Job Costing Basics

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Proper job costing is essential for any construction company and is one of the most effective tools for accurately determining the actual cost of jobs performed.  Job costing allows for proper analysis of jobs performed and can help companies remain profitable. It gives contactors the information needed to properly bid on potential jobs.

What is Job Costing?

Job costing is a system that accounts for billings, revenues, direct costs and indirect costs of a company’s operations, and applies them to each specific job undertaken.  Applying billings and direct costs to jobs is a standard practice and is easy to compute.  The indirect costs are the key to really effective job costing.

Job Costing Basics

First, billings, direct expenses, and direct labor are tracked and applied to each specific job in progress.  Direct labor can be identified to jobs based on time sheets.  All modern accounting software (including Quickbooks) should allow for the tracking of direct costs and labor by job.  The next step is to apply the indirect costs of a company, or “burden” (rent, indirect wages, insurance, etc…).  This is where it can get tricky.  There are many ways to allocate indirect costs to each job, but the most common is to allocate indirect costs based on the direct labor incurred on a particular job.  In order to calculate this “burden rate”, it is common to calculate the average indirect costs as a percentage of direct labor for a company for a representative period, such as the prior three years.  Then, at the time of each payroll run, indirect costs should be allocated to jobs based on this calculated “burden rate”. With the resulting job costing information, the amount of revenue to be recognized for the period under the percentage of completion method of accounting can now be determined.

Why Use Job Costing?

When it comes to job costing there are many benefits to be realized.  The percentage of completion method of accounting is required for contractors under General Accepted Accounting Principles, and job costing is necessary for the calculations.  Job costing is also often required by bonding companies. The practical benefit of job costing is that it allows a company better analysis of each job undertaken.

Basic job costing is a must for all construction contractors.  It can be an intimidating job to tackle, but with a basic understanding of the principles of job costing, anyone can do it.

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