Midsize business

How to estimate construction job costing to improve profitability

Construction job costing is a method of pricing that uses information from the field to forecast a profitable construction project. Inaccurate or incomplete job costing estimates create unprofitable jobs for project-based businesses. An accurate assessment of costs verifies the financial viability of a project, creates a baseline for project management, and ensures customer satisfaction starting with a successful bid. 

In this post, learn how to accurately estimate construction job costing to keep your project on schedule and on budget before, during, and after a project, plus how to use accounting software to track job cost overruns.

How to price a job in construction

Job costing is a cost control method that spans the life of a project, starting with an estimate of anticipated costs and ending with a job profitability analysis.

different examples of accurate construction job costing

To create an accurate project estimate, outline the project scope and expectations and their likely costs. A good estimate that guides your project to a profitable completion should include cost categories like hourly wage, materials, equipment, risks, and indirect costs.

Hourly wage costs

Your human resources cost will be one of the project’s biggest expenses—and workers are arguably the most important input to successful project completion. Set hourly rates for labor training, general labor, specialty labor, and skilled tradesmen. Then, estimate how many workers you require in each category and the labor hours needed to complete the project. 

Wage calculation costs should also include deducted federal and state taxes from paychecks. To align your compensation with industry standards, reference construction cost guides with wage data. Then, consider whether you will be hiring union or non-union workers. 

The cost of material

Once you understand project details and scope, determine the cost of material for the project. This is known as material takeoff. Material takeoff should be a comprehensive list of material quantities and their expected costs. For a closer estimate of material costs, consider the following in your calculation:

  • Could there be fluctuations in supply or demand for my required materials?
  • Will there be delivery challenges that add to costs?
  • Do I need customized materials?
  • Will the installation of certain materials require special equipment or skill sets?

When performing the material takeoff estimation, get supplier quotes as soon as possible to understand lead times for orders, recommended materials with appropriate specs, and delivery timelines to match your build schedule.

Tool and equipment cost

Tools may be considered a direct or indirect expense depending on if the tools are purchased, rented, or previously owned. Determine if renting or owning the tools will generate more profit based on the project. Then allocate a tool use percentage to your project based on hours, days, weeks, or sale value of the contract to account for tool depreciation.

Project risk costs

Long projects are more susceptible to risks like rising material costs, inflation, or supply chain issues. Identify risk factors that could increase your costs or lengthen the project timeline such as:

  • Change orders
  • Supply bottlenecks
  • Delays in the build schedule of subcontractors
  • Bad weather
  • Worker injuries

To compile a list of potential risk factors and their costs, review past projects and the source of unexpected costs that cut into margins. This process is easier with searchable job costing records in a construction accounting solution.

Indirect costs

While wages and materials are directly billable to projects, you may incur other indirect costs that you need to account for in the estimate. These can include office rent, utilities, vehicle maintenance, and project-specific costs like non-billable hours for project estimation and administration, transport of workers and equipment, and legal fees. Estimate and allocate indirect costs to projects on a pro-rata basis.

While these five categories can serve as a guide for general cost considerations, you should also include costs like permit fees, prep work, trash removal, and other non-material costs. Look at past projects or use a checklist to make sure you consider all potential costs in your estimates.

How to improve construction job costing estimates before a project

As experienced contractors know, estimation is not a one-off exercise but an ongoing process. There should be several estimates leading up to and following a bid. The American Society of Professional Estimators prescribes a framework of five levels of estimation prior to a project starting, each with increasing accuracy as more information becomes available. Here is a brief description of each level:

  • Level 1: The initial assessment—sometimes referred to as an order of magnitude estimate—comes before the design phase and is considered a financial feasibility check. The estimator provides approximate figures based on the general project scope and his or her past experience with similar projects.
  • Level 2: You will use the level two estimate, or the intermediate estimate, to check whether the construction concept fits with the proposed budget in level one. The contractor should decide to continue or abandon the project after this estimate.
  • Level 3: This phase is known as the preliminary estimate. The preliminary estimate includes a reliable projection of labor and material costs. You will typically base initial project budgets on this estimate.
  • Level 4: The level four estimate, or the substantive estimate , occurs after schematic designs and blueprints are available and project objectives are fleshed out. The estimator creates a detailed cost analysis with an itemized list of expected expenses and projected labor hours per project phase.
  • Level 5: This is a definitive estimate compiled by referencing the actual cost of materials, cost of purchasing equipment, and other worksite specific costs. Tenders, bids, and cash flow management plans will be based on this estimate.

Construction job costing software

A construction accounting solution tracks and stores historical data and generates vendor and job-specific reports to create more accurate construction job costing estimates. By examining cost overruns per activity, reviewing cost allocation, and performing project profit and loss analyses, contractors can better anticipate the costs of future contracts.

Specialized reports can provide accountants and project managers with easy access to project cost insights like:

  • Costs by job
  • Cost-to-complete
  • Unpaid bills by job
  • Expenses not assigned to jobs
  • Billed/unbilled hours by person or job
  • Open purchase orders by vendors

In addition to providing data insights for more accurate estimates, your accounting software should include functionality that helps contractors manage costs and track their bottom line through the duration of a contract with automatic cost tracking, online invoicing, and change order functionality.

To get the most out of digital tools, make sure you have strong existing job costing practices.

Construction cost codes

Cost codes are key to tracking task-specific costs throughout the life of a project and help improve the accuracy of future job costing estimates. Software solutions that support cost tracking with customized or standardized cost code lists enable live cost updates and budget adjustments throughout a project, as well as easy historical cost analysis.

Many contractors base their codes on the CSI Master Format while others develop their own through years of experience in their construction niche. 

Using construction cost codes throughout the life of your project can help analyze overruns after a project and improve the accuracy of future construction job costing estimations. 

Manual construction job cost report

Reliable estimating processes help accurately track expenses throughout a project to understand when a project goes from projected profitability to projected unprofitability. This allows businesses to take swift action to manage overruns and maintain profitability throughout a project lifecycle. 

The following steps can serve as a general framework for contractors to build their own estimation processes:

  • Adopt a job costing practice that includes a financial feasibility estimate, a construction concept feasibility estimate, and a definitive estimate based on actual costs of materials and labor.
  • Make a reasonable bid estimate that accounts for the desired profit margin, indirect costs, and risk factors that can inflate project expenses.
  • Use a control estimate to keep costs in check and manage cash flow as a project gets underway.
  • Use cost codes to accurately track task-specific project expenses.
  • Consider whether your estimation processes could benefit from accounting software for contractors to eliminate redundant data input, automate calculations, and analyze historical project data.

How to improve construction job costing estimates during a project

Following a successful bid estimate, you need a work in progress (WIP) report to ensure the project remains profitable and invoices are paid based on the terms. Using a WIP report allows you to quickly assess whether you’ve underbilled or overbilled on the project. The report should factor in any changes to the scope of work, management of committed costs, and tracking estimates vs. actuals. Consider the following when building your WIP report:

  • Change orders: Project changes require an understanding of the variability of projected costs for an accurate revision of job costing during the project.
  • Committed costs: Calculate these costs by estimating upcoming payroll costs based on existing time sheets and open supplier purchase orders.
  • Estimates vs. actuals: Tracking estimated costs vs. actual costs mid-project provides visibility into areas that have gone over budget so you can scale back in others to remain profitable.
an example of a construction job cost WIP report

To account for changes to materials, labor use, or build schedule, the budget needs to be revisited periodically during a project. This helps to avoid cost overruns and ensure adequate cash flow to complete the project. If major changes in scope or timeline are necessary, a change order will likely be needed to secure the project’s continued viability.

How to improve construction job costing estimates after a project

Construction job costing post-mortem is nearly as important as the estimate. This helps realize losses in profitability and areas for improved estimation accuracy. Monthly or quarterly, review completed job costing reports to refine decision-making for future projects and bids. 

Construction job costing reports should include:

  • Estimated costs vs. actual cost
  • Labor reports
  • Cost code summary reports

While ending a project under budget is better than running over, it still means the estimate was inaccurate, and could potentially cost you future bids. Make adjustments to your construction job costing estimates based on previous reports to make more informed decisions and remain competitive in the industry.

With more accurate and efficient estimating and job costing processes through manual reporting or construction job costing software, contractors can deliver quality work with fewer unexpected costs to improve profits and customer satisfaction.

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