Construction Cost Codes: How You Can Use Them to Boost Profit
by Lentune on 4 May, 2023
Imagine if there was a financial tool that helped you analyse all your project costs down to the finer details. For each project, you could drill down and see where every single dollar was being spent.
Rather than just looking at the general ledger or final profit and loss, you could actually see in real-time the exact expenses as they relate to specific activities.
For example, you could see that on one project, it took 200 hours to lay the foundation, whereas it usually only takes 120 hours.
How helpful would that be? How much could it help you understand your cost drivers, fine-tune your pricing and ultimately boost profits?
This is the magic of construction cost codes!
In this article, we’ll dive into the world of these construction cost codes and show you how they can be a game-changer for your construction business. Let’s get started.
What are construction cost codes?
Construction cost codes are essentially a system that helps you separate project costs into specific categories. For example, you may have cost codes for concrete, foundation, plumbing, P&G and so on.
Each cost code represents a specific task or activity that incurs expenses, and these codes allow you to track those expenses in a more granular way.
Rather than just having a general ledger account titled “Direct Labour,” you will now have a list of cost codes that shows you the exact activities driving that figure.
The real genius here is it allows you to go into each project and see all your actual costs compared to your budgeted costs, giving you more detailed tracking against your pricing.
If you were to measure success solely based on profit and loss, you’d know if you made or lost money on a project — but you wouldn’t understand why, and knowing that why is how you actually grow your business.
Let us explain how you achieve this through cost codes.
The benefits of using construction cost codes
Using cost codes in your business unlocks the why behind your bottom line. Here’s why that’s so important:
1. Easily identify profit centres
Assigning a unique cost code to each activity on your projects allows you to easily identify which activities are driving your profit and pinpoint those areas where you may be overspending or inefficient.
For example, let’s say a particular aspect of a job like the foundation is constantly taking more labour hours than expected and blowing out the budget. With the use of cost codes, you will be able to easily identify this over-spending and take corrective action.
A common scenario related to this benefit is realising that you simply don’t have the resources to optimise the foundation work. In such cases, it might make more sense to start subcontracting that portion of your projects.
Which leads us to the next benefit:
2. Refine your business model
As you begin to understand your profit centres through using cost codes, you’ll be able to focus on the types of jobs that are earning you the most money, allowing you to refine your business model.
This means focusing on high-profit activities and letting go of the lower-performing ones.
For example, before using cost codes, you might have identified your business as a general contracting company, but with the new insight, you may find that your business is better suited to specialise in a particular type of construction like residential remodelling or commercial builds.
This streamlined focus will help you increase profit margins, establish a reputation as a go-to expert and ultimately build a more successful and consistent business.
3. Improve future bids
Using cost codes in your business will also help you develop more accurate project estimates and bids. With the ability to analyse historical data, you can determine the average costs of various activities.
This data-driven insight will allow you to create more realistic budgets, forecast expenses more accurately and ultimately boost profits.
It is by using cost codes that you go from just trying to make money to actually having a system to track, measure and grow your revenue. So, how do you bring the magic to your business?
How to implement construction cost codes in your business
Implementing cost codes into your business doesn’t have to be a complex task. While you will need to invest some initial time and effort, they should be a simple extension of your current processes. Here are our tips to help you get started:
1. Customise them to fit your needs
Construction companies often derive their cost code structure from the CSI MasterFormat list. This list provides you with hundreds of cost codes, but you don’t necessarily want to or need to be using all of them.
It is better to create a custom list that is specific to the data you need to track for success. Using too many cost codes will just lead to chaotic data that constantly needs to be consolidated — that’s more work for you, and you’ll lose the benefit.
A good rule of thumb is to start with a minimal list of cost codes that track the project costs most important to you. If you find the tracking is too limited, you can then add more codes as needed.
For example, you may start with a list of 50 generic cost codes and then later expand to 200.
2. Use construction project management software
Using project management software is essential when you’re implementing construction cost codes. Why? It enables you to track and analyse all your project costs in real time.
Instead of spending hours poring through spreadsheets to find potential problems, use a project management software that allows you to tag POs, invoices, expense claims and timesheets directly to projects and cost codes as you’re creating them.
This will provide you with a consolidated, real-time view of your expenses, making it easier for your team to spot any budget creep before it becomes a major issue.
Furthermore, construction project management software often comes with default cost code lists that you can easily customise to fit your needs.
Construction cost codes are often mistaken as an accounting tool, but in fact, they are a project cost management tool. You should not confuse the general ledger with cost codes.
Your general ledger provides a financial picture of your entire company, showing total income, expenses, assets and liabilities. On the other hand, cost codes offer project-level detail about how much you’re spending and where you’re spending it.
The general ledger will only ever show you actual costs, but cost codes allow you to track and manage project costs against your budgets. By using cost codes, you can monitor progress, identify cost overruns and take corrective action to keep your projects on track.
So, develop a cost code system for your business and start reaping the benefits!
How we can help
At Lentune, we help construction companies streamline the way they handle project finances. Our clever project cost management software will help you manage your cost codes, grow your profit and even save you hours each week. We’d love to show you how it works!
In a live demo, we can answer any questions and show you how Lentune could grow your business.