Improving job-level profitability requires an effective job costing system. It serves as the foundation for controlling costs, reveals where you are making or losing money, and provides the necessary insights to make better business decisions. However, data out is only as good as the data coming in, and for this reason, conducting a construction job costing audit is critical to ensure accurate and reliable information is coming in that can be used for actionable results. If you are new to job costing or still need to create your own system, we have you covered with our essential guide to construction job costing!
In this blog, we will explore why you need to audit your job costing system, the benefits of doing so, and how you can approach conducting an audit to improve profitability.
Why you should audit a job costing system in construction
The audit process will serve as an objective review of your current job costing system to evaluate accuracy, reliability, completeness, and effectiveness. The reality is that there are certain areas of every trade that are more or less competitive or that certain contractors are better at than others; identifying where you are most efficient and productive is why you job cost in the first place. With this insight, you can better plan each construction project to be a profitable venture. The main reasons you should audit your job costing system will include the following:
As you consistently job cost and accumulate job cost data, you can create a historical database to understand where and how you make money on projects. This info might seem obvious or even unnecessary, but this could not be further from the truth. For example, a contractor may think, “as long as I am profitable, why does it matter where that money comes from?” The answer is scalability.
As a company grows and takes on bigger or more complex jobs, the needs, requirements, timelines, and, most importantly, the costs will change. Suppose your current job costing system is not robust enough or doesn’t consider these new project details. In that case, it will need to be evaluated and retooled to ensure it is providing accurate information. This is vital for companies looking to continue to scale operations. Through an updated job costing system that is growing and adapting with the company, better choices can be made depending on where contractors want to take the business long-term.
Utilizing the right construction management software can help with this transition. They can capture and visualize job costs in real-time, provide budget tracking and reports to better evaluate costs at each phase of projects, and seamlessly track labor, materials, and equipment. In addition, having a tool handle brunt of data collection and organization helps deliver the right information when and where you need it.
Improved financial accuracy
Since job costing is all about dollars and cents, the numbers coming in must be accurate and up-to-date. Unfortunately, there are many instances where crucial pieces of data are missed, not properly accounted for, or ignored altogether. For example, many contractors will track labor by marking who did the job, followed by their wages, and the number of hours they worked. This is a good starting point, but it doesn’t go far enough as it leaves out a big piece of the puzzle. That piece is labor burden; part of auditing your job costing system is to ensure you provide a clear picture of your costs. This doesn’t mean you should try to get as accurate as possible; it means you should get the exact numbers. You need to be precise here. In this scenario, not including labor burden will skew the numbers on financial statements, and the profit on each job will appear larger than it actually is. In fact, If you don’t account for your total labor burden, your job cost could be off by as much as 50%. This level of granularity needs to be achieved for all of the major cost categories of job costing (labor, materials, equipment, sub fees, additional direct costs).
Improved financial accuracy will be of immense importance when it comes to cash flow management. Knowing how much is going in and coming out is fundamental to assessing the financial health of every job. Any inaccuracies can throw off your numbers across the board, resulting in skewed financial statements and various financial issues down the line, as any project manager, CPA, or construction business owner knows.
With a growing labor shortage and perpetually fluctuating material prices, auditing your job costing system is essential for contractors to properly account for changes in construction costs that are primarily out of any contractor’s control. Material costs will change over time due to a myriad of reasons:
- Fuel costs will swing.
- New technology is introduced into the market.
- World events can potentially complicate supply chains (i.e., the suez canal crisis and COVID).
On a smaller scale, yet just as important, contractors may switch suppliers, purchase higher or lower-quality materials, or take on a job requiring specialized equipment. These changes must be accounted for and adequately included in budgets. You want to avoid overcharging customers or underpricing your jobs. Never assume the cost of materials; stay on top of market prices and continually evaluate these costs so you can identify opportunities to control material costs for future projects in an ever-changing construction industry.
Improved efficiency & decision-making
A construction job cost audit will give business owners a valuable opportunity to gain insight into their finances with a bigger-picture bird’s eye perspective. Conducting an objective review allows you to take a step out of looking at the numbers job-by-job and now allows you to look at the bigger picture of each job and how each job affects overall profitability. For instance, if you consistently see cost overruns on jobs conducted on Mondays, this warrants a thorough investigation as to why. Is the overrun a data acquisition issue or a labor, materials, or equipment issue? Did you fail to properly account for how a change order would affect project cost?
Answering these questions is imperative for deciding how best to handle cost discrepancies. The real power of job costing comes from consistency, and conducting an audit allows you to harvest the benefits of that consistency. The goal is to improve estimating and uncover the exact conditions that maximize profit for your team, trade, and industry.
Additionally, essential cost savings and process improvements are uncovered. Is your company infrastructure and procedures as optimized as they could be? Is this affecting your job level profitability? These are important questions to answer that will be revealed by thoroughly analyzing your numbers and processes. When conducting the audit, it’s crucial to determine if costs are being properly allocated, tracked, documented, and accounted for. Construction accounting is complex, but with the proper foundation in place, construction companies and project managers can collect the information they need to secure healthy profit margins on every construction project.
Job costing audit checklist
Reviewing company-wide processes and procedures
Are overall business processes and procedures up-to-date and in line with industry standards?
- Are office processes (timecards, estimates/quotes, invoices) done via digital tools and platforms?
- Do you have a CRM system in place, and do you actively track and manage your sales pipeline?
- Are you able to share project information and important documents with clients through digital means (not phone, fax, or email)?
- Are you able to send and receive electronic payments?
- Are you able to securely store and manage contracts through digital means?
Are job management and reporting systems up-to-date and in line with industry standards?
- Are you using construction management software to track and organize detailed job costing information?
- Is job costing information stored, organized, and easily accessible?
- Are you able to create accurate profitability reports on past jobs?
- Are employees able to track time in an accurate and efficient manner?
- Are you able to view job costing data in real time throughout the course of a project?
- Are you able to quickly look up which invoices are outstanding/overdue?
Ensure all major cost categories are being tracked accurately on every job
- Subcontractors fees
Are you including the “full-cost” of every job?
- Are you accounting for labor burden when tracking labor costs?
- Are job costs being reconciled with vendor invoices to ensure accuracy?
- Are job costs being appropriately allocated and tracked to the appropriate job (i.e., are cost figures matching up to the right job)?
- Are you calculating the cost of equipment rental or usage on a per-hour basis for jobs?
If using cost codes, are your jobs coded correctly?
- Do they align with the most recent CSI codes?
Reviewing per-job profitability
Have you analyzed the job cost reports from every job over the past week to identify any potential areas for cost savings?
- Are any jobs underperforming or overperforming?
- Are labor costs consistently exceeding estimates? If so, have you analyzed all jobs with cost overruns to determine why?
- Are material costs consistently exceeding estimates? If so, have you analyzed all jobs with cost overruns to determine why?
Are you monitoring the job progress consistently during the course of a project and adjusting costs accordingly?
- Are margins being monitored on a per-job basis?
- Are profitability goals being met and tracked?
Double-check the deadline to submit to ensure you deliver the proposal on time
If you are providing warranty information, have you provided the necessary details on what you will and will not perform after the project?
Have you reviewed project documents with your team and given them time to answer questions?
Do you have a process in place for following up?
Are estimates consistently falling within budget?
- If estimates and total project costs are considerably off – have you reviewed the job to determine and identify what caused the cost discrepancy?
- Are the estimated costs in line with the actual costs?
Have you analyzed job cost/profitability reports for any potential areas to improve the accuracy of your estimates?
- Are you identifying costs you may have missed when creating your original estimate?
- Are you accounting for labor burden when estimating labor costs?
- After identifying where you over or underspend, are you using this information to adjust future bids for similar jobs?
Compliance and accessibility
Ensure that your financial recording practices comply with all applicable laws and regulations
Ensure that job cost records are properly archived and stored in a secure location
You can download the full checklist in a pdf format here.
How Knowify helps in optimizing a job costing system as you scale
Knowify gives subcontractors the tools they need to scale, evaluate, and organize jobs for improved profitability. Through powerful reporting tools, job costing improves job management for the entire lifecycle of projects. Knowify allows contractors to create precise estimates with detailed budgets. From there, we deliver fully integrated time tracking, purchase orders, and more so you can have a complete hold of each job through every phase. Once a job is complete, Knowify provides project profitability data based on revenue collected and expenses incurred so that you have all the information you need to determine what went right and where performance could improve. Overall we give contractors the know-how and tools to gain actionable business intelligence. Identify problem jobs that consistently bleed money, and find areas where you excel so you can lean into what you do best and make more money doing it.
Knowify brings job costing full circle by helping you manage job costs throughout the life cycle of a project. When a job is in the estimating phase, you can put together precise cost estimates with itemized material, labor, and subcontractor budgets. Then once the job kicks off, Knowify’s fully integrated timekeeping, purchase orders, and more will enable you to track progress against your budgets in real-time. Finally, when the job is complete, Knowify will give you project profitability data based on revenue collected and expenses incurred and powerful reporting tools to look across your jobs to see where you performed well and where you did not. You’ll never look at job costing the same way again.
Benefits of optimizing a job costing system
#1 Provides the necessary info for scaling a business
#2 Improve efficiency
#3 Foster better decision making
#4 Increases job-level profitability
#5 Helps mitigate cost overruns or unexpected project expenditures
Simply put, an optimized job costing process will result in improved profitability on jobs. To understand how we need to think back to why job costing is even done in the first place; job costing allows contractors detailed visibility into the dollars and cents of every job. By identifying where there is consistent overspending or inefficiencies, contractors can do two immensely important things: adjust currently underway jobs to reduce additional overspending or even entirely course correct a specific job, turning it from unprofitable to profitable, and use historical cost data to strategically plan jobs to virtually guarantee profitability.
In the long run, optimizing and fine-tuning your job costing system will ensure that costs are accurately tracked and reported. This is fundamental for making more informed decisions about projects to safeguard your business from overspending or undercharging for services.