The project-centric nature of construction accounting makes for some unique processes that either don’t exist or don’t play a large role in other industries. One of these is the process of job costing.
Basically, job costing is used alongside the accounting general ledger (G/L) to track and report transactions specific for every individual job the contractor takes on. While the G/L is used to track financial information across the entire company, the job costing process is used on a narrower scope for each individual project. The other main difference is that the G/L comprises a series of accounts, while job costing comprises individual projects, cost activities (such as framing or foundational work) and cost types (such as materials or labor).
By accurately tracking all of this information and keeping it recorded and organized, project managers are able to better track costs and make better financial decisions during projects. Companies will also be able to more accurately predict break-even costs, even in more challenging situations. Overall, job costing creates better, more reliable bidding, estimating and cost control, which improves profit margins and protects contractors in jobs when those margins look to be narrow.
How does all this happen?
With the information gained from job costing, contractors can better track costs faced in the project, the total amount of labor used (in hours) and the overall physical completion of the project. This information is tracked not just for every individual job, but also within groups of job activities and types of cost, as described above.
So, for example, you can code certain job activities or costs with different numbers or phrases, and use those codes consistently across all of your jobs to allow for easy sorting of job activities and types, costs and incomes.
It becomes easy, then, for contractors to label every transaction they make with information from that created job costing structure, which allows those contractors to get much more information out of their costs. They can track how much every aspect of their operations costs for a specific job, and across their entire company. They can track which costs are shared across multiple jobs, which can then make it easier for them to find ways to distribute these costs and lessen the financial impact on the company.
Ultimately, job costing helps contractors more clearly identify the true costs of all their work, as well as their profitability on multiple levels (job level, entire company). When you consider how many variables exist in construction accounting, this removes a lot of question marks that would otherwise exist.
For more information about the job costing process and how to perform more sensible construction accounting for your company, we encourage you to contact us today at Patin and Associates.