There are challenges and opportunities with accounting for businesses in the construction field. My first job after graduation was as a Controller for a modular construction company—so I know well what accounting issues need to be dealt with.
Most construction work is done on a fixed price basis so “knowing the numbers” is vital to success.
Labour and materials are typically the bulk of the job costs, but overhead is an element as well. Overhead includes administrative expenses such as rent, office supplies, administrative salaries and telephone.
There are four elements in pricing construction jobs:
- Labour – estimation of hours needed to complete the specific tasks – the part that requires the greatest amount of skill and experience to get it right
- Materials – a materials list is taken off the drawings, then priced
- Overhead – usually a percentage added to labour and material costs
- Profit – often a percentage of the above costs and can disappear in a heartbeat when there is bad estimating or mismanaged project control.
Profitability and Accurate Job Costing go Hand in Hand
The bottom line of any accounting system is to have accurate financial results for the construction company and each job in a timely manner to provide management with up-to-date information to operate profitably. Skipping this is the road to failure which unfortunately happens all too often with construction companies.
Job costing is a method of recording the costs of individual construction projects. General accounting records overall income and expenses while job costing is an extra step to allocate labour, materials and overhead to specific jobs or projects.
Just preparing an annual financial statement (Balance Sheet and Profit & Loss) for tax purposes is the absolute irreducible minimum but won’t provide the estimator and management with much needed individual job costing results.
Benefits of Job Costing
- Project tracking in real time by comparing actual costs against estimated costs to avoid cost overruns or take fast actions when there are overruns. At a minimum this should be done weekly.
- Detailed costing information is a basic requirement to do progress billings to customers. Erroneous billings will result in very bad relations and lack of trust. The percentage completion has to be accurate to produce accurate customer invoices. This is at the heart of cash flow management for a construction company.
- Generates labour costs for a job or parts of a job which is typically the most challenging part of job cost management and future estimating. Materials are much easier to estimate as prices are easily available from suppliers and wholesalers.
- Provides management with individual “profit and loss” reports for each job and even parts of a job which are vital for current operations a future job bidding.
- Provides job costing information to monitor jobs on a daily and weekly basis which is vital to avoid labour cost overruns. It is far too late to “manage” a job using just annual financial statements.
- While employees and managers need to provide additional information, it is a small price to pay for accurate job costing information. Ensuring that projects are on time and on budget is a daily task of project managers and management.
- There can be a number of projects on the go at any one time, so it is important to have costing data to manage by.
Resources for Accurate Construction Job Costing
There are many technology resources available for job costing:
- Online time sheets such as TSheets (web-based and mobile time tracking and employee scheduling app)
- Estimating software
- Accounting software such as QuickBooks, Sage or Premier Construction Software.
Timely and accurate job cost accounting will help avoid project overruns and stay in control of your business’s profitability.
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