Odds are if you’re reading about “construction job costing” then you either own a construction business or are thinking about starting one.
No matter where you are in your construction business-ownership journey, job costing will be a part of what you do daily. It affects everything from building budgets for projects, managing payroll to pay your team, and sourcing all that new tongue-and-groove flooring you’re going to blow your clients away with.
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What is construction job costing?
The million-dollar question.
If we want to get technical about it, construction job costing is anything that has to do with the tracking of the overall cost of a construction project. Taken that way, it actually could be a million-dollar question.
At this point you might be thinking but don’t I already do that?
While it’s pretty standard to create an estimate and keep track of how much projects cost as a manager or business owner, job costing is a bit different from process costing.
Process costing involves a lot of pricing based on past experience. This is useful for industries like manufacturing, where each job is typically the same. Because no two construction projects are exactly the same, process costing can often get you in a bind and could lead to crazy cost overruns.
Job costing is different. Rather than guessing about prices, you spend more time calculating costs to get a very accurate budget.
It involves more work, but it’s better to know exactly how much you’ll be spending on that new reno instead of just guessing and having an awkward conversation with your client later.
Why is job costing important in construction?
Let’s say you sign on for a substantial new project with a hotel chain. This isn’t your first hotel-rodeo, but you know this client might turn into much more work in the future.
You could just show them what you spent on your last hotel build and give them a sort of estimate and just get started. That could end up costing both of you more money down the road.
By spending a little more time completely costing out the job, you get an accurate number for your client. You can even show them what it could look like to scale up the operation to numerous hotels. This means happier clients, more work, and less money going missing from your budget.
Job costing is important because it’s accurate. By putting in the work, you can show your clients exactly what they’ll be spending for that incredible marble-laden hotel lobby.
When it comes to your crew, you’ll know exactly how many members to hire and how much time you’ll need to get this building up and running.
Done right, job costing can lead to very accurate estimates and bigger revenue. It can even help you see how profitable each of your jobs are and, when the next one rolls around, you’ll be able to better plan, source, and negotiate with your clients, distributors, and crew.
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How to break out the cost for construction jobs
To start, job costing is only useful if you put in the time to do it right. It’s best to start by breaking out each part of construction into sections and figuring out what you need from there.
First, figure out just how long you think your project is going to take. This will be the basis for every other decision you make, so don’t guess. Do some strategic thinking here.
How long will it take to source materials? How long does a building this size usually take? Will the weather play a part in the work? These are all critical questions to ask. Once you’ve got that number, give yourself some breathing room and add in a few extra weeks. You never know when the whole crew will come down with the flu.
Now that you know how long the project is going to take, let’s figure out labor costs.
Start by calculating how much it would cost to have your full-time crew on the job. If they’re hourly, figure out how much you pay the crew each week and apply that to how long the job is going to take.
From there, decide if you’ll be hiring subcontractors. Use their actual rate (again, don’t guess) and add that in. Be sure to confirm that they’re available as well. The last thing you want is to promise work from people that aren’t free to actually do it.
Materials and tools
You’ve got the bodies you need to get the job done. Now, let’s give them something to work with.
Figure out which materials you’ll use, how much, and what they’ll cost. We’re talking everything from the wood down to those little chains that go inside of toilets.
This can seem like a lot. It’s a more manageable task if you break it down into direct and indirect materials.
It bears mentioning that you’ll need to factor in any tools that you’ll purchase or rent on top of those that you already have. This can include anything from a pilot driver to a cement mixer.
The last piece of the job costing puzzle is overheads.
Overheads are pretty standard in construction, and you’d be hard-pressed to find someone who doesn’t charge them. These costs are used to account for things like the depreciation of equipment, office rental space, and administration.
Overhead costs are more of an indirect cost for your services rather than charging the client for something like, say, importing their hardwood floors from Spain.
This is a widespread practice in construction. Frequently, companies will tack on an extra 10% to account for overhead, but it’s entirely up to you. If you want to make sure you’re not over or undercharging your clients, have an accountant look at your numbers and overhead fees.
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What is a reasonable profit margin for construction?
Once you’ve paid off your subcontractors and your client has sent you the check, you should be aiming to make about 10% to 15% profit for the project. The average profit margin on construction projects is around 10%, so if you can get higher than that’s great, but making around 7% isn’t abnormal either.
Profit margins are different for each type of construction company. While a business focusing on new builds may have around an 11% return, a commercial contractor might end up only making 4% back.
This is a major reason why job costing is so essential. By building out incredibly accurate budgets and timelines, you can better anticipate how much of a return you’ll make on a project.
How to totally nail construction job costing
By this point, you get what we’re trying to say: Job costing is super important. How do you actually cost out construction jobs?
Here are a few good places to start when you’re ready to make it part of your process.
1. Use software
Use software for job costing rather than using scrap pieces of paper and spreadsheets. The main reason for this is that humans make mistakes, and when it comes to job costing you want to be as accurate as possible.
Apps like Hubstaff (that’s us!) allow you to track time towards projects and build out comprehensive reports around the work your crew does. Then add in all your costs and send your invoice directly to the client, all from one place. It’s that easy.
Plus, by keeping your admin work and crew hours in one place, you can gain time back in your day that you’d typically be spending sifting through papers at your desk.
2. Keep track of all your reports
Always keep a log of your job costing reports. If the client ever comes back to you (and they will) and asks why something costs so much or why you’re choosing a particular vendor, you can give them the exact reason.
Job costing can be a lot of work, but, by putting in a little extra effort, you can avoid massive cost overruns and run your construction business more efficiently. It could even leave you with more time for in your weeks to spend buying a drink for your crew at happy hour.