How to manage job costs: A guide for construction firms

It’s a nice problem to have—$550bn of federal spend on infrastructure over the next 5 years alone, and not enough construction workers to deliver it.

This ‘bonanza’ of work creates an exciting time for Small and Medium businesses (SMBs)—which make up 99.9% of US construction firms, according to the US Small Business Association.

But with every opportunity comes a perfect storm of risks…

Ongoing challenges include high inflation, increasing wage costs, and skills shortages. Combine that with price increases and multiple delays to project starts—and you’ve got a recipe for squeezed cash flow and margins, which can quickly turn profits into losses.

The secret to keeping in profit?

Managing job costs effectively. This guide from Sage will tell you how—and you’ll  learn to protect your business at every stage of a project.

Here’s what we’ll cover

What is job costing?

Job costing involves working out all your direct and indirect spending, so you know the total cost of every job.

It’s vital within construction—an industry which is often plagued by very low margins.

Job costing enables SMBs to view and control costs to safeguard profit. With data about your real costs, you can price services appropriately—accommodating contingencies, and adjusting your operations over time to stay competitive.

It sounds easy, but it’s not.

Across the world there’s a rise in the number of construction firms becoming insolvent.

The most common reasons for this include poor cash flow and financial management systems; lack of planning, late payments, and inefficient operations.

So, here are all the top tips for managing job costs, maintaining cash flow, and protecting your business from risks.

This is thanks to:

• The Project Management Institute (PMI),
• The Construction Industry Institute (CII)
• The Association of Project Management

Here’s how you can get ahead

Planning

Amid so much volatility, it’s never been more important to plan as much of project delivery as you can—and get on the front foot in dealing with any hiccups.

Labor costs

According to Procore, construction labor costs represent a huge portion of total expenses on projects—up to 50-60%. Whether you use your own people or subcontractors to deliver work, this needs to be managed very carefully.

You’ll need to know exactly how long it takes to complete certain tasks in a range of scenarios.

This enables you to plan effectively the use of expensive, specialist people and ensure they’re working at optimum capacity.

Risk assessment

Ahead of any construction project, think of any likely scenarios such as increasing materials costs, potential supplier insolvencies, and delays so you can accommodate these in a flexible project plan.

That way, you can proactively develop contingency plans and avoid unforeseen expenses.

Get your contracts in order

Make sure you word your contracts carefully so you can share—or reassign—risks to your suppliers or clients:

• With Firm Fixed Price (FFP) contracts, you can transfer financial risks onto suppliers so they pay for cost overruns
• With Cost Plus (CP) contracts, you can shift financial risk onto the client – they cover all expenses including overruns.

Keeping them as digital versions also means you can update them regularly and send the latest version over to sign without wasting paper or incurring storage costs.

General costs

Always negotiate the best prices with suppliers, but include a margin for error to accommodate cost increases and overruns.

Plan out where costs will fall within the project schedule to manage resource demand.

Agree the level at which costs will be collected and controlled so you can set budgets and record costs accurately.

Consider software that can manage job costing for you.

Control the details

With a high-level approach in place, break down the project into manageable tasks and assign these to the appropriate contractors to keep tabs on each individual aspect of the project.

Monitor and track against budget

It’s vital SMBs regularly compare actual costs against the budget to identify any variances early.

This will allow you to stop minor issues from escalating into significant financial risks.

This will also inform lessons learned so you can continually improve your approach over time.

Some companies find it helpful to benchmark their performance against industry benchmarks.

With an objective and realistic measure, you can objectively identify areas for cost savings and efficiency improvements.

Maintain cash flow

Without good cash flow, everything can grind to a halt on a construction project—which can effectively render even the most advanced job costings work completely worthless.

Reviewing your systems for managing costs:

It’s thought that around half of construction companies in the USA still use manual processes—pens, paper, and spreadsheets, to manage their projects.

Manual systems might appear cheaper, but in an increasingly competitive construction environment, they’re a false economy.

Because it’s almost impossible to control construction costs effectively using manual, paper-based systems:

Building in risks

With manual systems, it’s likely you’re going to waste time and effort on low-value administrative tasks. This creates the potential for human error and discrepancies—which calls into question the rigor of your entire data set.

In addition, manual systems do not usually enable real-time cost updates, which means it’s difficult to track expenses and respond quickly to changes or issues

Cash flow

You need to track the amount of money going in and out of your construction project to make sure you can meet your financial obligations. But it can be difficult to do this when you have to cross reference separate sources of information.

Switching to a paperless system can help by converting paper invoices or receipts to digital versions and then compiling the data within to give immediate insights.

Data security

You don’t keep cash under your bed because people can steal it. The same applies to construction data.

Information security is at risk when you’re dealing with physical documents—which can be taken, lost or damaged. It’s much more secure to use fully encrypted storage online.

Lost opportunity costs

Without accurate data, you can’t deliver accurate reporting or make the best decisions for your construction business.

In addition, as you grow, so does the complexity of managing cost and risk.

Clunky systems also make it almost impossible for other teams to collaborate with you in an intelligent way.

Go online – Use financial management software to get ahead

For many construction firms, it can feel like a big step introducing a software-based system to manage finances—but it’s worth it.

Using financial management software to manage costs in construction projects leads to greater accuracy, efficiency, collaboration, and control, ultimately contributing to successful project outcomes.

Design out errors

Online systems allow you to design out the potential for human error involved with manually inputting and processing data.

Accurate, real-time data

You’ll get all of your information in one place, making it easier to retrieve, manage, analyze, and report on data.

You’ll also get a clear picture of the performance of your construction project.

This enables you to proactively spot spending patterns and potential overruns, and then take steps to control costs.

And with the benefit of smarter data you can carry out better analysis.

Better management of labor costs

With an online financial management system, you’ll be able to go beyond using historical data, or simply recording how long it takes to complete each task.

You’ll be able to accurately predict construction labor costs based on data and analytics using insights to predict trends and patterns in the future as well as the present.

This enables you to plan more effectively the use of expensive, specialist people and ensure they’re working at optimum capacity—preventing wasted time, and managing real costs more effectively.

Cash flow

Cash flow makes or breaks a business—and you don’t want to have this resting on a few pieces of paper. Proper software enables you to understand your true financial position and make better decisions about the future.

Use an online system and you’ll also get data that will help you identify potential financial risks early, and proactively take steps to mitigate any issues.

Better insights

With accurate data, you can redirect time and effort from low value tasks into protecting and growing the bottom line.

From there, you can use tools and analytics to forecast future costs and trends, and support improved budget planning and risk management.

Scalability

With an online system, you’ll also be able to handle the increasing complexity and scale of projects, accommodating growth seamlessly, without making any significant changes to the process.

It’s also easier to work smarter and more collaboratively.

Key partners can access and update information from anywhere, and you’ll be able to integrate all your systems to streamline management of the entire project

Peace of mind

With all your transactions well-documented, it’s more likely you’ll be compliant with, and less likely to be caught out by, regulations.

You can also sleep easy knowing you’ve optimized security to protect financial information.

Final thoughts

The US’s $25 trillion economy relies on a vast network of infrastructure  including roads, railways, and electrical grids—most of which needs to be renewed.

At a time of unprecedented opportunity within construction, we could see winners and losers decided by their ability to manage construction job costs and cash flow.

Now’s the time to get ahead.

*- US Small Business Association