Construction Job Costing: A Proven Guide to Project Profit Tracking

Construction job costing can determine your project’s profitability. A newer study, published by QuickBooks shows that 25% of construction companies risk insolvency after just two or three unprofitable projects. Your profits could suffer from even one small oversight in cost tracking that disrupts the project’s workflow.

Failed construction job costing methods lead to devastating results. Job cost tracking monitors every project expense, from labor and materials to overheads. Construction job cost accounting gives contractors a clear view of their project-specific business operations. You can make informed decisions by allocating costs to individual jobs and seeing where money flows. To cite an instance, see how higher profit margins in residential projects compared to commercial ones could help you focus on the more profitable sector.

This piece outlines proven approaches to construction job costing that help track project profits. You’ll learn everything from simple concepts to sophisticated tracking systems that prevent cost overruns. A well-laid-out construction job cost report can revolutionize your financial visibility and boost your bottom line.

Understanding Construction Job Costing

Construction companies use precise financial tracking methods to stay profitable in a variety of projects. A systematic approach that tracks every dollar forms the foundation of this financial control.

What is job costing in construction?

Job costing in construction tracks all income and expenses tied to specific projects through project-based accounting. This method monitors direct costs (labor, materials, equipment), indirect costs, and overhead expenses throughout a project’s lifecycle. Construction job costing differs from traditional accounting by categorizing costs and linking each expense to its specific project.

The system creates individual entities with numbered costs tied to their parent project. Contractors can track expenses as they happen and see exactly where money goes. Job costing helps construction businesses monitor their financial health at both project and company levels.

Why job costing matters for project profitability

Proper job costing’s detailed visibility affects your bottom line directly. A QuickBooks survey showed that 25% of construction companies risk insolvency after just two or three wrong estimates. Job costing lets construction firms stick to project budgets by comparing actual expenses to budgeted amounts continuously.

Construction companies can take quick action by spotting potential cost issues early. This constant monitoring helps catch budget variations before they become problems. Job costing helps businesses maintain cash flow and protect profit margins, especially when projects change during execution.

Job costing vs general ledger accounting

These vital systems serve different purposes in construction financial management. General ledger accounting shows a business’s overall revenue and spending, not individual projects. Job costing focuses on tracking costs for each specific project.

Job costing and your general ledger work together as complementary systems. The general ledger shows company-wide performance while job costing looks at individual projects. Your job cost data naturally fits with your general ledger, especially accounts linked to your cost of goods sold. This combination gives you a complete picture of both project and business performance.

Breaking Down the Cost Components

Construction projects need careful cost tracking in several categories to stay profitable. These components are the foundations of job cost tracking and financial management.

Direct costs: labor, materials, equipment

Direct costs link specifically to particular jobs. Workers’ hours, materials, tools, equipment, and subcontractor fees make up these expenses. These costs usually account for 70-80% of total project costs.

Labor costs cover workers’ wages and must factor in base rates, productivity levels, and overtime premiums. Material expenses include raw materials, prefabricated components, and transportation costs. Equipment expenses combine purchasing or rental fees with ongoing costs like fuel, maintenance, and depreciation.

Indirect costs: overhead and labor burden

Project management fees, owned equipment usage, and indirect labor expenses fall under indirect costs that support overall job management [25, 26].

Labor burden represents much of indirect costs beyond an employee’s base wage. Payroll taxes, health benefits, retirement contributions, workers’ compensation, and paid time off typically add 15-25% to base wages. Some contractors see this cost rise up to 70%.

Committed costs and subcontractor expenses

Financial obligations you agree to pay but haven’t settled yet are committed costs. These include:

• Open subcontractor agreements for unpaid services
• Purchase orders for materials or equipment
• Unposted payroll for reported but unprocessed time
• Site-based expenses against the project budget

Tracking committed costs shows cash obligations clearly and helps prevent budget overruns while ensuring accurate financial forecasts.

Conclusion

WIP reporting helps calculate completed work percentage against total spending. This calculation predicts remaining and final project costs accurately. It also identifies overbilling or underbilling situations.

The core team needs five data points to create effective WIP reports: contract price, total cost estimate, cost-to-date, billed-to-date, and projected cost to finish. This information helps measure all past, current, and future work for proper budget allocation.