101 Guide to Job Costing in Construction and Manufacturing

Your business’s projects must be properly documented to ensure that you understand direct costs, such as labor and indirect costs. Job costing can help you track these costs, but you need to fully grasp the concept and which industries it works best in.

What is Job Costing?

In the construction and manufacturing industries, a lot of time must go into planning. You need to plan to meet deadlines, better serve customers and keep everything moving along smoothly by determining expenses.

Job costing tracks every project’s revenue and costs.

You can use this method to:

  • Forecast a job’s profit and loss
  • Compare your estimates to actual costs
  • Uncover excess costs
  • Discover operational inefficiencies

If you understand a job’s cost better, it will empower you to price your services properly, budget with greater accuracy and maintain profitability goals. 

Still confused about job costing? Watch this YouTube video for a more in-depth explanation.

Job costing has multiple key components:

Key Components of Job Costing

Job costing helps you better understand your costs by breaking down each cost into:

  • Direct Labor: Costs for the employees on the job site and working on the job directly
  • Direct Materials: Costs for the job’s materials that are necessary to fulfill the contract
  • Overhead: These are the indirect costs associated with producing a product or delivering a service

With these three components in mind, you can streamline your own job costing system to better control your overhead and costs, while ensuring you remain profitable.

Setting Up a Streamlined Job Costing System

Streamlining your processes and procedures is always a good thing. You need to streamline your job costing to ensure that you can quickly and confidently cost any job that you provide an estimate for and work on. It’ll also help you ensure profitability throughout the project and stay organized. 

We recommend that you do the following to streamline job costing:

Create Job Cost Sheets

Job cost sheets should be available for each job. You may try to cut corners on creating a job cost sheet because it’s a job you do often, but even slight changes in material or labor costs can cause profit margins to fall.

Instead, do the following:

  • Create a standard job cost sheet that you can copy in the future and use as a template. There’s no reason to reinvent the wheel. Templates eliminate the excuse that there’s “not enough time” to create a sheet.
  • Create and fill out the sheet for every job that is in your pipeline. You’ll gather an immense amount of data from these sheets and better maintain your profitability, too.

Line Up Invoices and Vendors

Invoices and vendors should be provided for each job. Not only will it ensure you maintain accurate records, but if you work with a lot of vendors, it’s important to line these items up to maintain clarity. One vendor may be charging more than others, and you can use this step to identify these excess costs.

Use of Purchase Orders (POs)

POs will help you make every job costing as clear as possible. You will want to include:

  • Customer addresses
  • Names

Your POs will allow you to know exactly what your expected costs are and keep transparency throughout your projects. POs will show all aspects of a transaction, committed costs and future committed costs that are yet to be billed. The POs you create will last for the life of the project.

Credit Card Control

Credit card usage can be difficult to track. If you’re not on top of the credit cards that your technicians have, you risk the card being used for personal use. Unfortunately, there are times when a technician knows that the company card isn’t being monitored and will take liberties when using it.

Strict credit card control should be in place, including:

  • Usage limits
  • Expense reviews
  • POs from vendors for each transaction

Job costing can be complex and challenging for you to manage on your own. Thankfully, you’ll find many tools that will help you master job costing.

Software Tools for Job Costing

If you really want a streamlined job costing system, consider using software tools QuickBooks. These tools can automate expense tracking and recording, which will save you time and reduce the risk of errors. 

Wave is a great free option for tracking your income and expenses, but you will likely outgrow it. Also, keep in mind that this platform does not have job costing-specific features.

QuickBooks is the preferred option because it supports job costing and has more robust features.

With QuickBooks Advanced, for example, you can:

  • Add customers and associate jobs with them
  • Assign all of your expenses to jobs
  • Enter estimates
  • Create invoices
  • Run job costing reports

The beauty of using software tools is that everything you need is in one centralized location. It’s easy to organize and assign job expenses, so you can better track costs and compare estimates versus actual expenses.   

With a tool like QuickBooks, you can even run reports to see which jobs are profitable and which ones are not. Being able to analyze jobs will help you create better estimates and identify problems before they progress.

Regular Reviews for Accuracy

Projects are always in flux. Things change because unanticipated costs can arise on any given day. Regular reviews of job costing reports can help ensure accuracy and keep things on track.

How often should you conduct reviews?

  • For smaller companies: Monthly
  • For larger companies: More frequently to ensure accuracy and identify discrepancies

Along with regular reviews, it’s important to ensure consistent documentation. All job-related transactions should be recorded meticulously and regularly. 

Make sure that your employees understand the importance of maintaining consistent, thorough, and accurate documentation. Everyone must be on the same page if you want your costing system to be efficient.

Also, make it a point to regularly compare your estimated costs with your actual expenses. Doing so will allow you to identify discrepancies and variances early on.

Best Practices and Moving Forward

Once you’ve established a streamlined and reliable job costing system, it’s important to keep things on track. 

  • Ensure that your records are up to date
  • Take a forward-looking approach to job costing by anticipating future costs and needs

If you follow these best practices moving forward, you’ll find that your job costing is more streamlined and reliable.

To learn more about job costing or to schedule an appointment, click here.

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