As a contractor you may wonder, why use construction cost codes? Cost codes are essential for tracking where and how you incur project costs and are a key indicator of success for construction businesses. They offer a clear view of what was spent, how much you made, and what expenses helped you not only get the job done – but increase profit.
What are cost codes, exactly?
Cost codes provide an easy and effective way to organize costs by separating them into specific categories. They also show how much specific activities are costing — including which activities are costing too much. When you know where money is being spent across each contract, you can use that information to create more accurate estimates and bid more effectively on projects.
Leveraging cost codes can help construction businesses increase profits, reduce overhead, and scale effectively. Ready to learn more? Let’s dive in.
Improving efficiency and profitability
Cost codes can improve efficiency and profitability across every part of your construction business. Here’s how you and your employees can use them effectively:
Estimating. Providing accurate estimates can be a frustration for many contractors. Ballpark estimates without hard data to support a project’s expected costs could put you in hot water – especially if the scope of work changes or the cost of labor or supplies shifts. Instead, use cost codes to get an accurate sense of what past project costs have been.
To do this effectively, many contractors divide a project into defined jobs or activities, assign a cost code to each, and then add up the numbers attached to individual line items to determine the project’s estimated cost. If the scope of a project changes, you simply add or delete line items and recalculate the total. This makes creating accurate estimates easy for busy business owners and can help you to stay on top of unexpected costs.
Project management. Job supervisors and business owners can use cost codes to document work and track the progress of construction projects in real-time. They can compare actual costs to job budgets and make any needed adjustments before the money is lost on unnecessary materials or labor. By tracking actual project costs, project managers can make it easier for business owners or client representatives to create accurate estimates for future jobs. They can also offer feedback on project costs to help trim the excess and increase profit along the way. This cycle of continuous improvement sets your company up for success in the long run.
Finance and accounting. Cost codes can help reveal spending trends so that you can better control purchasing and the use of materials and labor. They also enable you to calculate under- and overbilling and pinpoint where costs are generated, which activities generate the most expenses, and which costs are linked to profits. This helps with both short-term decision-making (like creating estimates) and long-term planning (like deciding which types of projects and associated costs help move the needle in your business).
Integrating data
Generally, accounting software helps contractors automate processes. However, the accuracy of data generated by software will be only as good as the data you use!
If you decide to implement cost codes in your construction business or refine your approach to how they’re used in your company, it’s helpful to establish a cost code structure. This structure can be used consistently across all of your teams and business units and ensure that your software will have accurate data to organize and use to make future decisions.
Because accounting software integrates cost codes with transactions — for example, accounts payable bills, invoices, purchase orders, and timecards — you can easily analyze budgeted vs. actual costs and revenue. This helps keep projects on time and on budget and provides you with the information needed to eliminate profit fade, a gradual decline in expected gross profits over the course of a job.
Adding cost types to cost codes allows you to extract specific values related to labor, equipment, material and overhead. Especially important in the current challenging environment, cost types enable contractors to track new items, such as personal protective equipment costs, and expenses related to employees working from home. If your business has received pandemic-related loans or grants, the ability to track and document these amounts is essential.
Best way to standardize processes
Cost codes aren’t the only way to divide costs into categories, but they’re the best way to standardize processes. Using descriptive phrases, however, can lead to typos and errors and make it difficult for you and your employees to search for data. By creating a standard cost code list that’s used throughout your business, you’ll simplify searches and enable consistent analysis of information.
Many companies use the construction cost codes list provided by the Construction Specifications Institute (CSI). But if the CSI’s list doesn’t meet your business’s needs, you can draw up your own cost codes.
Another way to standardize the process is to review data derived from cost codes regularly. Having a project manager or team lead analyze data can help to both prevent inaccuracies and make future decisions. Just having cost codes in place isn’t enough to effectively leverage them to help your business increase profits and scale. Putting systems in place both around their use, and how data is processed and synthesized into feedback can be helpful.
Need help?
The team at Mashburn CPA is here to assist you. Together with our clients, we look to create processes and systems that help them move the financial needle in their construction businesses. Implementing cost codes is one way to easily jump-start your cost analysis and make strategic decisions about the growth of your business moving forward.
Our team has experience working with construction businesses like yours to navigate your unique challenges and financial pain points. If you have questions about our services, or how we can help your business reach new heights, contact us today by clicking here. We look forward to hearing from you soon!
