percentage of budget spent.
2. Percent Complete – When you don’t have a measurable unit,
track progress in comparison to the estimated budget.
3. Cost to Complete – Cost to date + cost to finish = your
revised estimate.
Shapcott & Lauber can significantly enhance your construction company's job costing processes by providing specialized knowledge, expertise and software solutions that streamline expense tracking and reporting.
Our services enables contractors to accurately predict, record, and manage costs associated with materials, labor, subcontractors, and equipment in real time. By integrating these functions into a single platform, Shapcott & Lauber helps construction companies gain a comprehensive view of project financials, allowing for proactive decision-making and better resource allocation. This ultimately leads to improved profitability and reduced financial risk on every project.