When it comes to your construction business, success hinges on more than just winning bids and delivering projects on time. Behind the scenes, your ability to accurately track and control costs on every job can make the difference between a profitable year and one riddled with losses. Yet many construction business owners struggle with job costing, often underestimating its impact on their bottom line. Poor job costing doesn’t just lead to confusion — it quietly drains resources, damages cash flow, and erodes trust with clients.
MKS&H’s team has over 150 years of combined experience helping construction business owners manage their finances, so we understand the importance of breaking down the expenses and needs of each project. Our goal is to ensure that your job costing practices support the financial health of your company, both in the short term and the long term. Below, we will discuss the value of job costing, common mistakes and oversights, and what steps you can take to improve your processes.
Why Job Costing is Crucial to Business Success
Job costing is the process of tracking all costs related to each project, including labor, materials, subcontractors, and overhead. When done correctly, it provides you with a clear picture of whether you are making or losing money on a given job. But when job costing is inaccurate or inconsistent, it becomes virtually impossible to determine the success of each project and challenging to track where your money was actually spent.
For many construction business owners, job costing falls by the wayside because they are too focused on keeping projects moving. They tend to rely on estimates and general impressions instead of actual financial data. While completing projects promptly is important, doing so without insight into the project’s cash flow can lead to issues such as pricing jobs too low, overpaying for materials, or missing out on opportunities to cut unnecessary expenses. Without accurate job costing, you are essentially flying blind — and that is a dangerous place to be in a competitive market like the construction industry.
The Hidden Costs of Getting It Wrong
The silent killer of many construction projects is underestimated expenses. It is not uncommon for a job to incur additional costs as the work progresses; however, if you do not actively track expenses, you risk missing overruns until it is too late to make adjustments. This can easily result in the project budget exceeding the job’s payout.
Along with underestimated expenses, misallocated overhead can greatly increase the cost of an individual project. Many construction companies spread their overhead evenly across projects without considering the unique demands of each. While this simplifies the initial distribution of overhead costs, it has the potential to distort your profit margins and make some projects look more profitable than they are. By taking the time to assess the needs of each job, you can determine the actual consumption of resources and either identify jobs that will require greater allocation or eliminate unnecessary costs.
One of the long-term effects of poor job costing that is often not recognized until it has escalated is the damage to your company’s reputation. If your costs consistently exceed your bids, you may find yourself cutting corners in an attempt to stay afloat. This eventually causes clients to lose confidence in your work and product, which can be a difficult shift in public opinion to recover from. Part of the benefit of effective job costing is that it can keep your business operating well in the black so that you can focus on exceeding client expectations instead of worrying about your bottom line.
Common Job Costing Mistakes to Avoid
Even companies that recognize the importance of job costing can fall into some bad practices. One of the biggest mistakes made within the construction world is failing to track labor costs accurately. Construction is inherently labor-driven, and even small discrepancies in time tracking can add up to substantial monetary loss. By implementing a system that tracks work hours, you can avoid this mistake.
Another common oversight is neglecting to update finances when scope changes occur. While it is not uncommon for the scope of a project to pivot — sometimes multiple times during the lifecycle of a job — not addressing it in terms of financial obligation can result in you absorbing costs that should have been passed on to the client.
Errors, duplicated work, and missed information. These issues typically stem from companies failing to integrate job costing practices into their accounting system. For this reason, it is important to identify tools and programs that will integrate well with your business’s needs.
How to Improve Your Job Costing Practices
The good news is that there are numerous ways to improve your job costing practices, and it starts with establishing a system that works for your business. You will need to clearly define cost categories, implement processes for collecting data from the field, and ensure that everyone on your team understands their role.
Investing in the right software is often the first step that you can take and will have a palpable effect on your company’s job costing success. Modern construction accounting tools track costs in real time, generate accurate reports, and identify issues early. These tools also make it easier to handle change orders, allocate overhead appropriately, and streamline your billing process.
Training your team is equally important. Everyone involved in a project needs to understand what falls under the umbrella of job costing and why it impacts business success. By building a team of informed and well-trained employees, you will create an environment where accountability drives accuracy.
Working with an accounting partner who understands these needs and pain points of the construction industry will provide the insight and guidance needed to make the necessary adjustments. MKS&H specializes in helping construction businesses improve their financial management, including job costing. We offer not only technical expertise to set up efficient financial management systems but also strategic advice to help you leverage job costing data when making business decisions.
How Accurate Job Costing Helps You Stay Competitive
Accurate job costing provides a competitive edge in the construction industry. By maintaining knowledge of project costs, you can price your bids more confidently and competitively without risking your margins. You are also able to quickly identify inefficiencies, negotiate better deals with suppliers, and make informed decisions about which projects to pursue.
Accurate job costing also aids in cash flow forecasting and planning for future growth. You’ll know when to expect payments, when to reinvest in your business, and when to hold back. Having control over your business’s health can help you weather slow seasons, address unexpected challenges, and capitalize on work influx.
The Benefit of Bringing in an Expert
Trying to overhaul your job costing practices on your own can be overwhelming and time-consuming, especially when you are already stretched thin managing the day-to-day operations of your construction business. That is why it is beneficial to your business’s success to partner with a consulting firm that is familiar with the unique needs of construction companies.
When you team up with our experts here at MKS&H, you have access to years of experience and know-how. We will work with you to evaluate your current systems, identify gaps, and implement solutions tailored to your business’s needs. We will analyze and present your business’s financial numbers in a way that provides transparency and clarity, allowing you to see which projects are truly profitable, where you are losing money, and what changes can be implemented.
Take Control of Your Job Costing Today
Poor job costing is more than just a nuisance; it is a hidden drain on your profitability, cash flow, and reputation. By utilizing the right systems, tools, and support, you can ensure that every facet of every job is accounted for, allowing you to make decisions that support your business’s growth.
MKS&H is here to guide you on exactly how to identify these opportunities. Contact us today to begin your journey to financial health and successful project management.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.
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