Job Costing and Budgeting | Construction Accounting Software

Job costing is a vital process in the construction industry, enabling contractors to meticulously track and manage the expenses associated with individual projects. Given the complexity of construction projects, which often involve various phases and resources, job costing is essential to ensuring that every dollar spent is accounted for accurately.

In construction, job costs can be broadly categorized into 2 types:

1. Direct Costs:

These are expenses that can be directly attributed to a specific project. They include:

• Labor Costs: Wages and benefits paid to workers on the job.
• Materials Costs: The cost of materials used in the project, such as concrete, steel, and lumber.
• Subcontractor Costs: Payments made to subcontractors hired to provide specific services, like plumbing or electrical work.

2. Indirect Costs:

These costs are often not directly tied to a specific project but are necessary for overall project execution. They include:

• General business expenses: Such as office rent, utilities, and administrative salaries, that support the project.
• Equipment Costs: Costs related to the operation of equipment such as cranes, trucks, and scaffolding.

Accurately tracking these costs is crucial for determining the true cost of a project, ensuring profitability, and maintaining financial control.

The job costing functionality allows project managers to allocate direct costs like labor and materials to specific jobs. Real-time costing ensures that the budget remains accurate and up-to-date as the project progresses. Here are some of the ways direct costs are managed using construction accounting software:

Time Tracking and Payroll:

A construction ERP usually has time tracking and payroll features, allowing companies to accurately track hours worked by employees or subcontractors on a project. This data can then be linked to direct costs, ensuring that all labor costs are properly accounted for.

Inventory and Material Management:

A construction ERP can track the inventory and usage of materials on a project. By integrating with inventory systems, the ERP helps monitor which materials are being used for each job and ensures that material costs are assigned directly to the project that requires them. This also prevents over-ordering or underutilization of materials.

Equipment Tracking:

Construction ERPs include tools for tracking equipment usage. Whether owned by the company or rented for a specific project, the ERP records the hours of equipment use, allowing for accurate assignment of costs to the project. Maintenance costs can also be included as part of the direct costs if the equipment is project-specific.

Indirect costs are those that are not directly tied to a specific project but are necessary for the overall operation of the construction business. These include administrative costs, insurance, and other overhead expenses. Here are some of the ways indirect costs are managed using construction accounting software:

Overhead Allocation:

One of the key features of a construction ERP is its ability to allocate overhead or indirect costs to projects proportionally. Overhead allocation ensures that these costs across multiple projects based on predefined formulas, ensuring that all jobs bear their share of overhead.

General Ledger:

Construction ERPs have general ledger functionalities that enable contractors to track indirect costs accurately. The ERP can tag these expenses to specific projects, ensuring they do not get misclassified as direct costs that would alter the overall financial health of the company.

Project Support Costs:

Indirect costs can also include project support services, such as safety inspections and quality control, which are essential for maintaining project integrity. A construction ERP tracks these support services and assigns them to the appropriate projects.

Vendor Management:

Managing indirect costs also involves relationships with third-party vendors and suppliers. The ERP can manage contracts, payments, and billing for these partners, ensuring that indirect costs, like material purchases, are appropriately categorized and tracked across projects.

Having the right construction accounting software helps manage job cost effectively. Accurately tracking direct and indirect costs, helps with tracking profitability of projects and make informed future decisions.

Read more about how to choose the right construction accounting software for your needs. Check out how Followup CRM connects to construction ERPs.