How construction accounting is different than regular accounting
by Pam Schulz, Sage Certified Consultant
The Heart of Construction Accounting
Job Costs are a crucial piece of the information you gather and use. Understanding their role will help you get more from your data.
How are job costs different from all of your other accounting data?
Mainstream accounting discussions focus on “company wide” measurements of profitability and loss. For example, your income statement shows your “total revenue”, and then your expenses. These are separated into “Direct Expenses,” and one or more Overhead/Administrative sections on the report. All of this information is valuable. However, in Construction it is really necessary to analyze performance on other levels instead of just from the Financial Accounting perspective.
In Construction, it’s all about the job
And the job is measured by its COSTS. So, JOB COSTS are the costs that are allocated to a specific job. These include Materials, Labor, Subcontracts and all other expenses incurred for jobs. (In your Financial Account report- the Income Statement- these are the DIRECT EXPENSES.)
JOB COSTS are “categorized” into COST CODES
The Cost Code list is designed by you (there are some industry standards, but ultimately the list is determined by each company according to their specific needs). The purpose of COST CODES is to provide a breakout that is useful in analyzing job data. Costs are also further categorized into COST TYPES. These are “built in”- Material, Labor, Equipment, Subcontract and Other. (In Sage 100 Contractor there is also the ability to create up to four more User Defined types.)
Typically before bidding on a job, someone has compiled the ESTIMATED COSTS, as this would be useful to know in calculating a Contract Price. As the job progresses, it is important to analyze the ACTUAL JOB COSTS against the budget. Here’s why:
- to measure progress,
- to measure performance and production,
- to have historical data for future estimating.
How the BUDGET works
The BUDGET allocates the predicted costs between the various COST CODES and COST TYPES. Then as work is done, and money is spent, those COSTS are “coded against” the appropriate COST CODE and COST TYPE line on the BUDGET. From job reports based on this data, a Project Manager can determine how far along the project should be, how much has been spent, and make job management decisions based on this data.
How is this different from my “Financial Accounting” data?
There are several differences in the mindset when using Financial Accounting information vs. Job Cost information.
- WHO – Financial Accounting is measuring COMPANY, (or DEPARTMENT) performance; in Job Costing the focus is the JOB, or a group of JOBS, as well as particular COST CODES.
- WHAT – Financial Accounting is measuring all aspects of Revenue and Costs, including Overhead and Administrative Costs; compared with Job Costing which focuses on the direct costs.
- WHEN- Financial Accounting tends to focus on accounting periods (a month, quarter, year); whereas JOB COST reports tend to focus on the JOB TO DATE in addition to specific periods. Jobs can and do cross over multiple Financial periods.
How does “Job Costing” work?
I like to think that posting JOB COSTS “just happens.” The JOB COSTS are the result of posting a transaction; an AP invoice or payroll record for example. In Sage 100 Contractor, the program is written to “force” the Job Costs and the Direct Expenses to “balance.” As an AP invoice is saved, for example, the same dollar amount that is charged to General Ledger accounts in the “Direct Expense” range MUST be spread out to one or more Jobs. Cost Codes and Cost Types for the entry to be saved. A sample of the AP invoice screen and its corresponding “Job Cost” Window is shown below:
Notice the amount job costed equals the amount charged to Direct expense accounts.
In Payroll, the software automatically job costs the timecard lines:
No matter where the JOB COSTS come from, they are stored as “Job Cost Records:”
These are used in a variety of JOB and PROJECT MANAGEMENT reports:
The usefulness of these reports cannot be overstated! The JOB COSTS are your key to WHAT REALLY HAPPENED, and what is currently happening on your JOBS. And since the posting of JOB COSTS in Sage 100 Contractor is a part of posting each relevant accounting transaction, they are timely and accurate.
I hope this helps to explain Job Cost accounting!
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