Job Cost Reports are an important tool in the construction industry, providing contractors & stakeholders financial benefits and the ability to spot financial issues early. Project managers of active construction jobs use this tool to evaluate project’s performance against the contract budget – identifying discrepancies or financial windfalls.
With this said, Job Cost Reports in their simplest form are reports that track the actual ongoing cost of a construction project. These reports lets managers analyze and compare the project’s construction cost estimate versus real costs. When utilized correctly, they can help ensure that construction companies successfully complete projects.
What is the purpose and value of the Job Cost Report?
Job Cost Reports play an important role in a construction company’s financial statements, and they are an instrument for managing costs efficiently. Construction companies use financial statements to keep lenders or bonding companies updated on project costs. When these stakeholders see inconsistencies in these reports, they generally consider them be wake-up calls that indicate there are larger financial problems with the project.
Job Cost Report & WIP Schedule
The best practice scenario is one where Job Cost Reports are created and updated along with another report called the work-in-progress schedule, (also known as a WIP Schedule or WIP Report). “WIP” is the term used in management to describe a partially finished project, product, process, etc. that is awaiting completion. Below is the difference between the two reports:
- WIP Schedules are made at the end of an accounting period (monthly, quarterly, or bi-annual), with the objective of analyzing the current value of projects (the work done so far), the amounts billed to clients so far, and the remaining payments on construction contracts.
- Job Cost Reports provide information on the current cost status of the job, which helps project managers estimate what the real cost of the construction project will be at completion.
Both of these reports work hand-in-hand in giving construction project managers a clear picture of the job’s finances. Without them, it becomes a challenge to accurately track construction costs. Failing to take job costs and the WIP schedule into account can quickly cause financial issues such as cash flow problems and cost overruns. For this reason, using Job Cost Reports and WIP Schedules helps ensure accuracy and transparency of financial statements – which can make the difference between a profitable company and one that simply fights to stay in business in the market.
What are the advantages of job cost reporting?
There are several benefits to the discipline of using Job Cost Reports:
- Maintaining credibility with lenders, bonding companies and clients. As outlined above, stakeholders look for strong management – especially when it comes to financial performance. Job Cost Reports can go a long way to cultivating trust and credibility with these parties – this is key to staying in business and outperforming competitors.
- Support for upcoming claims. These reports provide details of the budget versus the variation of costs that ultimately are the real cost, as well as detailed background that can inform a claim.
- Stronger competitive position: Job Cost Reports are a high-value source of information that can help estimators create new budgets/proposals for similar types of work, resulting in the ability to create more competitive bids in the future.
What causes cost tracking errors?
Most construction companies utilize accounting tools to monitor and track costs across set periods of time. The cutoff dates between periods can be critical since errors often occur when items are omitted during a certain period. To avoid this type of mistake, management should implement a process that records costs incurred during the period as accrued costs.
The most common mistakes in tracking construction costs are:
- Poor estimating
- Inaccurate costs accumulation
- Budget revision omission
- Change order exclusion
A good way to prevent these types of mistakes is to use Job Cost Reports to compare actual costs rather than the estimated costs on a monthly basis.
Allocation of overhead rates
Another common mistake in tracking construction costs occurs in the allocation/assignment of overhead rates. In general, an overhead rate exists and is allocated as indirect cost (rent, utilities, etc.) to jobs. When the rate used is not monitored and tracked to ensure it is an accurate representation of the overhead costs for a certain job, an excessive amount of costs can be misallocated resulting in inaccurate budget or cost-to-complete.
Overhead rates and how they are applied are an excellent illustration of how one of the most important values in using Job Costs Reports is consistency, and why that consistency needs to be applied to accounting, where financial errors can be avoided by monitoring Job Cost Reports continuously.
How do you identify project issues on time?
If job costs aren’t being tracked consistently, deficiencies won’t be evident until the end of the project. By that point, there is not much that can be done. Oftentimes, owners end up assuming these costs were caused by problems that went unidentified along the way. However, if job costs are being tracked and looked at continuously, problems can be identified during the project’s execution. This allows time to make changes that could save the owner money.
Take, for example, identifying missing change orders. Change orders (CO) happen along the project’s life and impact both the job cost and the schedule, so it’s very important that they’re submitted on time and, as soon as they are approved, incorporated by project management into the job cost. If CO are forgotten and left aside until the end of the job to seek approval, it’s more difficult to compare the initial cost versus the real cost. Accounting for CO at the end of a project can have a negative impact on the job/project both financially and schedule wise.
Accounting and Job Cost Reports: better management for current and future work
To be as effective as possible, real-time reports are created with job costs and all additional values by identifying all variables affecting a budget. These include payable invoices, purchase orders, subcontractor contracts, change orders, and so on.
Next, all of this information must be entered into accounting as soon as possible and then allocated correctly onto the corresponding job within a schedule of values. Since Job Cost Reports are designed to offer insight into cost projections versus the current budget, this model of reporting gives project managers time to get costs under control while the job is underway and, if necessary, approach the client with a new variation of construction costs that will need to be covered.
Management and accounting can use the information provided in Job Cost Reports to review and create even more detailed reports. Examples include tracking the progress of the job, the cost to date, the expected cost by the end of the job, etc. Job Cost Reports consist of a comparison of actual job costs versus estimated job costs for each cost within a schedule of values. This type of breakdown enables analysis between jobs through time if required and offers the ability to track which jobs are profitable and what might be changed for future jobs where similar work will be executed.
Understanding the value of Job Cost Reports and taking advantage of all the information that can be extracted from them, benefits the business both immediately and in the future.
Author: Rafael Cardenas, CONSULTANT, SURETY