Construction Cost Codes: How You Can Use Them to Boost Profit

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?

Think of construction cost codes as your project's super-organised cheat sheet! They break down all your project expenses into neat, specific categories like concrete, foundation, plumbing and more.

Each code represents a particular task or activity that incurs costs, letting you track expenses with laser precision. Instead of a vague "Direct Labour" entry, you'll see a detailed list showing exactly what's driving those costs.

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 allows you to pinpoint which activities drive your profit and where you might be overspending.

For instance, if foundation work is constantly over budget, cost codes help you spot this quickly, so you can take corrective action or decide to subcontract this part of the job.

2. Refine your business model

Understanding your profit centres through cost codes enables you to focus on the jobs that earn the most money, allowing you to refine your business model.

For example, before using cost codes, you may 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 approach helps 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 also helps 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 allows you to create more realistic budgets, forecast expenses more accurately and ultimately boost profits.

With cost codes, you go from just trying to make money to actually having a system to track, measure and grow your revenue.

4. Enhance budget control

By tracking expenses at a granular level, cost codes give you tighter control over your budget. You can monitor spending in real-time and make adjustments as needed, ensuring projects stay within budget and reducing the risk of overruns.

This proactive approach to budget management helps in maintaining financial health and achieving project goals without unnecessary financial strain.

5. Boost team accountability

Cost codes make it easier to assign responsibility for different aspects of a project. Team members know exactly which costs they're responsible for, which enhances accountability and ensures everyone is working towards the same financial goals.

Clear accountability can lead to better performance, as team members are aware of their financial impact on the project.

6. Drive continuous improvement

Regularly analysing  cost code data helps you identify patterns and trends, fostering a culture of continuous improvement. Use these insights to refine your processes, reduce waste and increase efficiency over time.

Continuous improvement can lead to better project outcomes, higher profitability and a more competitive position in the market.

Tips for effective cost code implementation

Implementing cost codes into your projects and business doesn't have to be complex. 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 hundreds of cost codes, but you don't necessarily need to use all of them.

Create a custom list specific to the data you need to track for success. Start with a minimal list and add more codes as needed. For example, begin with 50 generic cost codes and expand them later if necessary.

2. Use construction project management software

Consider using project management software when 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 provides a consolidated, real-time view of expenses, making it easier to spot budget issues before they become major problems.

Furthermore, construction project management software often comes with default cost code lists you can easily customise.

3. Regularly review and update

Periodically review and update your cost code list to reflect any changes in your business or project requirements. This ensures that your cost tracking remains relevant and useful.

Regular updates can also help in identifying new areas for improvement. Schedule regular audits of your cost code system to ensure it is being used effectively and to identify any gaps or redundancies.

By keeping your cost codes aligned with your current operations, you maintain a dynamic and efficient cost management system that adapts to your evolving business needs.

4. Communicate the benefits

Clearly communicate the benefits of using cost codes to your team and stakeholders. Highlight how they improve accuracy, enhance budget control, and facilitate better decision-making.

When everyone understands the value, they are more likely to adopt and effectively use the system.

Use real-world examples and case studies to illustrate the positive impact cost codes have had on past projects. This not only motivates your team but also reinforces the importance of accurate cost tracking in achieving overall project success and profitability.

5. Leverage cost code data for estimating and bidding

One powerful way to use cost code data is for creating accurate estimates and bids. By analysing historical data from previous projects, you can identify the average costs associated with specific activities and tasks.

This insight allows you to develop realistic budgets and bids based on actual cost trends rather than estimates or guesswork.

Incorporate this data-driven approach into your estimating process to ensure your bids are competitive yet profitable. Accurate estimates help you avoid underbidding, which can lead to project losses, and overbidding, which can result in losing contracts to competitors.

Cost code structure and segmentation

Creating an effective cost code structure is essential for organising and tracking project expenses. Cost codes should be segmented into logical categories that reflect the various components of your construction projects.

Here’s how to structure and segment your cost codes for maximum efficiency:

1. Major categories

Start by defining major categories that cover the broad areas of your projects, such as:

• Labour: Wages, benefits, and subcontractor costs.
• Materials: Costs for concrete, steel, lumber, etc.
• Equipment: Rental and maintenance expenses for machinery.
• Overheads: Indirect costs like site management and utilities.

2. Subcategories

Within each major category, create subcategories to further break down expenses. For example, under Materials, you might have:

• Concrete: Costs for cement, aggregates, and admixtures.
• Steel: Expenses for reinforcing bars, structural steel, and fittings.
• Lumber: Costs for framing lumber, plywood, and sheathing.

3. Activity-based codes

Assign codes to specific activities or tasks within each subcategory. This allows for detailed tracking and analysis. For instance, under Labor, you could have:

• Foundation work: Labor costs for excavating and pouring foundations.
• Framing: Wages for carpenters and helpers involved in framing.

4. Project phases

Segment your cost codes by project phases to track expenses throughout the project lifecycle. Phases might include:

• Planning and design: Costs for architects, engineers, and consultants.
• Construction: Expenses related to the actual building process.
• Finishing: Costs for painting, flooring, and final inspections.

Custom codes

Tailor your cost code structure to fit the unique needs of your projects. Custom codes can be created for specific client requirements, regulatory compliance, or internal tracking purposes.

Benefits of a well-structured cost code system

• Enhanced tracking: Easily monitor and control costs at every level of your project.
• Detailed reporting: Generate comprehensive reports that provide insights into cost drivers and variances.
• Improved budget management: Maintain tighter control over budgets and make informed financial decisions.
• Increased transparency: Offer clear visibility to stakeholders about where and how funds are being utilised.

In Conclusion

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.

Book a demo