Job Costing Basics for Construction Industry

Job costing is considered to be the most crucial part of running a construction business. And you may think that it is too complicated and time consuming, and that is partly true, (that’s why I have a job). It requires a lot of attention and dedication, but it is absolutely worth it in the end to know your numbers and make sure that you are running a profitable operation. You need to track and categorize all your costs based on their relationship to any project you’re running. Let’s break today’s job costing topic down into 4 parts:

  • Categorization
  • Job Costing using Quickbooks Online
  • Reporting and Trends Analysis
  • Software solutions

Categorization With every project you will have your direct materials costs, direct labor costs (hourly employees and subcontractors), equipment rentals and several others depending on the type of construction work you do. That is your Cost of Good Sold (COGS). Understanding these costs is vital because they bring you to your Gross Income. But there are also other costs that you need to factor in and these are your indirect expenses, also known as Overhead. Your indirect expenses are your administrative, sales and general expenses.  When it comes to allocating the Direct Costs to each job everything is straightforward as long as you keep good records. The overhead allocation process for standard costs is to use historic cost information to arrive at a standard rate per job. Cash flow is the lifeblood of any business. This is especially true in construction where many expenses are paid in advance of receiving payment from the customer. You cannot forget to account for these costs and add them to your payables while assigning to your jobs.

Job Costing using Quickbooks Online There are many ways to track job costing in Quickbooks Online:

  1. Projects
  2. Classes and locations
  3. Customers

My favorite way is to use the feature called Projects and Classes at the same time. First you would need to turn both features on in Settings. Here is how you do this:

  1. Select Settings  ⚙, then select Account and Settings.
  2. Go to the Advanced tab.
  3. Find the Projects section and select Edit ✎ to expand it.
  4. Select the Organize all job-related activity in one place checkbox.
  5. Select Save and close your settings.

The Projects menu now appears in the main navigation bar. To create your first project

  1. Select the Projects menu.
  2. Select New Project.
  3. Give your project a memorable name.
  4. Select the customer you’re working for from the drop-down menu.
  5. Add any notes or details about the project.
  6. Select Save.

To turn on Classes:

  1. Click the Gear icon.
  2. Select Account and Settings.
  3. In the navigational bar, click Advanced.
  4. Select Categories.
  5. Check off Track classes to turn on class tracking.
  6. Click Save and then Done.

After that when you create any transaction, you will have two extra fields Customer and Class. What I like to do is to create a Project and assign phases of the project like plumbing, electrical, flooring, etc. to classes. This way you will see all the information in detail.

Reporting and Trends Analysis Analyzing these trends will help you to spot any patterns and can ultimately help you understand where your finances are. Analyzing trends can also help you to determine where you’re going wrong and how you can fix it. Whether on a daily, weekly or monthly basis, regularly reviewing job costing reports allows you to make fast adjustments. Sample job costing reports include cost-to-complete, budgets versus actuals, labor productivity reports. When expenses in one account grow higher than estimated, you  will need to find ways to decrease them in other areas to ensure the overall project remains profitable. The projects feature that we have discussed earlier lets you access and customize the profitability reports for each of your jobs as well.

Software solutions Quickbooks Online is a great accounting software, but if you want a little bit more detail and abilities from your software, I strongly recommend getting a project management software and connect it to your Quickbooks Online to avoid any double entry. Using software allows you to price jobs more accurately, making for better final estimates. The more accurate your estimates are, the lower the chances that you will lose on the job. You can just plug in the numbers and the important metrics like profit margins will be calculated for you. Another benefit software brings is real-time tracking of project progress and costs. Add scheduling, communication options with your crew and the customer, custom reports and you are all set.  Construction job costing will take some time and effort to implement, but the benefits will pay off, you will be in control of your numbers and will be able to run more profitable jobs and pay yourself more.

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