Chapter 3: Tracking Costs
Once a bid has been accepted and a contract has been signed, you have the information you need to build a budget.
Choosing the Right Tool for the Job
Some construction companies choose to use full job costing software, while others go with a simple spreadsheet. The choice is yours, but you should know that the difference between the two is significant.
Accuracy - Spreadsheets allow you to make complex formulas, giving you some of the features you'd find in accounting software. However, those formulas are editable. This leaves open the risk of accidental editing or deleting by any user with access to the spreadsheet.
Custom Reporting - Accounting software can run custom reports. You can see how much money was spent in a certain period, how much you've spent on nails for home remodels, how timely a specific subcontractor did their work, etc. A spreadsheet would require you to gather this data by hand.
Bank Reconciliation - Software can download transaction records from your bank each month. It can compare those transactions to your accounting records to make sure everything is accurate. Spreadsheets cannot do that.
Automation & Alerts - Software can automatically run reports at a given interval. You can also set alerts to notify you of various things, such as a budget overrun.
Mobile Access - Software can be hosted in the cloud, allowing users to access reports as needed. It can also email reports to stakeholders right from the program. Spreadsheets can also be cloud-hosted, but they can be very difficult to use on a phone, as spreadsheets are too large for the display.
Compliance - Accounting software is often built with GAAP in mind. For example, software can keep an audit trail. This is something that spreadsheets don't do.
Tech Support - If you build a spreadsheet for your construction company, you are responsible to fix it when there's an error. If you make an accidental edit to a critical formula, you are now tech support. If you're working with an accounting software company, they can help you back up and restore your data.
Integration - Accounting software is built to integrate with other programs, such as estimating, project management, and payroll. Spreadsheets require manual data entry.
Setting Up a Job
Before you do any accounting, you'll need to set up a job. Whatever your software choice is, you will need to designate a new job with a unique tracking number. This makes it possible to allocate all relevant income and expenses to specific jobs, keeping projects separate from one another.
Tracking jobs separately is critical, because each project has its own opportunities and risks. Each job must be assessed individually in order to keep them on track and on budget.
Cost Codes
In Chapter 2 we briefly mentioned cost codes. These are 6-digit numbers used to identify the type of work that's taking place. For example, 088100 is designated for "Doors and Frames." This number can be used in the job cost estimate, the project budget, and all expenses that are recorded throughout a job.
There are several advantages to using cost codes. They allow you to specify the type of labor that's being done, which is important because different jobs have different pay rates. It also allows you to keep track of material costs and equipment usage in more detail.
The official cost code list, known as MasterFormat® is released and managed by a non-profit group called the Construction Specifications Institute.
The list is comprehensive and covers a multitude of construction types. As building technology changes, the list is updated accordingly. However, there is one piece missing from the code system. That is the ability to specify whether an expense is for labor or materials.
As an example, code 055510 is for Metal Stairs. Doing this type of work will require materials and labor, and each will need to be recorded separately. To accomodate this, companies can create their own sub-codes. This can be done a couple ways. Metal stair materials can be designated as 055510.1, and installation of the stairs can be 055510.2. Alternatively, you could append "L" for labor or "M" for materials, like so: 055510-M.
That little bit of extra organization will make your accounting life much easier down the road. Now, let's build a budget.
Building a Budget with a Spreadsheet
A construction budget can be built using a job's cost estimate. If you use a spreadsheet, you'll need to enter the data by hand.
There are a number of ways you can arrange your budget in a spreadsheet. Here's one way:
| Cost Category | Cost Code | Unit | Quantity | Unit Cost | Total Budget | Total Spent | Percentage Complete |
|---|---|---|---|---|---|---|---|
| Flooring Materials | 099640-M | Boxes | 8 | 106.28 | 850.24 | 850.24 | 100% |
| Flooring Labor | 099640-L | Hours | 6 | 50.00 | 300.00 | 150.00 | 50% |
| Painting Materials | 099912-M | Gallons | 4 | 35.12 | 140.48 | 140.48 | 100% |
| Painting Labor | 099912-L | Hours | 8 | 50.00 | 400.00 | 100.00 | 25% |
| Total | $1,690.72 | $1,240.72 | 68.75% |
Each line item of the budget can have its own page in the spreadsheet. As expenses are entered into each category, the totals can be added into the Total Spent column for that item. The Total Spent can then be divided by the Total Budget to get the Percent Completed.
Building a Budget with Accounting Software
If you're using accounting software, you should be able to import the estimate. A-Systems JobView can import estimates from popular estimating software, like PlanSwift and Exactimate.
Once the estimate is imported, it is automatically set up as a job budget.
As you enter your budget, make sure to include the costs codes from the job estimate. This will be extremely useful later.
Tracking Actual Costs
As the job progresses, invoices will come in from vendors, payroll will be paid, trucks will need fuel, and other expenses will follow. As you enter each of these expenses into your job costing system, you will specify the job number they apply to. You will also specify a cost code for each expense, depending on what category it belongs to.
Now, this is where you see the beauty of job costing.
- When the budget was entered, it was attached to a specific job ID.
- When expenses were entered, they were attached to that same job ID.
- Each item in the budget was attached to a cost code.
- Each Expense was also attached to a cost code.
The job costing system can now link your job expenses with your budget for that project. It can automatically compare budgeted costs to actual costs and show you where you are over or under budget. This data can help keep a job on track. This makes it much easier to keep an eye on your data, because projects are kept separate. It's much easier to stick to a budget with job costing than it is when using a generic accounting system.
Because of cost codes, you can view specific details, rather than just total job costs. For example, if you've spent $350 extra dollars on kitchen fixtures, you will know it. This is possible because you have the budget for that particular cost code, and your expenses are tied to that same cost code. This is a very handy way to keep track of the details. It's this attention to detail that can help you protect your job's profit.
You can also use job costs to run company-wide reports. For example, if you want to see how much you've spent on shingles during the first quarter, your system can pull all expenses for that cost code during the given time period.
Job cost accounting organizes your data and allows you to see the details you need to run a job profitably.