Construction Job Costing: An Essential Guide 2023

If you aren’t receiving the data you want, revamp your cost structure. Job costing can be flexible, be open to trying a variety of cost structures until you find your most successful version, effective construction job costing is different for each company. The overall goal of job costing is to help companies record and report the profitability of each completed project. Job costing is most effective for businesses that are using or providing a variety of products and services, like the construction industry.

1. Put simply, job costing in construction accounting software streamlines the entire job costing process, giving you faster and more accurate insights into how much your construction jobs cost.
2. Aside from keeping all of your costs organized, easy to access, and aligned with your accounting, job costing also gives you real-time financial visibility during projects.
3. They need it timely, they need it accurate, and they need it relevant to managing their jobs properly.
4. This involves tracking the hours worked by field teams against specific job and cost codes in real-time.

By going through each of these areas in detail, it’s possible to generate a much more accurate picture of what the job costs will be. And sure, getting it right can be complicated and time-consuming – but skipping it simply isn’t an option if you want to keep your project costs on track and your business in the black. John Meibers is vice president and general manager, Deltek ComputerEase. He has more than 35 years of experience serving the construction industry. John has been a leader at Deltek ComputerEase since 2000 serving over 4,500 contractors nationwide. In addition to actual labor costs for regular and overtime employees, you need to account for employer-based payroll taxes (burden) as well as costs for providing benefits to employees (fringes).

Project Budget Example

To calculate working capital turnover, first calculate working capital, which equals current assets minus current liabilities. General contractors need to subtract subcontractor payments from revenues to calculate working capital turnover, as this money simply passes through the GC from the owner. Even when they are not collectible within the “current” timeframe of 12 months, retainage accounts are typically shown as current accounts and current liabilities, respectively. As a result, the financial statements of construction companies often include a paragraph describing the special treatment of retention.

Specialized Construction Billing

On the other hand, a company with a debt-to-equity ratio of less than 1 may not be using enough debt financing to take on new projects and grow. Assets are a company’s financial resources — in other words, anything that is cash or could likely be converted to cash. Cash accounting is the simplest and most straightforward approach to tracking finances, but it’s also the most limiting. As a result, construction companies often find it difficult to match the efficiency of companies that make the same products repeatedly in a controlled location.

The classic spreadsheet can be effective, especially if there are multiple spreadsheets being used for every project — at least one for each of the three main categories of materials, labor and overhead. For most companies, however, some construction job cost accounting form of job cost accounting software is essential to be able to organize and track the immense costs involved in big scopes of work. That leaves contractors and construction accountants with a choice of revenue recognition method.

With this software, you can develop and build your job cost structure and store all of your project data. As figures get larger and more complicated, these programs can still instantly calculate and generate reports — streamlining the job costing process. This is a very basic, high-level overview of how job cost accounting calculates a company’s spending per project. Job costing allows construction businesses to effectively track and allocate expenses related to each project, enabling accurate budgeting and financial reporting.

Retainage is the predetermined amount of money an owner may hold back from payment until they’re satisfied with contract completion. A common retention amount might be 5-10% of the contract value or invoiced amount, but it can be less or more. The idea of retention is to provide the customer with some security against any deficiencies or defects on the project. An accrual method will recognize an expense when it’s incurred and revenue when it’s earned, even if cash hasn’t come in or out yet.

Monitor job cost reports.

All these are in a Work In Progress report, and so that progress report literally shows you, the owner of the construction company, how much profit you have left in a job. And even just your chart of accounts level, spending a little bit of money up front to get a good process in place is worth, from my perspective, it’s well worth spending a little bit of money. And this technology is amazing, but you’ve got to not just only get the technology, but sometimes pay for getting it set up right.

Accounting for all of these areas in detail results in more revenue and prevents the project from going over budget. Plus, it can give you pivotal insights about the profitability of each job so you can plan accordingly and continue to improve on future projects (i.e., negotiations, team members, material sourcing, etc.). It should also provide sufficient detail to track expenses accurately.

And if anybody has been working on this kind of thing, you probably already know that. But to answer your question, there are a lot of things that we can do to get these things in place. So number one, you got to figure out getting your labor costed properly, but then if you got that, then you can figure a burden to cover workers comp and these other things that are tied to payroll.

Construction businesses that have annual revenues exceeding $25 million over the last three years are required to use the percentage of completion method. These larger businesses also include general overhead costs within each project, which has the advantage of providing clear insight into exactly how profitable each job is. By the time a company using cash accounting recognizes a cash flow problem, it’s often too late to do anything about it. That’s why most construction businesses use more sophisticated accounting methods that enable more active financial management practices. By tracking your expenses and producing accurate job cost reports throughout the project, you can proactively identify ways to reduce costs. This creates lower bills for your customer and/or higher profits for you.