If you are looking for costing techniques to use for your construction business, you have reached the right page. Here is a brief description of job costing, activity based costing and life cycle costing. There are also suggestions of software solutions.
Performing a costing technique is the procedure adapted to ascertain costs. There are various methods of costing including job costing, batch costing, contract costing, unit costing, process costing, service costing, activity based costing, and life cycle costing. Construction methods, procurement methods, materials, IT tools used, business processes, and management techniques frequently change. Ascertaining costs involved in a construction project is essential for its successful completion. Businesses in the construction industry usually use job costing, activity based costing or life cycle costing for this purpose.
Job Costing in Construction Project Management
Job costing is the process of tracking the costs incurred on a job against the reveue generated by that job. In job costing (also known as job order costing), the costs involved are recorded in a ledger throughout the duration of the job. The actual values of materials (direct and indirect), labor, and subcontractor costs are recorded. Steel and wood are examples of direct materials. Screws and nails are examples of indirect materials. Purchase orders and receipts help to determine the cost of materials used on the job.
Employee time cards are usually used to determine the labor hours. Wages can be determined by dividing the wage amount by the number of hours or days spent on the job. It is advisable to avoid using a flat rate while estimating the labor costs. The overhead has to be calculated for each job. This is usually based on direct labor hours. The total cost of the job is calculated by adding material costs, labor costs and overhead expenses.
A good cost control system involves setting up a budget before starting the job. This facilitates the comparison of actual costs with budgeted costs as the project progresses. Managers can work on variance. Cost codes are used to help in this. The Construction Specifications Institute (CSI) has established a standard cost coding system for the construction industry. Job costing software programs (like Seradex) are available in the market. These programs enable users to ensure that all costs involved in a job have been properly ascertained. They also facilitate generation of various reports which help in effective decision making.
Activity Based Costing in Construction Project Management
Construction projects involve many activities. These activities consume various resources (like materials and labor). Consumption of these resources add to overhead costs. Activity based costing (popularly known as ABC) is a costing technique which determines the cost of activities without distortion. ABC identifies these activities. Resources that are involved in each activity are identified. Cost of each resource is determined using purchase receipts. Cost per unit of material is determined. List of activities performed to complete a job are listed. Resource consumption of each activity is determined. Cost per unit of material is multiplied by the amount of each material used in the job gives the total cost of materials. Total cost of material can be obtained by adding direct labor and overhead expenses to the total cost of material. Activity based costing technique is popular because it recognizes the relationship between costs and activities. This makes assigning of overheads less arbitrary. Identifying activities that use resources is one of the challenges involved in ABC. Activity based costing software programs (like SAS® Activity Based Management) are available in the market. They help the users in making informed decisions.
Life Cycle Costing in Construction Project Management
Life cycle costing is a costing technique for examining and determining all the costs of an asset (like a building) through its entire life. The Royal Institute of Chartered Surveyors (RICS) has defined LCC as, "the present value of the total cost of that asset over its operating life; including initial capital cost, occupation costs, and the cost or benefit of the eventual disposal of the asset at the end of its life".
Popularly known as LCC, it can be implemented at various stages of the life of the construction project. However, it is most useful when implemented during the design stage. The business is faced with many alternatives at design stage. This technique helps the business compare different options available. LCC provides a logical and systematic method for determining the cost of a project. This helps a great deal in determining the budget for the proposed project. This technique takes factors like inflation into consideration while determining the costs. BridgeLCC is a life cycle costing software program developed by NIST. Life cycle costing is a new costing technique which is yet to gain wide acceptance by the construction industry.
Good costing techniques will definitely have a huge positive impact on businesses in the construction industry. Job costing and activity based costing techniques help in taking right decisions and are implemented by many successful construction companies all over the world. Life cycle costing is yet to gain in popularity, even though it is tailor made for businesses in the construction industry.