People don’t start out in construction knowing everything about construction accounting, even if they are “good with numbers” or have a background related to general accounting. To become successful, they need to learn about construction-specific accounting and how to apply best practices in a construction business. If that’s you, or if you need a refresher, this series is for you.
Let’s start at the beginning by talking about Job Costing, which is unique to project based businesses like those in the construction industry. We’ll start by reviewing some basic financial statements, which you may be familiar with, since they are something every company needs whether you’re in construction or not..
There’s the balance sheet, if you want to know what sort of assets or liabilities you have. If you want to know your net worth, the balance sheet is the place to go.
If you want to know whether you’ve made money, you’ll want to look at an income statement. That will show you exactly what sort of revenue and what sort of expenses you’ve had for the month.
You could also run some general ledger transaction reports so you can see all the transactions that have been entered this month. That way you can see every single one of your debits and credits for the whole month, which will tell you even more about whether or not the company made money for that particular month.
So you are able to tell the owner or managing executive, “Our expenses are greater than our income this month, so we definitely did not make money this month.”
But what the owner is likely to want to know then are things like how much payroll the company had on the city library project, or how much cost you had in excavation on that project. They may want to know how productive a work crew on the project was.
These are great questions that a construction owner or CEO should be asking, but they are not questions that can be answered with an income statement alone. In order to answer these types of questions, you have to go beyond the General Ledger. Construction businesses need what’s called a Job Cost Ledger.
This Job Cost Ledger stores the specific costs that are charged against a project.
What is the difference between a Job Cost Ledger and a General Ledger?
First, the General Ledger is something that accountants really care about. Anytime an accounting transaction is recorded in the system, it hits the General Ledger. This could be a payroll check, or an accounts payable invoice, or a credit card receipt. All accounting transactions hit the General Ledger.
In the Construction Industry, if that expense is related to a project, it will also hit the Job Cost Ledger. THIS is what Project Managers care about. They want to know details on what the project costs are. You’ll never meet a project manager who will ask you for details about the General Ledger - not going to happen.
When accounting people talk about the General Ledger, they use words like “debits” and “credits” and other fancy accounting words that frustrate non-accounting people, like project managers. Project Managers don’t care about “debits and credits.” They care about dollar amounts.
When an accountant posts to a General Ledger, they are posting to a Chart of Accounts. Think of it as saying “Hey, I’m posting this invoice to office supplies, and posting this check payment to rent, and posting this invoice against accounts receivable.
Well, guess what. Project Managers don’t really care about that fancy Chart of Accounts either. They care about things like Cost Types and Cost Codes.
Now, when an accountant looks at a General Ledger, they are going to look at the numbers and compare those against a budget just like a Project Manager compares numbers to a budget, but a General Ledger budget looks at company-wide spend. Things like, how much the company has spent on rent? How much money has the company spent on materials so far this year?
The accountant is not paying attention to particular costs on a specific project at this point, but is paying attention to company-wide spend. For project specific costs, you’d want to look at the Job Cost Ledger. When Project Managers want to compare a project’s performance against its budget, this is where they go, because they don’t care about company-wide spend, but do care very much about project-specific spend.
Job Costing reporting is not only essential for construction businesses, but they are actually easy to understand since there are just three key elements of Job Costing.
Now that you know some Accounting and Job Cost basics, let’s take a closer look at the three basic elements of Job Costing.
When a construction accounting team posts an accounting transaction, their system is going to ask for three pieces of information:
Which project did we spend this money on?
What type of cost is it? (For example, is it labor? Is it materials? is it equipment?)
And third, the system is going to ask, “How was the money spent? Was it on the CSI division? Was it on a specific kind of activity? Was it for a given project phase?
Now there are five very standard types of cost types in the construction industry. Almost every company will use these five Cost Types: Labor, Equipment, Material, Production and Subcontractors.
Now, depending on what type of company you're working with, you'll see they may have additional types of cost types. For example, when I talk with a home builder, I would also talk about a cost type like an allowance. Talking to a civil contractor, you'll find that equipment is often not a detailed enough cost type. They'll break that down further into two categories: owned equipment, and rented equipment. There are going to be variations on cost types. But these five cost types you see here are standard for all construction companies.
The third element of Job Costing is Cost Codes.
We talked about which project this cost goes to. We talked about what kind of cost type it was. But now let's get into the details on how this money is spent. Was it spent on a CSI division? For example, was it a general requirement, a site work cost, concrete - those are all examples of CSI divisions. Let's look at a real world example: at the Home Depot.
Let’s say you spent $500 at Home Depot. All of that was a material cost type. Makes sense, right? But now let's break that down: $100 of this was for concrete. Another $100 was for electrical. And that remaining $300 should be coded to masonry. See? Those are divisional cost codes.
Another type of cost code is an activity code that takes a division and brings it a little deeper. So, yes, it’s good to know it was electrical, but that's not enough detail for me. Was it rough-in electrical? Maybe it was finished electrical, or you are installing electrical fixtures. Those sorts of details are examples of activity codes.
Phases can be tricky because they can mean different things to different people. Some people refer to phases as a “project phase.” For example, some may consider building a single building as a whole as a phase, while others may
But here's my point. Job Costing is always these three elements. Now you're probably looking at this and you're saying, hey Jen, I see those cost types that you've got labeled here and they look an awful lot like those project expenses that I saw on an income statement, to which I would say good job, you're paying attention.
But that one level of detail that you see here is a limitation of an income statement. So if you want to see more detail than just cost type, you're going to want to run some kind of job cost report.
In this example of a pretty detailed job cost report. You can see all three elements of Job Costing at work. There's my project, there's my cost code, and there's my cost type.
So when a construction owners says, “I want to know how much money we spent on slab on grade during the month of March on the 4021 Paradise Road project.you will run to these job cost reports that are pulling transactions from a job cost ledger to get the amount of detail that all project managers need to know to make good decisions on their projects.
Job costs, along with other accounting workflows, can be difficult to manage in a way that maximizes your organization's efficiencies.
Trimble Construction One is a connected suite which connects your office to the field to streamline these workflows with the industries’ leading solutions to give you the right data for your projects. Check out what Trimble Construction One can do for you.