Everyone speaks the same language when using construction cost codes. They’re the rosetta stone of our industry.
They help you track and manage the costs of construction. It’s easy for all players to understand what’s being spent on what.
Here’s almost everything you need to know about construction cost codes.
Construction cost codes are a set of standard codes used for cataloguing, tracking, reporting, and managing expenses related to a construction project.
These codes allow you to get complete budgeting visibility for each project you handle.
These codes are crucial for tracking and evaluating project expenses, increasing the accuracy of task costing, and streamlining interactions across various departments and organisations.
By assigning a code to each cost item, you can quickly filter through the expenses and determine what needs to be prioritised, cut, or adjusted.
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In cost coding structures, you will find elements like:
Project ID/Job number: this represents the job that connects to the cost code and cost.
Cost code: this is a code that relates to the specific cost item or activity. They will vary depending on how you organise your cost codes, with the three main ways being:
It’s a hierarchical approach that helps you track and control costs and progress together at all levels.
The CWAS has detailed work section definitions and attaches a code to each representing a construction activity.
This method helps you form detailed and structured documentation to ensure accurate and consistent cost data through the project lifecycle.
Cost type: this gives more information on the costs related to the accounts in your cost coding structure.
Cost Category: this puts the cost code into a broader category, like MEP, finishes or foundations.
Budget Amount: the approved budget for each cost code shows the money allotted to an item or activity.
Actual Cost: this is the actual cost against the cost code, likely different from the budgeted amount - construction doesn’t deal in absolutes.
Variance: shows the cost difference between the budgeted and actual costs, both negative and positive.
Date: shows the date costs were incurred or recorded.
VAT: this reflects the total costs of the project with Value Added Tax included.
A great tip when building construction code lists is to make your list of project cost codes in the same order you would build a house. This helps keep things organised and logical.
Here's how that translates – if you're using numbers to format your framework, then the earliest stages of the project will appear first on your expense reports. This makes your reports easy to understand and helps with your analysis and decision-making.
Don’t make your categories too specific. There shouldn't be only one thing in each category; it should have a fairly broad range. You can always add later add more levels of detail once you have a framework in place.
A standard construction cost code list could include categories like:
Remember to cover every expense in a project within a category. This includes products, services, labour, and logistics.
Here's an essential guide to construction accounting, for those who aren't accountants.
Cost coding structures help standardise the documentation process in a construction project.
They allow construction companies and project managers to categorise costs, understand spending patterns, and provide the documentation necessary for governmental reporting and oversight.
These are some of the most notable benefits of a cost coding structure.
A robust cost coding structure helps you track costs and steer projects before it's too late. In addition to being practical, cost codes are also insightful.
Contractors need help with juggling costs across multiple projects at a time. Using cost codes that follow industry standards allows them to collaborate with other stakeholders easily.
Contractors can then identify which project parts are profitable before investing resources.
Cost codes also allow them to catch spending categories that have gone over budget during a project. This helps to identify bleed points and make adjustments in real-time to avoid further overspending.
For example, a contractor may face the challenge of optimising a task but needs more resources with a significant financial investment. In this situation, subcontracting the work may be a more profitable option.
Construction cost codes are a fantastic technique for standardising data utilised in the sector. A consistent set of codes and numbers allows people in the field to process much information effectively.
Effective cost coding structures facilitate operations by making it simple for businesses to classify, arrange, and track all expenses related to building projects.
They also aid in data analysis and reporting by making it simpler to compare expenses over time for a single project or across other projects.
Additionally, these regulations offer contractors and clients transparency in pricing so everyone can make educated decisions about budgeting and scheduling.
Here are a few areas that can use a cost coding structure.
Cost code structures allow contractors and project managers to plan future project estimates accurately. They can look at historical data and industry numbers to budget how much different categories will cost in building a particular project.
Job costing on construction accounting software or construction software
Construction accounting software helps you assign specific codes and job costs accurately and quickly.
Suppose you have a cost coding structure in place. In that case, you can feed that information into construction project management software to get a complete picture of all costs associated with a specific job and look at labour, materials and overhead.
Cost tracking, budgeting, and analysing spending become easy with a cost-coding structure. It also enables cost documentation for all ongoing projects.
You can easily monitor overspending and underspending on a project. With this, your field team can access all project-related information and accounting and billing become effortless.
Creating your cost codes depends on how you run your projects and business. Most general contractors prefer the standardised construction cost codes because it gives them a broad range to choose from in a project.
Speciality contractors find those categories too general and prefer to create cost code structures. You can create your own cost coding structures depending on your industry or sector.
Occasionally, you’ll be forced to work with non-standard cost coding structures.
When you bid on government or big public contracts like HS2, you may have to work to a mandated cost coding structure. If you don’t have the framework to deal with this, you could lose the bid or come into trouble during the construction projects.
“It was a mess. We had to do the work manually, several times over. Once to match our own cost codes and again to match the contractors. By the time we were done, we didn’t know which way was up.” Danny Mitchell, author and ex-estimator at Sharpfibre, a specialist contractor.
You can overcome this challenge with proper construction management software, like Archdesk, making this process painless. Keep in mind that not all construction software has this capability.
Cost coding is a complex process; however, you can get the most out of it with the right strategy and approach.
Here are a few things to remember when implementing a cost-coding strategy and process.
Here are tips for getting the most from cost coding structures:
When building a cost code structure, the most crucial factor to be mindful of is to assign them consistently and accurately.
Make sure the code you assign appropriately describes the activity it refers to. It will cause confusion and illegible reports if you give two distinct goods the same cost code.
Everyone working on the project must understand how codes work because doing so might help to avoid mistakes that could later cost money. Each stage of your project will be more accurate if you assign different, detailed pricing codes.
Define your construction cost code structure early in the project life cycle. Doing so will enable alignment with the engineering work packages, the construction estimate, the master schedule and the job cost system.
Using an efficient cost coding structure will allow a project manager to organise and better plan big projects by breaking down large jobs into multiple smaller groupings and tasks.
For example, a cost coding structure will allow your project manager to coordinate engineering, equipment, material and labour costs within a project to align with the master schedule.
Whether using a standardised cost coding structure or creating your own from scratch, here are a few things to remember when updating and maintaining your cost coding structure.
I hope you got what you came for from this article. I've covered the cost code subject in a 'medium' level fashion, but it goes far deeper. If you want more information, or to talk about anything construction, I'm always checking my LinkedIn. Here's a link to my profile.
Have a lovely day/evening/night.
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