Why Construction Companies Should Use Job Costing

Job costing can be an issue that divides construction companies. While some embrace the necessary time and resources needed to accurately job cost, others do not see its value. However, job costing provides a comprehensive understanding of project costs, allowing construction companies to make informed decisions, optimize resources, and ensure profitability.

How To Job Cost

When considering job costing in your business, companies must understand what elements to consider. First, companies must account for direct costs, including labor, materials, and other costs directly associated with a specific job, including subcontractors and performance bonds. They must also account for indirect costs or overhead costs. These costs are not directly associated with a specific contract, such as insurance, depreciation on property and equipment, labor (i.e., back-office personnel, project managers, and estimators), and travel and automobile-related expenses.

Companies should already have an initial budget from the bid on a contract that accounts for all the direct costs involved in the job and then combine that with the estimated overhead that covers the indirect costs. Throughout the job, all direct costs must be properly recorded so the updated cost can be compared to the initial budget at any point. All departures from the original contract, such as change orders, must also be recorded in a timely manner. This allows the company to bill the customer for additional work and not leave them negotiating for less money later.

The Benefits of Job Costing

Companies should weigh the following benefits when deciding to dedicate the resources needed to accurately Job Cost:

1. Accurate Budgeting: Creating accurate budgets for projects by tracking all expenses related to a specific job allows a company to ensure their initial bids better align with the final costs of a job.
2. Resource Allocation: Understanding the actual costs of different projects helps in efficient resource allocation. Companies can optimize the allocation of materials, labor, and equipment to maximize efficiency and profitability.
3. Cost Control: Identifying cost overruns or unexpected expenses early in the project by monitoring costs in real-time enables construction companies to intervene in a timely manner to control costs and maintain profitability.
4. Billing Accuracy: Maintaining accurate job costing ensures that invoices sent to clients are based on precise and transparent cost data. This helps to maintain trust with clients and prevents disputes over billing discrepancies.
5. Profitability Analysis: Comparing estimated costs to actual job costs allows companies to determine the profitability of each project and identify areas where they're over or under budget to adjust accordingly.
6. Future Estimations: Analyzing historical job cost data serves as a valuable reference for estimating future projects. Companies can create more accurate bids and quotes, increasing the chances of winning contracts while maintaining profitability.

Still Unsure About Job Costing?

Some companies may still be concerned about the resources and time needed to accurately job cost. Job Costing requires a commitment from the top of a company down, and the importance of job costing must be clearly communicated to all involved. Project managers will need clear guidelines to be held accountable for accurate job costing. This means those employees may need to perform additional work, or companies may need to hire additional personnel to assist or train existing employees in job costing methodologies.

Additionally, the company may need to invest in new technology to track costs. However, many payroll processing services offer various packages to track employees and allocate their time to specific jobs. Also, there are software packages that help companies track costs by job and compare them to the budget.

Job costing is an investment in the future of your company. It ensures optimum cash flow that is generated and collected in a timely manner. Job costing provides accurate record-keeping to identify successes and avoid failure while ensuring the company can provide outside lenders and bonding companies with accurate financial statements.

Overall, job costing is necessary to ensure your company’s ongoing growth and success. Contact Baldwin CPAs for a consultation for advice on effectively implementing job costing and what tools to utilize. Our expertise in accounting and tax services for the construction industry will ensure you never leave money on the table.