A construction company can be profitable overall while losing money on individual projects. Without reliable job costing, profitable work can hide poor estimates, labour overruns, unapproved changes, inefficient processes, or costs assigned to the wrong project.
Job costing connects the accounting records to individual contracts and projects. It allows owners and managers to compare the revenue earned on a project with the labour, materials, subcontractors, equipment, and other costs required to complete it.
A useful job costing system should help management answer the following seven questions.
1. What Was the Original Expected Margin?
Every meaningful project review needs a starting point. Management should retain the accepted quotation, estimate, or project budget, including expected revenue, labour hours, material costs, subcontractor costs, equipment costs, and relevant overhead assumptions.
If the original estimate is not available in a format that can be compared with actual results, it becomes much more difficult to understand why a project performed better or worse than expected.
2. Are All Direct Costs Assigned to the Correct Job?
Supplier invoices, employee time, subcontractor charges, equipment usage, and other direct costs should be assigned consistently to the correct project.
Costs recorded only in broad general ledger accounts may still produce accurate year end financial statements, but they provide limited information about the performance of individual jobs.
The accounting system should also have a reasonable process for handling shared costs. Project costs should not be left in general overhead simply because the correct job was not identified, and costs should not be assigned to a project merely because that project has budget available.
3. Are Labour Hours Consistent With the Estimate?
For many construction companies and trades, labour is one of the largest and most variable project costs.
Owners should compare estimated labour hours with actual hours and investigate significant differences. An overrun may result from an estimating error, rework, inadequate supervision, scheduling problems, unexpected site conditions, or work completed outside the original scope.
Recording payroll dollars without tracking project hours can make the underlying cause of a labour overrun much more difficult to identify.
4. Have Change Orders Been Approved and Billed?
Additional work does not automatically become profitable simply because the customer requested it.
Management needs a process to document the request, estimate the cost, obtain approval where required, complete the work, and issue the related invoice.
A change order report should clearly identify items that are awaiting pricing, customer approval, completion, or billing. Without this process, completed work can remain unbilled until the end of the project, when collection may become more difficult.
5. How Much Will It Cost to Finish the Project?
Costs recorded to date do not provide a complete picture of project performance.
A project can appear profitable halfway through while significant labour, subcontractor, deficiency, or completion costs remain.
For larger projects, management should regularly update the estimated cost to complete. This requires operational knowledge from the project manager and field team in addition to information recorded in the accounting system.
6. Which Costs Were Not Included in the Estimate?
Project reviews should identify costs that occur repeatedly but are regularly omitted from quotations or budgets.
Examples may include:
- Supervision
- Delivery and freight
- Waste and disposal
- Small tools and consumables
- Equipment mobilization
- Permits
- Warranty and deficiency work
- Travel
A cost does not disappear because it is classified as overhead. If recurring overhead costs are not reflected in pricing, projects may show a positive direct margin without producing an adequate overall return for the business.
7. Which Types of Work Produce the Best Return?
Job costing becomes significantly more useful when management looks beyond individual projects.
Results can be analyzed by customer, project type, estimator, project manager, geographic area, contract size, or other characteristics relevant to the business.
The company may discover that a smaller category of specialized work produces stronger margins and faster collections than larger projects. It may also identify customers whose administrative requirements, change order processes, or payment practices consume more resources than expected.
The Accounting System Must Match the Operating Process
Effective job costing cannot be created by the accountant alone. Estimating, purchasing, timekeeping, project management, billing, and accounting all contribute information to the process.
Project codes and cost categories need to be used consistently across these functions.
The system does not need to be unnecessarily complicated. It does need to capture enough information, early enough, for management to make decisions while a project is still underway.
Accounting Support for Contractors and Skilled Trades
Seniuk and Marcato can review your existing bookkeeping and job costing structure, identify gaps, and help improve the quality of financial information available to management.
If your construction company has strong revenue but cannot clearly determine which projects, customers, or types of work are producing the best results, contact our team to discuss your accounting and reporting needs.
This article provides general information only and is not accounting, tax, legal, or financial advice for a specific business or contract.
