Construction accounting involves a range of specialised financial practices that help builders manage costs, monitor profitability, and ensure accurate reporting.
Construction Job Costing is one of the most critical commercial processes in building and construction and is non-negotiable if you plan on being able to generate reliable profits from your projects. Many businesses invest considerable time in the construction cost estimating phase of a project. However, once the job kicks off and invoices start flying in, they don’t have a clear process for staying on top of job costs. It’s no surprise that without visibility on costs, they can get out of hand pretty quickly and ultimately erode all of your profit and your team’s hard work. A significant part of the problem can be avoided by implementing job costing as part of your construction accounting toolkit.
This article provides an easy-to-understand explanation of Construction Job Costing, why it is important for good construction accounting to have job costing, or back costing, set up in your business, and some tips on how to go about setting up a reliable Project Job Costing Process.
Construction Job Costing is where you match all supplier invoices, as they are received againts your WBS (Work Breakdown Schedules) in your Construction Software, to the corresponding project, category, or stage, and compare the invoice cost to your original estimate for the same item. It’s a foundational element of any good construction accounting system.
There are a range of reasons why a job costing process is a vital part of construction accounting. Key reasons include:
Check out our WIP Masterclass to learn how to calculate WIP and download our free WIP Template.
Setting up job costing the right way will immediately improve your overall construction accounting function. Here’s how to get started:
There are a range of great tools in the building and construction space that will make job costing much easier. Depending on the businesses age and stage, we recommend using Dext to capture your invoices and get them straight into your accounting platform – we prefer Xero. Once in Xero, you can sync your invoices to your job management platform like Buildxact, making sure you match the invoice items to the correct stage and item in the job. Larger systems will likely have something already integrated. These tools work together to sync data across your job costing and accounting platforms, making your construction accounting process more streamlined.
Having a unique code for each job and referencing this code when you order materials (preferably in your Purchase Order) or deal with subbies, allows you to easily match the invoice to the corresponding job. Make sure you are using the same code across each platform in your tech stack so the invoice data will automatically sync where possible, minimising errors in your construction accounting system.
These are non-negotiable if you want to set up a well-oiled Construction Job Costing process. Purchase Orders make it much easier for you to link your incoming invoices to the specific job and line items in the job. They are also used to lock in the quantity, price, and timing of your materials and cut down on endless conversations with your bookkeeper on how invoices need to be handled in your accounting platform. And if the invoice doesn’t match the PO – you can reject it and go back to the supplier with a “please explain”.
As long as you’re set up properly, materials and sub-contractor invoices are fairly easy to allocate to the specific projects, however, allocating your own internal labour to specific jobs can be a challenge. The solution for this is the use of time sheets. Platforms like Deputy provide the ability to input job codes when staff are filling out their time sheet, so this can feed into both Xero and your Job Management software.
To ensure your job costing and construction accounting process is providing timely data for your profit reporting, it is important to have a regular weekly process for things like Accounts Payable processing. We recommend running weekly bank reconciliations and accounts payable processes.
Setting up job costing can be challenging initially. It is worth getting advice from someone who knows this process from both a tech and accounting perspective. Once you are setup, your team need to be trained on the correct processes, and as an owner, you need to regularly check the process is being maintained.
Construction Job Costing is a cornerstone of effective construction accounting but it can be challenging to implement properly – and there is no “halfway approach” when it comes to getting it right. You’re either doing job costing properly and yielding the benefits of full financial clarity – or you’re potentially giving yourself a false picture of costs and profit.
Watch the video from our recent webinar, led by our Xact Advisory Team at Xact Accounting, Daniel Wilkinson, where they explored the importance of job costing for builders.
Get in touch to set up a free consultation to find out more about how we help businesses implement processes like job costing and other powerful financial levers.
