No matter the size of your construction business, cost codes are essential for tracking where and how you incur project costs. Although a job's overall cost will tell you what was spent and how much was made, it won't tell you why you spent the money or earned that profit.
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 on each job, you can use that information to create more accurate estimates and bid more effectively on projects. Ultimately, this could help to increase profits and spur business growth.
Cost codes can improve efficiency in every aspect of your construction company. Here's how you and your employees can use this tool:
Estimating. 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.
Project management. Job supervisors 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 money is lost on unnecessary materials or labor.
By tracking actual project costs, project managers provide estimators with continuous feedback they can use to create accurate estimates for future jobs.
Finance and accounting. Cost codes can help reveal spending trends so that you can better control purchasing and the use of materials and workers. They also enable you to calculate under- and overbillings and pinpoint where costs are generated, which activities generate the most costs and which costs are linked to profits.
Generally, accounting software helps contractors automate processes. But the accuracy of data generated by software will be only as good as the data you input. If you decide to implement cost codes, or refine your approach to them, establish a cost code structure and use it consistently across teams so that your software will have accurate data to organize, sort and manipulate.
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.
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 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. To learn more about establishing and using cost codes, consult a CPA with construction industry expertise.
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