As someone who works closely with SMB contractors every day through implementing the LiveCosts product ( a job costing software ), I’ve had the unique opportunity to look under the hood of hundreds of SMB construction businesses. This firsthand experience reveals how accurate cost management is not just a cornerstone but the foundation of success for profitable projects. This comprehensive guide focuses on construction job costing specifically for SMB contractors, diving into its components, benefits, challenges, and tools to optimise the process. I hope you find it useful.
Table of Contents
- What is Job Costing in Construction?
- Key Components of Construction Job Costing
- The Job Costing Process for Construction Projects
- Benefits of Job Costing for Construction Companies
- Common Challenges and Solutions in Construction Job Costing
- Job Costing Tools and Automation
- Case Study: Job Costing in Action
- Conclusion
What is Job Costing ?
Job costing is the process of tracking all costs and revenue associated with a specific project, for example labour, materials, equipment, subcontractors, and overhead. By assigning costs and revenue to individual jobs, contractors can evaluate profitability as they progress through the various phases of the job. This can help to identify potential inefficiencies, overruns and monitor budgets as they happen.
Why is Job Costing Important in Construction ?
Construction projects often involve complex workflows, fluctuating material costs, and tight deadlines. Profit margins are also notoriously low so job costing provides an opportunity to hold a tight reign on operations to ensure :
- Actual costs are equal to estimates ( or below hopefully ).
- Bidding accuracy increases through learning for future projects.
- Cost overruns are prevented and delays avoided.
Where do you start with Job Costing?
Getting started with job costing can seem overwhelming, but breaking it into manageable steps makes it more approachable. Begin by identifying what level of detail you want from your efforts. Most contractors start by assigning costs to a job reference number but this method often does not provide enough detail. Often a good starting point is to look at the estimate. Contractors make huge efforts to ensure accuracy in their estimate but oftentimes they can then be cast aside when the project goes live.
Start by developing a detailed project budget, categorising expenses like labour, materials, equipment, and overhead. They often are further categorised with a work breakdown structure (WBS) that may reflect the original estimate,
Example: headings such as Groundwords, Substructure, Blockwork broken down again by labour, materials, equipment, and overhead.
In some cases, this WBS can sometimes align with the headings on a Bill of Quantities providing clarity and organisation. It’s also important to have an organised process for real-time cost tracking, ensuring that every expense is assigned to the correct categorisation & budget. By building a solid foundation with accurate estimates and real-time tracking, you can gain actionable insights into project performance and profitability all against the original estimate for a feedback loop.
Key Cost Components of Construction Job Costing
Below is a list of the main cost components:
1. Labour Costs
- Wages, benefits, and overtime for employees.
– Generally includes holiday pay and employee taxes
– Hourly rates should be the full cost of the employee to the business - Labour hours by role or individual.
– Assign accurate rates to each employee
– Assign hours to each budget / task
2. Material Costs
- Direct materials used for the project (e.g., concrete, steel).
- Freight and delivery charges.
- Track either through Purchase Orders or assign invoices directly to budget
3. Equipment Costs
- Depreciation or rental expenses for machinery by project and budget.
- Fuel costs.
- Maintenance ( maybe seen as an overhead )
Keep a log of usage and costs
4. Subcontractor Costs
- Payments to third-party contractors.
- Performance-based bonuses or penalties.
- Track either through Purchase Orders or assign invoices directly to budget
5. Overhead Costs
- Administrative expenses (e.g., office rent, utilities).
- Insurance and permits.
- Track directly to budget for project specific overhead
- Apply an overhead percentage to spend for general business overhead
The Job Costing Process for Construction Projects
Here’s a step-by-step workflow for applying job costing to construction projects:
Step 1: Create Budgets
- Develop a detailed budget based on estimates & project requirements.
- Budget in headings similar to bill of quantities summary page (Work breakdown structure ,WBS)
- Record variations to budget and contract value as they happen
Step 2: Record Costs in Real-Time
- Use digital tools to record time based costs / hours.
- Record all other costs as they happen such as material usage, and equipment expenses
Step 3: Allocate Costs to Jobs
- Assign each expense to a specific job and heading. (WBS)
- Also categorise costs by type ( e.g., labour, materials, sub-contract etc ).
Step 4: Review and Analyse Data
- Compare weekly, actual costs with budgeted amounts.
- Review as each budget is complete
- Identify discrepancies and take corrective action.
Step 5: Generate Reports
- Use reporting tools to evaluate profitability and identify trends.
- Share insights with stakeholders & estimators to improve decision-making.
Benefits of Job Costing for Construction Companies
Job costing offers numerous advantages tailored to the construction industry:
- Enhanced Budget Control:
-
-
- Real-time expense monitoring to avoid overruns.
-
- Improved Estimate Accuracy:
-
-
- Leverage historical data for precise and competitive future estimates.
-
- Better Resource Allocation:
-
-
- Optimise the use of labour, materials, and equipment.
-
- Increased Profitability:
-
- Identify inefficiencies and improve cost margins.
Common Challenges and Solutions in Construction Job Costing
Challenge 1: Communication Breakdowns
Problem: Poor communication between office and field teams often leads to inconsistent cost reporting and delays in decision-making.
Solution: Involve site teams in the process. Implement collaborative tools that integrate real-time updates, ensuring seamless information flow across all stakeholders.
Challenge 2: Delayed Data Entry
Problem: Delayed entry = Delayed reports. Manual entry of costs and delays in recording expenses result in outdated data, making it difficult to track budgets effectively.
Solution: Create a process where costs are entered in real-time.
Challenge 3: Scope Changes and Variations
Problem: Frequent changes to project scope or unexpected variations can disrupt budgets and schedules.
Solution: Develop a structured change order process that tracks variations and adjusts budgets accordingly.
Challenge 4: Tracking Indirect Costs
Problem: Indirect costs like administrative expenses or equipment maintenance are often overlooked, leading to underestimated project costs.
Solution: Ensure that indirect costs are accurately categorised and included in the job costing process to improve overall cost control.
Challenge 5: Lack of Integration Across Systems
Problem: Using separate systems for job costing, procurement, and accounting creates inefficiencies and increases the risk of errors.
Solution: Adopt integrated software solutions that centralise project data, streamline workflows, and eliminate silos for greater efficiency.
Job Costing Tools and Automation
Streamlining job costing processes is essential for reducing errors, saving time, and improving the accuracy of project management. By leveraging the right tools, contractors can centralise data, streamline workflows, and gain real-time insights into job performance. Below are key areas where automation can enhance construction job costing.
Track and Monitor Costs in Real-Time
Accurate job costing starts with real-time tracking. Tools like LiveCosts ensure every labour hour, material usage, and equipment expense is recorded as it happens. This allows contractors to stay on top of budgets and avoid surprises.
Integrate Procurement and Cost Tracking
Integrating procurement with job costing enables contractors to track purchase orders, material costs, and supplier invoices seamlessly. With software that centralises these processes, you can ensure that every cost is tied back to its corresponding job.
Generate Individual Project Reports
Reporting tools allow contractors to evaluate project profitability and share data with stakeholders. LiveCosts provides custom reporting options that break down costs by category, phase, or job, offering clear insights into financial performance.
Mobile Accessibility for On-Site Updates
Empower your field teams to input data directly from the job site. Mobile-enabled solutions make it easy to update costs on the go, ensuring your data remains accurate and up-to-date.
Automating job costing simplifies the process and reduces errors. Tools like LiveCosts provide:
- Mobile Accessibility: Empower teams to input data from the field.
- Real-Time Tracking: Monitor costs as they happen.
- Custom Reporting: Generate detailed cost reports with ease.
- Integration with Accounting Software: Streamline workflows.
Case Study: Job Costing in Action
Kelbuild Ltd, a building contractor specialising in restoration and conservation works across Dublin and the Midlands (Ireland), faced significant challenges due to excessive paperwork from purchase orders and delivery dockets across multiple sites. This manual process caused delays in paperwork reaching the head office and created a substantial administrative burden on the accounts department.
By implementing LiveCosts ( a job costing software ), Kelbuild achieved:
- 60% Reduction in Accounts Data Entry Time: The accounts team experienced a significant decrease in data entry tasks, freeing up time for other responsibilities.
- Real-Time Cost Visibility: The Quantity Surveying department gained immediate insights into the live costs of projects as they progressed, enabling better budget control.
- Enhanced Efficiency: Generating purchase orders directly from mobile devices reduced reliance on paper and improved overall operational efficiency.
This transformation not only streamlined Kelbuild’s operations but also significantly improved overall project profitability.
Conclusion
Job costing is an indispensable tool for construction companies striving to maximize efficiency and profitability. By understanding its components, overcoming challenges, and leveraging automation tools like LiveCosts, contractors can ensure projects stay on track and within budget.
Learn more about Job Costing with LiveCosts
Written By :
Niall Brennan
Product Manager & Founder @Livecosts.com
