Within this blog post, Finance with Flow look into the importance of project costing for your construction business and discuss how we can support and guide you through effective cost management and provide effective strategies for implementation.
Understanding Project Costing
Project costing is when you estimate costs and income on a project by project basis, and then track actual costs and income against this. This is different from ‘standard’ bookkeeping, as there is an extra layer of detail.
It may seem very like a straightforward task, however the execution in reality can be quite different. Materials need to be ordered quickly and project details aren’t added. Subcontractors don’t charge as per agreed scope (extra VOs, full contract not fulfilled etc) and so on. Your system needs to be set up correctly and you need to ensure everyone is aware of the project costing requirements and is disciplined about using it.
If you don’t have a clear budget, and measure against these, it is easy to quickly become bogged down in muddled transactions and lose the overview.
Key Components of Project Costing
Every business will have its own unique way to analyse their projects, but it is helpful to standardise these across the business.
Materials Costs
This will come from the bill of materials, and shouldn’t really change unless there are variations to the scope of works. The analysis used for materials will be depend on the type of work being undertaken, you may be happy to have one pool within a project for ‘materials’ of you may want to breakdown by type; for example, concrete, timber etc. There is a balance to be found between details and high level, which will be unique to each business. More detail allows you to analyse previous costs and case be useful as a base for future quoting but if its too detailed it may become counter productive as staff my not accurately use codes.
Subcontract Costs
It is helpful to break out subcontract costs separately within a project, as this will allow you to track and variations or omissions by subcontractor, and so ensure that you are well prepared when it comes to their final account as well as ensuring you can approach your client well prepared to discuss VOs.
Labour Costs
Labour costs can form a significant part of any construction contract so is critical is managed well, you will have estimated time requirements at the outset, but there will always be a difference between that and what actually happens on site.
It you are overrunning, you need to know early so you can plan and adjust as necessary, and again, this is a potential flag for applying to your own client for variations. If more time is being spent on the job than was anticipated, why is that? Was it quoted too optimistically? Are the guys on site adding in extra client request? Is there any unforeseen event?
Overhead and Profit
Your contract should be realising a profit for the business, this will be your gross margin. However, your business also has overheads, and each project should make a contribution towards these to ensure that the business overall is making a profit. Ideally you also want the business to make a contribution towards net profit as well, to ensure the business has longevity by providing a buffer and allowing for re-investment.
Strategies for Project Costing
Through Planning
As we said at the outset, a solid basis is needed for project costing, you will want to ensure you have a system that works for your business.
Utilise Previous Data
Drawing on insights and comparable from previous projects provides valuable data for cost estimation for new projects, along with identifying potential areas that could be increased. Previous data can be a reliable reference point, enabling businesses to make informed decisions and enhance cost efficiency.
Engagement with Stakeholders
Collaborate with your key stakeholders, including project managers, finance teams and anyone with a vital role within the project ensuring that you are all aligned throughout the project cycle. Regular communication and updates will ensure transparency and allow you to have realistic cost assumptions that can be adaptable to changing circumstances.
Monitoring and Evaluation
Project costing is not static, and needs regular review throughout the entire project. Regular monitoring of the costs against the budgeted estimates enables businesses to identify variances promptly and implement corrective measures to maintain sound financial budgets.
How can we help?
Project costing should serve as a linchpin of financial management in any construction business, providing a framework for evaluating the feasibility and profitability of a project and ensuring it stays on track.
Understanding the goals, objectives with a strong feasible strategy in place for Project Costing, allows your business to navigate the complexities of project management with confidence and ensure growth for now and in the future!
Our team of experts at Finance with Flow cover many different skill sets and can help you plan and create strategies to ensure that you are in control of your business.
Contact us today on undercontrol@financewithflow.com and let’s chat through your needs. We can shape your success together!
Visit our website to find out more about our services and packages –https://financewithflow.com/packages/
