Construction job costing: How to use it to improve profitability

Construction job costing is a method used to track the costs associated with specific construction projects. This process includes assigning direct expenses like materials, labor, and production costs to specific jobs. It enables contractors to precisely gauge the profitability of each project and make well-informed decisions for future bids.

But how does it work, and what are its benefits? Find that out along with a construction job costing example and how to use job costing to price a construction job.

How does construction job costing work?

Benefits of construction job costing

What does a construction job cost structure look like?

How to use job costing to price a construction job

Improving your construction job costing

Navigate midsize business challenges and opportunities

Construction job costing FAQ

How does construction job costing work?

Construction job costing starts with project setup. Contractors create a job cost sheet before they start any project. This sheet includes details like the project name, location, estimated costs, and budget. Here’s how it goes forward: 

1. Cost tracking: All costs incurred during a project are recorded and categorized. It includes the cost of materials, labor, equipment rentals, subcontractors, and overhead costs.
2. Cost allocation: Direct costs, such as materials and labor used directly on the project, are allocated to the specific job. Indirect costs, such as overhead expenses, are distributed using a predetermined allocation method.
3. Progress tracking: The job cost sheet is routinely updated to monitor the project's progress and compare actual costs against the estimated budget. It helps identify any cost overruns or underruns early on.
4. Profitability analysis: Once the project is completed, the final costs (calculated through cost-plus pricing) are compared to the revenue generated to determine the project's profitability. This information is valuable for evaluating the performance of different projects and making informed business decisions.

Construction cost coding

Construction cost coding is a crucial component of job costing. It involves assigning unique codes to different types of costs, such as materials, labor, equipment, and overhead. This coding system helps organize and track costs effectively, making it easier to analyze project profitability and identify areas for improvement.

A well-structured cost coding system helps improve cost accuracy, enhance financial reporting, identify cost trends, and streamline auditing.

Benefits of construction job costing 

Job costing in the construction industry offers numerous benefits that can significantly improve efficiency and profitability. By accurately tracking and allocating costs to individual jobs, contractors gain valuable insights into project performance, identify cost-saving opportunities, and make data-driven decisions. 

Here are some of the key benefits of construction job costing:

• Accurate profitability assessment: Job costing provides a clear picture of each project's profitability by comparing revenue to actual costs—not operating costs. This information helps evaluate the success of different projects and identify areas for improvement.
• Enhanced decision-making: By tracking costs in real time, you can make informed decisions about resource allocation, change orders, and risk mitigation. This proactive approach helps minimize cost overruns and delays.
• Improved cash flow management: Job costing enables you to monitor cash flow closely and anticipate potential financial challenges, allowing for better cash flow management and reducing the risk of liquidity issues.
• Effective labor tracking: Job costing provides detailed information about labor costs, including hours worked, wages paid, and overtime expenses. It helps identify labor inefficiencies and optimize workforce allocation.
• Enhanced bid accuracy: Historical job cost data can help you develop more accurate bids for future projects. This reduces the risk of underbidding and ensures that projects are priced competitively.
• Improved compliance: Job costing helps you comply with various regulatory requirements, such as tax reporting and contract compliance. By maintaining accurate records of costs, you can demonstrate compliance and avoid penalties.

Job costing software also helps identify cost trends, supports continuous improvement, and facilitates risk management.

What does a construction job cost structure look like? 

A construction job cost structure offers a systematic framework for organizing and monitoring the costs related to a specific project. A well-designed job cost structure ensures that all costs are accurately allocated and accounted for, providing valuable insights into project profitability and performance. 

A typical construction job cost structure includes:

• Job codes: Unique identifiers assigned to each project or job
• Phases: Different stages or milestones of the project
• Cost types: Categories of costs, including direct materials, direct labor, and overhead
• Cost codes: Specific codes assigned to each cost element within a cost type
• Classes: Groups of similar cost elements

Here’s how to build a construction job cost structure:

1. Clearly outline the project's scope, including the deliverables, milestones, and expected completion date.
2. Determine the key cost elements involved in the project, such as materials, labor, equipment, subcontractors, and overhead expenses.
3. Develop a systematic way to categorize and track different types of costs. 
4. Assign specific codes to each job or project to differentiate costs and track them separately.
5. Break down the project into distinct phases or stages to track expenses at different points in the project lifecycle.
6. Make a comprehensive list of all cost types and assign corresponding codes.

Finally, group similar cost elements into classes to simplify reporting and analysis. For example, materials can be classified as lumber, concrete, and electrical supplies. It can help create a clear track record of the cost of goods sold (COGS).

Example of a job costs 

Imagine building your dream house. You've got the blueprint ready, but what about the budget? A typical construction job cost structure breaks down into several key components: 

• Direct costs: Expenses directly linked to the construction work in a project. Examples include materials, labor, and equipment costs. 
• Indirect costs: Supporting expenses that are necessary to complete a project but not directly linked to the actual construction work. Examples include project management or administrative costs.

The contractor’s profit is then the revenue from the project minus all of these costs.  

How to use job costing to price a construction job

Pricing a construction job can be challenging—like piecing together a complex puzzle. Each expense factor plays a crucial role in ensuring your project is profitable while staying within budget. Job costing allows you to break down these factors and create an accurate estimate. Here's how to do it:

1. Hourly wage costs: Start by calculating the labor costs. Determine the hourly wage rates for your crew, including any overtime or additional benefits. Multiply this by the estimated hours required for each phase of the project.
2. Cost of materials: Next, estimate the cost of all necessary materials, from basic building supplies like cement and lumber to specialty items. Don’t forget to factor in waste and potential price fluctuations.
3. Tools and equipment costs: Include the expense of renting or purchasing tools and machinery necessary for the job. If you already have the equipment, add the cost of fuel, maintenance, and wear and tear.
4. Project risk costs: Try to anticipate potential risks such as delays, weather-related issues, or unexpected complications. Adding a contingency buffer to cover these risks can prevent budget overruns.
5. Indirect costs: Consider indirect costs like project management, insurance, permits, and utilities. These costs may not directly relate to construction work but are important for project completion.

Lastly, include a percentage for overhead costs (office expenses, admin staff, etc.) and determine your desired profit margin. Combine all these elements to arrive at a competitive yet profitable price for the job.

Improving your construction job costing 

Effective and accurate job costing is the backbone of a successful construction project. By refining your approach at every stage—before, during, and after the project—you can optimize costs, enhance efficiency, and ultimately increase your profit margins.

Planning before a project

Start by creating reports to track costs to establish a baseline for more advanced methods. Then, organize your expenses by specific cost codes to streamline tracking and reporting. Finally, consider upgrading to specialized software before a project starts or during the less busy season. 

During a project

Monitor costs consistently to avoid surprises, and use real-time data from your software to adjust and make informed decisions on the go. Also, keep communication open with your team to ensure everyone is aligned with the budget and timeline.

After a project

Conduct a thorough review of the job cost reports and compare estimated vs. actual costs to identify areas for improvement. Use insights gained from completed projects to refine your costing approach for future jobs.

Navigate midsize and complex business challenges and opportunities

Navigating the challenges and opportunities of running a midsize or complex construction business requires a strategic approach to job costing. You can gain better control over your finances and improve profitability by fine-tuning your processes before, during, and after each project. 

If your business is more complex, an all-in-one enterprise resource planning system like Intuit Enterprise Suite can help you manage your finances with precision and ease. Keep growing with a more powerful suite, and boost productivity with business and financial management all in one solution. Make faster decisions with real-time data and visibility across your portfolio.