Construction Job Costing, otherwise known as Back 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. A significant part of the problem can be avoided by implementing job costing.
This article provides an easy-to-understand explanation of Construction Job Costing, why it is important 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, to the corresponding project, category, or stage, and compare the invoice cost to your original estimate for the same item.
There are a range of reasons why you should have a job costing process set up in your business. Key reasons include:
There are a number of things to consider when you are setting up Construction Job Costing in your business:
There are a range of great tools in the building and construction space that will make job costing much easier. 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.
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.
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 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 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 CFO Advisory Team at Xact Accounting, Daniel Wilkinson and Gayle Williams, 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.
