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Job Costing Advantages & Disadvantages: Is It Right for Your Construction Company?

Jan 23, 2020 2:45:00 PM

construction tools used for construction | Accounting

Owning a company is like owning anything else: you love some aspects of it, and you despise others. We hear about the best and worst parts of ownership/leadership all the time, and everyone seems to agree that the worst part is managing accounting. (The best parts? Autonomy and office snacks, obviously.)

The truth is that bookkeeping is an essential reality for every owner, especially if you're in a competitive and cost-focused industry like construction. Like it or not, even before you hire your first employee or win your first bid, you have to start tracking your spending.

With a small team, you might be able to get by with manual data entry, but as you scale, this can become unsustainable.

For many in the construction industry, job costing is the answer. Of course, job costing advantages and disadvantages are different for each business, but in general, many find it helpful. To understand whether job costing is right for your construction business, we’ve put together a list of the greatest advantages and disadvantages from companies like yours.
 

 

What Is Job Costing for Construction?

Job costing for construction is the process of determining the cost of a project. It accounts for all the materials needed, the hours of labor required, and any overhead costs to your business.

Unlike job processing, the job costing formula considers each job on a specific project. For example, with job costing, you need to determine the amount of materials needed, labor hours required, and any overhead costs incurred during the framing of a new construction site.

Then, you move onto determining the amount of materials, labor hours, and overhead for wrapping.

The job costing procedure breaks down costs by the day, rather than in bulk. While your business’ unique requirements will determine whether job costing is right for you, it’s a helpful tool for many in the construction industry.

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What Are the Advantages of Construction Job Costing?

There are plenty of advantages to job costing for construction businesses. Depending on your current bookkeeping practices and operations, some will be more significant than others. Here are just a few you’ll be able to see right away.
 

Accurate Profitability Analysis

With bulk bookkeeping procedures like job processing, it can be hard to understand exactly where your team is profitable and where you’re losing money.

You might be able to see that the first six months of a project was a loss, but you’ll have a hard time understanding why without detailed bookkeeping.

The advantage of job costing is in the details. Your team has visibility into all the materials used, labor hours, and total costs of each project. This removes any guesswork, so you can focus on the facts.

In terms of your bottom line, that means more accurate bids, better margins, and a more efficient team overall.
 

Correct Bidding and Costs

Many businesses who end up closing their doors for good point to cash flow as a major reason for their failure. Accurately anticipating the cash you have access to at any given time is much easier when you use the job costing formula.

Ensure that you’re never without enough money to pay salaries, operational bills, and other unexpected costs by using job costing.
 

Detailed Understanding of Each Job

One incredibly helpful insight that job costing provides is how your team performs on each job. With accurate, detailed historical data, you can start to identify trends throughout your various builds.

For example, you might see that your team is much more profitable when they work on retail store buildouts rather than healthcare buildings. With a strong understanding of where you excel as a team, you can start bidding on projects you know will give you the best margins.

Soon, you’ll start to see meaningful growth as a business.

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What Are the Disadvantages of Job Costing in Construction?

Of course, not everything in job costing is improved margins and increased efficiency. The job costing formula itself requires time and attention from your team that you might not be used to. In order to understand whether job costing advantages or disadvantages will greatly impact your team, consider the following.
 

Detailed Work is Required

To get the kind of robust bookkeeping and reporting that helps you pull important insights, you have to enter the right information. That requires your team to be very detailed in all aspects of job costing.

The people entering the data need to pay attention to every number, and someone must have the time to verify all data. We'll admit it: dedicating that kind of time to bookkeeping and accounting might seem like a lot compared to your current process.

If job costing seems impossible because of the time required, don’t write it off just yet. There are software solutions that can make the process smoother—but more on that later.
 

The Market Determines the Cost of the Job

One factor that is uncontrollable in many job costing examples and solutions is the market. When you’re detailing the material costs in job costing, you’re at the mercy of what the market says.

Other formulas use prices from past projects to forecast new ones. If, for example, the cost of a material goes down before you start a new project, your team might see better profits compared to past projects. With job costing, those areas of profit disappear.

On the other hand, with more accurate bids from job costing, your team shouldn’t have to rely on those small profit wins. But if you’re not able to give those up just yet, it might not be the right fit for you.
 

Getting Buy-In from Your Team

We mentioned that job costing is time-intensive, especially when you first make the switch.

One of the job costing disadvantages often felt by construction companies is getting buy-in from their employees in the field. Those teams might be less than enthusiastic when you ask them to keep track of all their hours (including their breaks and the materials they’re using).

It’s a lot to remember on a job that already requires intense concentration.

A good remedy if you see your team opposed to the idea is to communicate your plan for growth, explaining exactly how the job costing formula can get you there.

Help them understand the short-term benefits as well as the long-term impact this new procedure will have on profits and eventually, their salaries.
 


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Learn How Botkeeper Can Help With Accurate Job Costing

Job costing has its share of advantages and disadvantages, but the process can be invaluable for construction businesses like yours. If job costing seems impossible right now, construction bookkeeping and accounting software can help. With a tool like Botkeeper, you’ll get insight into estimated costs and actual costs so you can see how your jobs are or aren’t progressing.

If you’d like to learn how we can provide accurate profitability analysis, correct bidding and costs, and a detailed understanding of each job, let’s talk!

 

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Aaron Sullivan
Written by Aaron Sullivan

Aaron is a content marketer with a background in writing and editing for social, email, and blogs. His experience is heavily focused on bookkeeping/finance, entertainment, and beer.

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