In construction, every project is unique, with complex labor, material, and equipment costs. Companies also deal with changing economic conditions, with interest rates and inflation adding to the challenge of staying profitable in recent years.
These elements make accurate job costing the foundation for profitable projects and sustainable business growth. However, many construction companies still struggle with manual processes, siloed data, and unclear cost tracking, leading to profit leaks and missed opportunities.
By optimizing job costing through digital tools, construction companies can gain real-time insights and control costs to improve project profitability. Below, we’ll explore common job costing challenges, the strategies to streamline your efforts, and the benefits your construction company can expect.
Job costing is the process of tracking and allocating all your direct and indirect costs — labor, materials, equipment, subcontractors, etc. — associated with a specific construction project. This accounting task breaks down all project-related expenses to understand where each dollar of your project is spent and if your costs are aligned with the project’s budget.
Job costing allows you to track projects while they’re in progress, helping you determine if a project is profitable or running over budget. It empowers project managers and CFOs to make real-time decisions to address overruns or make adjustments to keep costs controlled and projects on track. Additionally, project costing informs more accurate bidding for future projects, helping you set more realistic budgets by understanding your true costs.
Job costing relies on tracking accurate data from multiple sources across your construction company and projects. Without the right systems and strategies in place, your business could face:
Traditional job costing processes use spreadsheets, paper time cards, and other paper-based documents, which can take hours to comb through and easily lead to human errors. This time-consuming, manual workflow also delays data visibility, meaning by the time you see the numbers coming in, you may have already lost significant profit.
A lack of integration between your field tools (such as time tracking apps) and accounting systems creates data silos, leaving valuable information disconnected or inaccessible between your teams. As a result, your field teams and back-office staff may work with outdated or mismatched information, impacting project productivity and profitability.
Without the right tools and software, your labor hours, equipment usage, and material costs aren’t always captured in real time. Delayed reporting in any of these factors makes it hard to identify cost overruns until it’s too late.
Poorly defined or inconsistent methods for the allocation of overhead costs, including administrative expenses, maintenance costs, and equipment depreciation, can lead to skewed profitability data.
Without standardized job costing processes, different project managers or teams may use inconsistent methods for tracking costs, making reporting unreliable.
By optimizing your construction job costing, you can overcome the challenges above and see direct benefits for your business that support long-term growth and sustainability. Your construction company can:
Improve profit margins: Accurate job costing identifies profit leaks and ensures your projects stay on budget, which is key in an industry like construction with tight profit margins.
Reduce cost overruns: Real-time cost tracking allows project managers to make quick adjustments when expenses exceed budget expectations, ensuring you stay on track financially.
Smarter bidding and estimating: Insights from past construction projects enable more accurate bidding on future jobs, improving your win rates while maintaining profitability.
Enhance financial visibility: Real-time dashboards and financial reports empower CFOs and Controllers to make data-driven decisions to drive growth.
Strengthen client and stakeholder relationships: Clear, accurate reporting builds trust with your clients, investors, and other key stakeholders.
To make the most of your construction job costing, consider implementing the following methods:
Why It Works
Automating your labor, material, and equipment tracking through software or tools that integrate with your accounting system eliminates manual errors and saves time.
How To Implement
Use digital tools like hh2 Remote Payroll to accurately capture labor hours in the field and sync them directly with your ERP system. You can also integrate expense-tracking tools with your accounting platform for seamless cost updates.
Why It Works
Project managers and CFOs can make proactive decisions and better manage project budgets with access to up-to-date financial data.
How To Implement
Set up dashboards to monitor job costs, labor utilization, and profitability in real time. Using mobile-friendly tools ensures your field team can input accurate data while on-site.
Why It Works
Developing consistent methods for tracking and reporting projects ensures accuracy and reliability.
How To Implement
Create templates and step-by-step processes for cost tracking. Make sure to include elements like labor codes and equipment categories for a more detailed breakdown of costs. Then, train your teams — both in-field and office staff — on these standardized job costing procedures.
Why It Works
Insights from your completed projects inform better budgeting, estimating, and scheduling of trades and equipment for future projects.
How To Implement
First, review your past project data to identify patterns and recurring cost overruns. Are you meeting expectations in terms of overtime pay or material costs, or are they running higher on a consistent basis? Using this information, you can then build predictive models for labor hours, materials, and equipment needs based on your past performance.
Why It Works
To ensure each project reflects its true profitability, it’s important to properly allocate your overhead costs.
How To Implement:
Use percentage-based or activity-based costing methods for more precise allocation. Percentage-based job costing applies a fixed percentage of overhead costs to your labor, materials, and equipment expenses, while activity-based accounts for the specific consumption of overhead costs during each project. You can also automate overhead calculations within your ERP or accounting system.
Technology plays an important role in streamlining and even automating many job costing processes. Here are a few to consider:
Not sure where to start optimizing your job costing process? Just follow our five-step guide:
First, assess your current workflows, tools, and pain points in your job costing process. Knowing what areas are already streamlined and which still need improvement will help you determine where to start.
You also need to identify where automation and integration through technology can eliminate inefficiencies within your job costing process. Then, you can select tools and software solutions based on your needs.
Next, you’ll need to train your field and office teams to ensure they understand how to use the new tools and follow your construction company’s standardized processes.
Deploy mobile and cloud-based solutions to capture construction project costs accurately and in real time. These tools automatically sync with your accounting and ERP systems for more efficient job costing.
Review your processes post-project regularly to identify areas for improvement and make adjustments. This step allows for continual optimization and improved profitability.
Optimized construction job costing is more than just a financial process; it’s also a strategic tool for driving profitability, improving decision-making, and setting your business apart from your competitors. hh2 solutions can help your construction company automate job costing and maximize profitability — learn how by scheduling a demo today.