Job costing is a methodical way for construction companies to keep track of all the costs involved in completing a project. With a proper job costing system in place, contractors can quickly narrow down which projects make the most profit — or cause the biggest losses.
While a project’s entire cost can be found by adding together prices for labor, material and general overhead, these can be broken down further into smaller sub-categories.
For example, the cost of materials can be divided into the cost of raw materials — like plywood and sheet metal — and the cost to use required equipment. Knowing exactly where all of your costs are coming from on the job is where job costing comes into play.
When you start a new job, you’ll already have your estimated cost from your bid, but that number is liable to change as you move to complete the project.
From unexpected delays and material shortages to fluctuating gas prices, each project has several moving parts that can impact the overall financial burden of the job. This is especially noticeable as the construction industry continues to feel the effects of the pandemic.
Effective job costing can help you keep track of it all.
There are four key terms frequently used in job costing: jobs, phases, cost codes, and cost classes.
While these terms may differ depending on the software or system you use, the concepts behind them remain the same.
There are many terms and phrases to learn when it comes to construction accounting in general, and job costing is no different.
But don’t worry, we’re here to help.
What Are Jobs in Construction Job Costing?
Jobs sit at the top of the funnel because they define the entire project. Let’s say your company has been contracted to construct a brand-new grocery store: “Bob’s Grocer.”
Bob’s Grocer would be considered the “job.” Everything related to completing the project — from start to finish — will ultimately fall under this “job” category.
This category should be dedicated to only defining the job. This organization will prove useful if your company is juggling several different projects at once.
Every cost — from labor and materials to equipment and overhead expenses — will be attributed to the job as we move down the funnel. A dedicated job category will help you visualize the income and expenditures associated with the job.
You can see the start of our job costing funnel below, beginning with our job:
What Are Phases in Construction?
Phases are the second category and the next tier down on the funnel. Each job can be divided into several different phases.
“Phases” can be thought of as the essential, broad steps that must be taken before a construction project is complete. A single phase may be made up of several different tasks.
Phases are completed in the same order for every project. For example, you cannot begin to frame a building before you excavate the land and complete the foundation work.
Let’s look at our example: when you’re constructing Bob’s Grocer, you first have to complete site preparation and excavation (phase one), from there you move onto foundation work (phase two), and then you frame the building (phase three). In this third phase, we would also complete the rough plumbing, electrical and HVAC work.
You will continue to complete new phases until the project is complete. The number of phases and sub-phases your job will have will depend on the complexity of the project.
In our “Bob’s Grocer” example, we can continue divide the project into many different specific phases including installing drywall and flooring (phase four), instating final touches such as landscaping and painting (phase five) and commissioning and final inspection (phase six).
To keep our example simple and easy to follow, we’ll only divide the project into three very broad phases: excavation, construction and finalization.
Each of these three “phases” would start a smaller funnel under the broad job title of “Bob’s Grocer.” You can see where we’re at in our job costing journey below:
What Are Cost Codes in Construction?
Within each phase, you’ll find several cost codes.
Cost codes in construction are aligned the individual tasks you must complete as you move through each phase. Everything that goes into completing each phase is a cost code.
For example, if we’re completing the foundation work phase, we might have eight cost codes: site work, forming, mixing, placement, early finishing, troweling, final finishing and curing.
Let’s look at the construction phase for “Bob’s Grocer”. In order to move through this phase, you must complete several tasks such as pouring concrete, framing and drywalling. Each of these tasks will have its own cost code.
Of course, completing the construction phase of the project will require more than just these three tasks, but for ease of understanding, let’s assume that’s all that must be done.
Within our funnel chart, each cost code will be a new branch that stems from its respective phase. In this example, we now have three cost codes branching out from our construction phase.
What Are Cost Classes in Construction?
Cost classes conclude our funnel chart and branch out beneath each cost code.
All cost codes in construction can generally be divided into a few major cost class categories. Some of the more common categories include labor, materials, subcontractors, equipment, labor burden and other. While these cost codes are used by FOUNDATION, cost code names will vary depending on the system and software being used.
Cost classes allow contractors to calculate the monetary amount required to complete a project and help them understand where exactly their money is going.
Going back to our “Bob’s Grocer” example, let’s consider the framing cost code. This cost code can be broken down into the six cost classes.
Let’s say we get to the end of constructing Bob’s Grocer and realize the project went over budget. We can dive into our cost classes to discover where the money went.
In this example, let’s assume we budgeted $500,000 to frame Bob’s Grocer.
When we look into our cost classes, we see that we paid our laborers $200,000 to complete the project, spent $100,000 on materials, and had $50,000 in equipment costs. Halfway through framing, we realized we were behind schedule, and had to bring in subcontractors to whom we paid a total of $250,000.
Looking at this cost class, we can see we spent a total of $600,000 drywalling Bob’s Grocer. This means we went $100,000 over budget on framing. We can use this information to ensure we are charging the correct amount for our service. This knowledge can also help us to price our next project more appropriately.
How Can Accounting Software Help with Job Costing?
Construction accounting software like FOUNDATION® can help to remove the margin of error that costs construction companies thousands. Our technology removes the guesswork from job costing, giving you and your crew one less thing to worry about.
Between jobs, phases, cost codes and cost classes, there’s a lot to keep track of when it comes to job costing in construction. Whether you operate your own crew or look after the books for a larger company, it’s important to realize that construction accounting has a lot of moving parts and requires considerations that other industry professionals don’t need to worry about.
With proper job costing, Bob’s Grocer could have been completed on-budget. Specialized construction accounting software could have provided frequent job costing reports that would allow managers to connect overages to exact details on the job. Had this been the case, managers could have taken timely steps to reduce or mitigate the $100,000 overage on framing.
Paired with a proper job costing system, construction accounting software could have helped to keep Bob’s Grocer from encountering this last-minute budgeting crisis.
It can be hard to keep things in order, especially when your focus is divided. Out in the field, your attention is on completing a high-quality job that your client will love. Finishing tasks on time is another concern.
With all these things in mind, it can be easy to let job costing slip by the wayside or settle for general estimates and rough numbers. But accurate job costing is essential when it comes to keeping projects on budget — something you, your employees and your client will appreciate.
When you embark on a construction project, many factors must be taken into consideration. Job costing is among these factors. For an easier way to job cost, check out this free product tour of FOUNDATION® construction accounting software.