How to Track Job Costs Accurately in Construction Accounting

Tracking job costs in construction projects can be quite complicated, necessitating the meticulous recording and tracking of multiple costs.

Construction businesses often struggle with providing visibility into their actual financial performance because of construction job costing errors that stem from obsolete accounting systems to track costs. Understanding how to track job costs in construction enables informed decision making and enhanced control over project finances.

In this blog, we will go through how to perform accurate job cost tracking for contractors, how to avoid construction job costing errors and the essentials for WIP reporting for construction projects.

What Is Job Costing in Construction?

Job costing involves the tracking and allocation of costs associated with a specific project. All expenses are assigned to the specific job where it occurs. This is often very useful when several projects are being handled at a time and materials are being ordered together or labor is being used interchangeably between projects. Some major job costs in construction include labor costs, equipment costs, material costs and subcontractor costs.

The Importance of Accurate Job Cost Tracking for Contractors

1. When contractors have accurate information of the costs incurred in previous projects, they are better able to participate in future biddings of projects. With poor tracking of costs, they may end up underbidding, leading to unanticipated business losses. On the other hand, it may also lead contractors to bid higher than others, missing out on otherwise profitable contracts.
2. Avoiding overspending is essential for contractors. By adopting modern accounting tools, managers can monitor costs in real-time, enabling them to discover problems promptly and provide quick measures to rectify these errors on time.
3. With strong bookkeeping, managers can make wiser financial decisions when financial reports are up-to-date. Also, contractors can analyze profitability by job such as by client or project.
4. Job cost tracking for contractors helps businesses maintain a healthy cash flow.  They also help in planning for possible cash crunches in the future.

Common Construction Job Costing Errors

There are several common construction job costing errors that even the oldest contractors in the market still do. Below we discuss the most common errors:

1. Inconsistent Data Entry: Delaying data entry is never advisable. Many businesses often end up forgetting to record or misplace invoices. This causes your books to be incomplete. With books not reflecting current business position, managers are unable to monitor budgets and control spending, especially when work is in progress.
2. Misclassification of Costs: Costs can wrongly be recorded in the incorrect category. For example, equipment rental may be recorded as an overhead instead of being assigned to the specific job.
3. Neglecting Minor Expenses: While the costs of fuel or small tools seem quite small, when out of control, they accumulate over time and can severely impact profitability.
4. Missing Change Orders: Clients often request for modifications, and recording these are very crucial. Without proper documentation, these changes may go unnoticed and the task may end up being performed without receiving any payment.
5. Poor Labor Tracking: Labor constitutes a major portion of construction costs. If not tracked by job or task, recorded labor costs may be incorrect.

Key Components of Job Cost Tracking for Contractors

Some of the most important cost categories that contractors also need to pay special attention to are discussed below:

Labor Costs: Labor costs are not just employee wages, it also includes payroll taxes, employee benefits, overtime and employee insurance. Several companies use digital time-tracking, enabling workers to log in their hours directly in to the system from their job sites. With accurate labor cost tracking, managers can efficiently monitor labor productivity.

Material Costs: Materials should be recorded as soon as they are purchased or delivered to the job site. Always remember to keep records of purchase orders as they enable accurate assigning of material costs to individual jobs. Proper material tracking also helps prevent and monitor waste and ensures cash is not uselessly tied up in excess or unrequired stock.

Equipment Costs: These include maintenance, fuel and rental fees. Equipment used between several jobs should be allocated accordingly.

Subcontractor Costs: Subcontractors are normally required for specialized work such as for plumbing, roofing or even electrical work. Remember to carefully record all new contracts signed, monitor supplier invoices and compare them with estimated costs.

Overhead Allocation: Overhead include costs that are not directly related to the job such as insurance, administrative costs, and rent. They are most commonly allocated to the job based on labor hour.

How To Track Job Costs in Construction Effectively

1. Accounting Software: Make use of specialized construction accounting software as generic ones normally lack essential features needed for construction projects. Specialized systems allow costs to be assigned to specific jobs and also enables real-time monitoring of budgets. With cloud accounting systems, you can now access detailed financial reports in real-time, enabling quick decision making. Automation also reduces manual error and saves time which can be used in more efficient activities.
2. Costs Codes: Codes may be assigned for expenses related to specific jobs, such as for framing work, plumbing, finishing etc. Using cost codes also makes financial reporting more streamlined and transparent.
3. Real-time tracking: Field teams can immediately submit timesheets, material purchases, and equipment usage reports to allow contractors to monitor daily cost reports.
4. Review Costs Regularly: Reviewing costs gives contractors clarity on the factors leading to differences between actual vs estimated costs. Contractors can analyze the reasons leading to variances related to labor productivity and material usage. Understanding variances is very important as they provide information critical for future project cost estimates.

Labor and Material Cost Tracking in Construction: Best Practices

Labor and material cost tracking in construction is vital for businesses, especially since they represent the largest portion of expenses.

Labor Tracking Best Practices:

• Workers should  be encouraged to log hours daily. Hours logged in should be divided into hours spent working on specific projects as well.
• Use digital tracking tools rather than manual work to improve transparency and reduce administrative work
• Frequently monitor overtime hours to ensure labor costs are under control

Best Practices for Material Tracking:

• Keep record of all purchases and payments made to suppliers.
• Document which project or job the material will be used.
• Verify all deliveries of materials purchased and immediately record them in the job cost system
• Monitor material usage to identify and prevent theft, reduce waste and maintain updated inventory counts

Understanding WIP Reporting for Construction Projects  

Work-in-progress (WIP) reporting for construction projects is essential as it provides a snapshot of the financial position of ongoing projects. WIP reports provide a revenue and cost incurred comparison, enabling managers to take action before losses grow. They also furnish managers with details of the remaining costs that are expected till project completion. This enables contractors to determine whether project costs are unfolding as anticipated. WIP reporting for construction projects are especially important for companies using the percentage of completion method for revenue recognition.

WIP reports include several key metrics such as:

• Contract Value
• Change Order Details
• Estimated project cost
• Costs incurred till date and remaining costs estimated till completion
• Percentage of completion
• Revenue recognized
• Billing status

Business owners and managers must take out time to understand job costing for construction projects. If you feel you are unable to update your costs regularly, consider consulting a professional with experience in construction cost overruns accounting. Outsourcing to experts can help alleviate problems related to inaccurate costs, and they can also help you gain benefits of updated books and professional financial decisions.