Job Costing for Contractors

In the construction industry today, accurate estimates are more important than ever. It can be difficult for architects, engineers, contractors, property owners, and property managers to assess the cost of projects with precision. With that in mind, it becomes clear that accurate job costing is of paramount importance. Keep reading to learn more about the job costing process and how it can be refined for more accuracy and fewer surprises once a job is in progress.

The Job Costing Process

The process of cost estimation in construction can be broken down into four stages: estimating bids, bidding work out to subcontractors, organizing the subcontractors’ quotes into a set of bids for each trade group on a project, and finally, estimating the costs for work-in-progress (WIP). 

Estimating bids entails calculating how much it would cost to pay someone to do the job you want done. When subcontracting to other companies, one has to consider their bids against their own profit targets in order to get the best offer. 

Job costing is an accounting process for calculating the total cost of a project by assigning costs to the various jobs or tasks. A job costing system is a method of project management that gives an estimate of a project’s cost. This estimate is based on the work that needs to be done and the resources needed to do it. This includes finding out what percentage of total costs come from direct and indirect items in order to determine profit margins and cost control. 

Construction bidding is when contractors put in bids for a project or phases of a project, and the company with the lowest bid will be awarded that contract. 

Direct V. Indirect V. Overhead

To make it easier for contractors and owners, we’ll split costs into three categories: direct, indirect and overhead. Let’s first take a look at direct costs. These costs are incurred during the construction process and can be directly attributed to the construction of a project. They include things like materials, labor and equipment rentals. Since direct costs are often traceable to a single cost object, they are typically easier to estimate than indirect costs. Indirect costs are related to general business activities, including items such as taxes, medical coverage, office supplies and transportation. Costs that do not include direct, tangible expenses are considered indirect costs. For example, the cost of management and overhead would be considered an indirect cost, as it is not directly related to the production of a project or task. Indirect costs are also known as non-chargeable expenses because they could be allocated to any other area in the company. Indirect costs can be difficult to calculate because they don’t have an identifiable price tag. These costs can also lead to budgeting problems if included with direct costs. The best way to account for them is by using ratios between the two types of costs.

Overhead costs are typically the most difficult to identify in a company’s budget, but are still considered necessary when allocating funds across different departments. They are usually associated with indirect activities that have no obvious connection to the company’s revenue streams, making them difficult to track. Costs like these often need to be allocated based on some predetermined criteria, such as an estimated total of hours spent on a project or general management activities done by the owner’s company or its affiliates, such as administrative salaries or borrowing costs.

Why you need job costing for your next construction project

Construction bidding is a competitive process. Youwin jobs based on your bid prices as well as your expertise in completing certain types of projects. A successful contractor will have a deep understanding of each aspect of a project’s scope and will be able to offer the best solution for both the client and the company’s long-term goals while maintaining profitability. 

When bidding on contracts, it is crucial that you have realistic expectations of your profit margins. Operational overhead can be reduced, charge enough for your services you can cover expenses and still turn a profit. The development of job costing is necessary because it enables you as the contractor to accurately estimate the cost of labor, materials, and equipment required to complete a construction project.

Need help with job costing? We can help you accurately estimate the cost of your jobs and provide accurate bids. As accountants specializing in the construction industry, we have the knowledge required to achieve permanent profitability in your business.