Project accounting is one of the most important financial tracking methods for construction companies. Often referred to as job costing, it is the process of tracking all of your costs and revenues towards a project or job.
This is often the key reason why business owners have low or no profitability. Because not tracking all your costs leads to poor planning and estimating on jobs which in turn leads to poor cash flow.
In order to know the true profitability of your projects, you need to be allocating every cent spent to every each and every project. Every direct costs, indirect costs and overhead costs. These three categories are the main categories for tracking your costs.
Direct costs are all of the costs that are directly associated with a project. These are the costs that most business owners know and are aware of. These costs are the primary costs incurred on any project. They typically include materials and labor but can also include hauling and equipment rental. The can be fixed or variable depending on the project. When creating an estimate for a job these are the costs that are never forgotten. But are often the only costs thought of.
Indirect costs are the costs that are necessary to complete a project but are not ties directly to one project. These costs are often variable and can be spread across multiple projects. They often include costs such as small tools, repairs and maintenance, bond expense or licenses and permits. They are indirect because they are necessary to complete a project but again, not directly tied to one specific project.
Overheads costs are the costs that are typically forgotten about when estimating the total costs of a project. These are your general and administrative costs that are necessary to keep the train running. Meaning you have to pay them whether you get a project or even complete a project. These are your back office costs and a portion of the total of these costs should be factored into the pricing equation for every project you have.
When you don’t include overhead costs in your estimating and pricing, you might end up with an estimated profit on your project but an overall loss in your business.
Now in order to include the overhead costs in your pricing you need to first calculate your overhead rate. Check out next week’s blog on How to Calculate Your Overhead Rate.