Good job costing should help contractors understand the financial performance of each project while the work is still underway.

It should not simply allocate expenses after the project is complete.

A strong construction job-cost system connects:

• estimates;

• project budgets;

• committed costs;

• actual costs;

• labor;

• materials;

• subcontractors;

• equipment;

• change orders;

• WIP;

• billings; and

• final project profitability.

The objective is to create a financial feedback loop from the original estimate through project closeout.

Start With the Original Estimate

Job costing begins before the project starts.

The original estimate establishes management's expectations for:

• labor;

• materials;

• subcontractors;

• equipment;

• project overhead;

• contingency;

• gross profit; and

• gross margin.

Those expectations should carry into the accounting and project-management systems.

If the estimating system and job-cost system use completely different structures, comparing actual performance to the estimate becomes much harder.

Build the Job Budget From the Estimate

Once the project is awarded, the estimate should become an operating budget.

The project budget should identify expected costs by meaningful category.

For example:

• labor;

• materials;

• subcontractors;

• equipment;

• permits;

• freight;

• project management;

• temporary facilities; and

• other direct project costs.

A good budget allows management to compare:

what we expected to spend

with

what we have spent

and

what we now expect to spend by completion.

Use Consistent Cost Codes

Cost codes create the language that connects estimating, operations, and accounting.

If an estimator organizes labor and materials one way but accounting records them differently, management loses visibility.

A consistent cost-code structure can help answer questions such as:

• Which phase is over budget?

• Is labor productivity below estimate?

• Are material costs exceeding plan?

• Which subcontract categories are driving the variance?

• Are the same types of costs overrunning across multiple jobs?

The cost-code structure should provide useful detail without becoming so complicated that employees stop using it correctly.

Avoid Overly Broad Job-Cost Categories

A project coded primarily to categories such as:

Labor

Materials

Subcontractors

may not provide enough information.

If labor is $200,000 over budget, management still needs to understand where the problem occurred.

More useful reporting may separate labor and cost by:

• project phase;

• division;

• activity;

• trade;

• cost code; or

• other operationally meaningful category.

The right level of detail depends on the contractor.

The goal is not maximum detail.

It is decision-useful detail.

Capture Costs Promptly

Job-cost reporting loses value when costs enter the system weeks after they occur.

Contractors should establish timely processes for:

• vendor invoices;

• employee time;

• credit cards;

• purchase orders;

• subcontractor invoices;

• expense reimbursements; and

• equipment charges.

If significant project costs are missing at month-end, the job may appear more profitable than it really is.

Timeliness matters.

Improve Labor Costing

Labor can be one of the largest sources of job-cost variance.

Contractors should capture labor at a level that allows management to compare actual performance to the estimate.

That may include:

• employee;

• job;

• phase;

• cost code;

• hours;

• labor rate;

• overtime; and

• burden.

For example:

Estimated labor hours: 2,000

Actual hours used to date: 1,400

Estimated project completion: 50%

That should prompt a question.

If half the work is complete but 70% of the labor hours have already been consumed, the job may be headed toward margin fade.

Include Labor Burden Appropriately

Direct wages are not always the full cost of labor.

Depending on the contractor's accounting approach, labor cost may also include items such as:

• payroll taxes;

• workers' compensation;

• employee benefits;

• union costs;

• insurance; and

• other employment-related costs.

If estimates assume burdened labor but job-cost reports capture only wages, comparisons will be inconsistent.

Estimating and accounting should use compatible assumptions.

Track Materials by Job

Material costs should be assigned to the correct project and, where useful, the correct cost code.

Common problems include:

• materials coded to the wrong job;

• credit-card purchases left uncoded;

• inventory withdrawals not assigned;

• freight separated from the related material;

• returns not credited to the project; and

• invoices arriving after the reporting period.

These errors can distort both individual job margins and company-level results.

Track Committed Costs

Actual costs alone are not enough.

Contractors should also understand costs that have been committed but not yet recorded.

Examples include:

• subcontract agreements;

• purchase orders;

• equipment commitments;

• material orders; and

• other contractual obligations.

Suppose a job has:

Actual cost to date: $1.2 million

Open commitments: $600,000

Looking only at the $1.2 million recorded in accounting may make the project appear stronger than it is.

Committed costs provide a clearer view of what is already economically obligated.

Integrate Subcontractor Commitments

Subcontractor costs can represent a significant portion of project spending.

The system should ideally track:

• original subcontract;

• approved changes;

• invoices received;

• amounts paid;

• remaining commitment;

• retainage; and

• pending changes.

That makes it easier to identify whether the cost-to-complete estimate is realistic.

Connect Change Orders to Job Costing

Change orders affect both sides of project profitability.

They can change:

contract revenue

and

project cost.

A good system should distinguish between:

• approved change orders;

• pending change orders;

• disputed changes;

• revenue associated with the change;

• cost incurred;

• cost remaining; and

• billing status.

If additional work is performed but the related change order is not tracked, the project can experience hidden margin erosion.

Don't Let Pending Change Orders Disappear

Pending changes deserve their own visibility.

Management should understand:

• work performed;

• cost incurred;

• amount requested;

• estimated remaining cost;

• customer approval status; and

• expected collection.

Otherwise, project teams may continue performing additional work while management assumes the original margin remains intact.

Connect Job Costing to WIP

Job costing provides much of the underlying information needed for a reliable WIP schedule.

A good WIP process depends on:

• accurate cost-to-date information;

• committed costs;

• contract values;

• change orders;

• estimated cost to complete; and

• project status.

If job costing is weak, WIP will be weak.

Related Resource: What Is a Construction WIP Schedule? →

Job Costing Should Include the Estimate to Complete

Historical costs answer:

What have we spent?

Management also needs to know:

What do we expect to spend from here?

That is the estimated cost to complete.

For example:

Original estimated total cost: $2.5 million

Cost incurred to date: $1.4 million

Original remaining estimate: $1.1 million

Updated project-manager estimate: $1.4 million

Revised total cost: $2.8 million

That $300,000 change may materially reduce expected project profit.

Without a recurring cost-to-complete process, the problem may remain hidden.

Compare Actual Results to the Original Estimate

Project managers should have access to reports that compare:

• estimated cost;

• current budget;

• actual cost;

• committed cost;

• estimated cost to complete;

• projected final cost;

• and variance.

Now management can see where expected project profitability is changing.

Review Forecast-at-Completion

The most useful job-cost report is often not simply:

Budget vs. Actual

It is:

Budget vs. Forecast at Completion

Actual cost tells management where the project has been.

Forecast at completion estimates where the project is going.

That distinction is critical.

A job can be under budget today and still be projected to finish over budget.

Monitor Gross Margin by Project

Each project should have a current expected gross profit and gross margin.

Management should compare:

• estimated margin at award;

• margin at project start;

• prior-month forecast;

• current forecast; and

• final margin.

That makes margin fade and gain visible.

Related Resource: What Causes Job Margins to Fade? →

Investigate Variances Instead of Simply Reporting Them

A variance only becomes useful when management understands its cause.

For example:

Labor is $75,000 over forecast.

Why?

Possible explanations might include:

• productivity problems;

• overtime;

• rework;

• schedule changes;

• scope changes;

• incorrect estimate;

• poor cost coding; or

• additional work not yet captured in a change order.

The system should support the conversation.

It does not replace it.

Give Project Managers Financial Ownership

Project managers often make decisions that directly affect:

• labor;

• materials;

• subcontractors;

• schedule;

• change orders;

• billing; and

• project margin.

They should therefore understand the financial consequences of those decisions.

A strong job-cost process gives project managers regular visibility into:

• budget;

• actual cost;

• commitments;

• remaining cost;

• margin;

• billing position; and

• project risks.

Job profitability should not be something discovered by accounting months later.

Establish a Monthly Job Review

For many contractors, job costing should feed into a monthly project and WIP review.

A practical discussion might cover:

1. Contract value.

2. Approved and pending change orders.

3. Budget.

4. Actual costs.

5. Committed costs.

6. Labor performance.

7. Cost to complete.

8. Forecasted final cost.

9. Gross margin.

10. Billings.

11. Collections.

12. Overbilling or underbilling.

13. Schedule risks.

14. Required management actions.

That creates accountability around both operations and finance.

Look for Coding Errors Before Assuming the Job Is Failing

Not every unfavorable variance represents a real project problem.

Sometimes the data is wrong.

Possible issues include:

• costs posted to the wrong project;

• labor assigned to the wrong code;

• duplicate invoices;

• miscoded credit cards;

• missed vendor credits;

• overhead incorrectly assigned;

• or missing commitments.

Material variances should be validated before management changes the forecast.

Reconcile Job Costing to the General Ledger

Project-level reports should reconcile to company-level accounting.

If job-cost reports show one cost total while the general ledger shows another, leadership should understand the difference.

Recurring reconciliation helps detect:

• uncoded costs;

• missing jobs;

• incorrect classifications;

• system-integration issues; and

• manual spreadsheet errors.

Financial reporting becomes much more reliable when the project system and accounting system agree.

Reduce Spreadsheet Dependency Where Possible

Spreadsheets can be useful.

But excessive manual reporting creates risks.

Problems may include:

• version-control issues;

• broken formulas;

• manual rekeying;

• inconsistent cost codes;

• data that becomes stale;

• and reporting dependent on one employee.

As contractors grow, job-cost information should increasingly flow from integrated accounting, project-management, estimating, and reporting systems where practical.

Keep the System as Simple as It Can Be

Better job costing does not necessarily mean more complexity.

A system with hundreds of unused cost codes is not automatically better than one with 40 meaningful codes.

The right system should provide enough detail to manage the work while remaining usable by:

• project managers;

• field staff;

• estimators;

• accounting; and

• leadership.

If the process is too difficult, data quality usually declines.

Use Completed Jobs to Improve Future Estimates

Job costing should create feedback for estimating.

At project closeout, compare:

• original estimate;

• final cost;

• original margin;

• final margin;

• estimated labor hours;

• actual labor hours;

• estimated material;

• actual material;

• subcontract estimates;

• final subcontract cost; and

• planned duration versus actual duration.

Then ask:

What should we change in the next estimate?

This creates a learning loop.

Analyze Results Across Multiple Jobs

Contractors can gain additional insight by comparing completed jobs by:

• estimator;

• project manager;

• customer;

• project type;

• geography;

• contract size;

• division;

• trade;

• and contract structure.

Patterns may reveal that certain types of work:

• consistently outperform;

• consistently fade;

• require more working capital;

• generate more change-order disputes; or

• produce weaker cash flow.

That information can influence both pricing and strategy.

Job Costing Should Help Contractors Price Better

Historical job-cost data can improve future pricing.

Instead of estimating solely from standard assumptions, contractors can use actual experience to refine:

• labor productivity;

• material usage;

• subcontractor expectations;

• equipment requirements;

• project overhead;

• contingency;

• and target margins.

Accurate job costing therefore influences not only reporting.

It can directly improve the quality of future bids.

Job Costing Should Connect to Cash Flow

A profitable job can still create cash-flow pressure.

Management should connect project profitability with:

• billing;

• collections;

• retainage;

• underbillings;

• overbillings;

• material purchases;

• subcontractor payments; and

• remaining project costs.

That allows leadership to understand both:

Will this project make money?

and

When will this project generate or consume cash?

Common Job-Costing Mistakes

Common problems include:

• cost codes that do not match estimating;

• inaccurate labor coding;

• slow vendor invoice processing;

• ignoring committed costs;

• failing to track pending change orders;

• incomplete cost-to-complete estimates;

• project managers not reviewing financial reports;

• excessive spreadsheet dependency;

• failing to reconcile to the general ledger;

• focusing only on actual cost instead of forecast-at-completion;

• and never comparing final results back to the estimate.

Each problem weakens management visibility.

A Strong Job-Costing Process Connects the Entire Project Lifecycle

The process should flow from:

Estimate

↓

Project Budget

↓

Cost Codes

↓

Actual + Committed Costs

↓

Cost to Complete

↓

WIP

↓

Billing & Cash

↓

Final Project Profitability

↓

Lessons for the Next Estimate

That is when job costing becomes more than an accounting function.

It becomes part of how the contractor manages the business.

The Bottom Line

Contractors improve job costing by connecting the financial information created throughout the entire project lifecycle.

A strong system brings together:

estimates

budgets

cost codes

labor

materials

subcontractors

committed costs

change orders

WIP

billing

cash

and

final profitability.

The objective is not simply to know what a project cost after it is finished.

It is to understand where the project is heading while management still has time to make a difference.

How Bilotta & Company Can Help

Bilotta & Company, CPAs, LLC works with construction contractors on job costing, WIP reporting, accounting, financial statement assurance, tax, cash-flow forecasting, and financial leadership.

Through our Contractor Compass® Financial Stewardship program, we help contractors build recurring processes that connect project-level performance to the broader financial picture.

That includes improving visibility into:

job margins

cost to complete

WIP

billing

cash flow

forecasting

and

management decisions.

Our Financial Stewardship as a Service® rhythm is:

Close → Analyze → Forecast → Decide.

Strong job costing makes each part of that rhythm more useful.

Related Resource: What Is a Construction WIP Schedule? →

Related Resource: What Causes Job Margins to Fade? →

Related Resource: What Is Overbilling vs. Underbilling in Construction? →

Explore Contractor Compass® →

Visit the Construction Contractor Financial Resource Center →

This article is provided for general educational purposes and should not be considered accounting, tax, legal, bonding, lending, estimating, or financial advice for a specific contractor or construction contract.