What is Job Costing in Construction?

Job costing in construction is an accounting method that tracks all of the expenses related to specific projects. This process tracks the cost of materials, labor, and overhead — which are the operating expenses of your business. 

Project managers will estimate the cost of the project before it starts, otherwise known as construction takeoff, and then will update the numbers as the work unfolds. For example, if a team needs extra siding or finds a deal on the carpet, they can adjust the project costs in the takeoff software interface.   

Job costing is an important accounting role for contractors and project managers. Not only does it improve your relationship with clients but it also makes your bookkeeping easier and more transparent. Learn more about this process and how to implement it. 

The Importance of Job Costing in Construction

Job costing can help you manage your finances and ensure your business is profitable. Even simple projects have multiple moving pieces that require different materials, equipment, and staff. If the scope of the project increases, so does the cost of getting it done. 

Job costing is a process, not a task that occurs just at the project's beginning and end. Whenever a new expense occurs, project managers can record it or update the estimated costs in the project software. By the time the job is complete, they will have a detailed and accurate picture of their expenses to review.  

Job costing can also help project managers make strategic decisions to stay profitable. They can see their profit margins through these reports and can decide whether any extra costs are worth it to complete the job. These documents help teams stay within budget. 

Without job costing, you risk overspending on the project and not catching it until the work is done. By then, it’s too late to ask for more money from your clients and you will need to accept the loss. 

The Role of Preliminary Estimates in Job Costing

The first step in job costing is preliminary estimating, which is the foundational projection of the project cost. Before any of the work begins, these estimates highlight how much the project is expected to cost. 

The variances of preliminary estimates can reach up to 50% in either direction if the contractor isn’t sure what the actual costs will be. For example, if a company is installing new flooring, they will include an estimate for carpet or tile costs and include a variance in case the customer opts for pricier materials. 

While the projections don’t have to be perfect, detailed preliminary estimates can contribute to more accurate job costing. Contractors can identify as many fixed costs that are in their control, like equipment rentals and permit fees, when creating these estimates, thus reducing variances. 

Estimating project costs is challenging because there are so many factors to consider. If you pay your team hourly, you could go over budget if a project takes longer than you expect. Supply chain disruptions or inflation could drive up materials costs. Very few projects run perfectly from start to finish. 

Factors Affecting Preliminary Estimates

Several factors influence the accuracy of your preliminary estimates and are nearly impossible to predict. These elements usually make your project costs increase, but some can help you save money. Here are a few factors to keep in mind:

• Materials costs: Prices for the materials you use can increase unexpectedly, making a project less profitable. 
• Market conditions: The current market can affect both materials and labor costs. For example, construction wages increased by 20% between 2021 and 2023 due to labor shortages. 
• Project delays: Various problems can slow down projects and make them more expensive. Equipment rentals, for example, will be costlier if you need to use the machinery longer than expected. 
• Growth of the project scope: A project may be more complicated than it initially seems. This drives up costs as contractors account for the new scope. 

Project managers need to keep track of direct and indirect costs to see how they will change. Accounting for unforeseen expenses with a variance buffer can prevent contractors from going over budget. 

Advancements in Job Costing

Project managers are improving their estimates with the help of modern technology. Estimation software guides contractors through this process and makes it easy to account for various costs and overhead needs. There are also many benefits of using artificial intelligence in estimation. Keeping up with these advancements can help you grow your business. 

Benefits of AI-Powered Estimation Software

There are multiple benefits of using AI-powered estimation software for your projects. You can spend less time measuring, researching costs, and estimating expenses with these systems. These tools can also help reduce human error. 

The more you explore AI-powered job costing software, the better you can utilize this tool. AI software can help quantity surveyors understand the materials they have while helping contractors measure oddly shaped buildings. AI can also keep up-to-date records to speed up your bookkeeping and money management processes. 

Implementing AI in Construction Job Costing

There are several benefits to using AI tools for job costing, but teams may need to learn how to use them effectively. First, test your estimation systems and compare them to your current reports to see how close they are. Next, train your staff on how the software works. Some AI-powered takeoff tools use machine learning, which means their estimates will get better the more they forecast costs for you. If your team knows this, they will have more faith in the systems. 

Strategies for Implementing an Effective Job Costing System

While a good software system can speed up your job costing process, you can implement other steps within your organization to drive better estimates. First, audit your expenses regularly to make sure your reporting is accurate. If your overhead increases or materials costs have permanently gone up, your software needs to know. 

Next, make job costing a collaborative effort. Make sure all stakeholders are submitting information and reporting costs. If you are using AI tools, this will also increase the amount of data you have to work with. 

Finally, learn from your mistakes. Decide whether you need larger estimate variances if you regularly go over budget. See where your job costing is going wrong. This will make you better at this task in the future. 

Job costing can predict profitability and help you estimate the scope of the project. However, you need your estimates to be as close as possible to help your clients and your business. Use the right tools and know-how to improve this internal process.