A construction business is like a three-legged stool. One leg is the ability to build the structures that customers are looking for, the second leg is customer service and marketing, and the third leg is accounting. No business can run successfully without accurate accounting but for construction, where the costs of a project can vary based on anything from supplier availability to customer whims to the weather, accurate accounting is vital to staying within budget, making a profit, and improving your financial efficiency for more profits in the future.
Construction contracting isn’t just about sorting the invoices and making sure that vendors and paychecks are paid on time. One of the most complex tasks in the construction business is job costing, the mirror image of estimates. Job costing requires the construction team and the accountant to work together to define every accrued cost from the light fixtures to the last box of nails. Job costing allows you to know exactly how much a project cost the company and how much of a profit margin that leaves you after the customer pays. Here are five tips for keeping your job costing well-organized and accurate.
Separate Your Detailed Estimate into General Categories
The estimate and job costing are directly linked and occur at opposite ends of a project. When first working with a customer, the contractor gives an incredibly detailed estimate of job costs. This is calculated very tightly based on exactly how much lumber, drywall, and pipes will be needed along with the cost of each individual light fixture and floorboard. Estimates tend to be incredibly detailed to give the customer a clear picture of how what they want equals the cost quoted.
Job costing, on the other hand, needs to match your estimate but is unlikely to be as detailed. When your accountant gets an invoice from your light fixture supplier, that should closely match the estimated cost for all the light fixtures in the project, or at least those from that particular supplier. Along these lines, your job costing report should be made of categories from your original estimate.
Track Every Expense and Payment Immediately
A common risk when managing a construction project is getting behind on invoices and paperwork, but that’s why you hire an accountant who can stay somewhat separate from the hustle of actually putting the building together. The most important thing about job costing on the worksite is making sure that receipts, orders, deliveries, and supply usage reports are sent back to the office as promptly as possible. Many companies have found that the easiest approach is to collect all the important messages and slips of paper in one place during the day’s work and make sure the whole stack gets to the accountant before the next morning begins. This will allow them to build your job costing report accurately in pace with the project so that changes can be estimated accurately.
Consider Mobile Technology for Cost Tracking
Cost tracking on the worksite is often cited as one of the most difficult tasks for accurately running a construction company. Everything from labor hours down to taking a box of nails from the supply needs to be marked down so that your accountant knows close to exactly how much everything has cost. To keep this level of detailed without slowing down the pace of work, consider mobile apps to mark time spent working and quickly add records of small expenses that occur on the job.
Keep Separate Job Costs Separate
Larger construction companies are more than capable of taking on several jobs at once and do so often during their busy seasons. However, this makes job costing much more complex because not every invoice is for one single project. It is therefore incredibly important for estimate-to-cost calculations to keep your job costing for different projects separate. This means knowing which invoices to expect based on the estimate and recent orders made. It may help your accountant to get a receipt or report when you make an order for one project so they can watch for the invoice and categorize each expense to the proper project.
Accurate Job Costing to Better Profit Margins
Our final piece of advice is one of motivation. Job costing can be a hassle and when a project is going well, it can even ‘get in the way’ of fast work. However, without accurate job costing, you can’t know for sure what your profit margin is from each project meaning that you can’t make it better. The more accurately you job cost, the more efficient you can make your business.