Material costs, supplies and labor are continuing to be a headache for builders nationwide.
Home builders are getting more used to changing construction industry trends. Still, rising costs make staying on budget more difficult.
While there are strategies you can try to stay ahead of rising costs, it may also be time to take a look at your current budgeting processes.
The truth is, many builders don’t immediately know what areas are costing their business the most and why. Without this knowledge, overages fly under the radar and dip into your profit margins.
The good news is that you can start down the path of clear understanding and profitability with one simple tool: cost codes.
What is a cost code?
Cost coding, also known as product and service items or expenses, categorizes different types of details within your construction budget. Cost codes range from pre-build, build and post-build work. Some examples from each stage include categories like permitting, framing, and punch lists.
It provides a way to track, budget and analyze spend. It also helps you document costs for each of your projects. That way, you’ll always know when you’re overspending —or underspending — on a project.
A strong coding structure helps your field team access the information they need for proposals quickly. It also makes accounting for and billing project costs easier.
The benefits of using cost codes don’t end there. Forecasting expenses for future projects is a breeze because you’re able to identify patterns and pull comparable estimates fast.
As your construction team begins work, real-time expense tracking helps you stay on budget based on the proposal agreement. And, if change orders or adjustments do occur, you can easily talk through them with the client for each construction category.
What does it take to set up a cost code structure?
Building and using your cost code system is the first step in having strong financials. It’s the foundation that informs your cost catalog. That, in turn, plays a huge role in your estimates and proposals. You should put an effective system in place and stick to it.
That said, it isn’t an immediate process. There are three, clear steps you’ll want to take along the way to ensure your system works now and as your business grows in the future.
1. Involve the right people
The first step in setting up a clear, easy-to-use coding system is to figure out what kind of categories you’ll need. When doing this analysis, it’s critical to involve all the right people.
Often, project managers are responsible for handling cost codes. They have the most hands-on involvement with all suppliers, clients and subcontractors. And, they’re used to knowing the timeline of expenses and are comfortable using project management software.
The misstep in that approach is that it can lead to miscommunication and mismatched data across your larger business.
For example, coding structures that are only managed and understood by one person can create problems for your office. This is especially common when accounting staff aren’t on the same page and uses a different method to categorize line item expenses. Disconnects like this mean inaccurate job costing, overspends and lost revenue.
Avoid this situation by getting all possible stakeholders involved in the creation of each code. That mix should include your accounting team, project managers and estimators, at least. You could also involve general contractors, job supervisors and admin staff who work with job documentation.
If you can’t get everyone together in one room, in-platform communication tools make for easy conversation tracking. Once everyone agrees on the framework, stick to it. That way, you’ll know all work for a project is accounted for, accurate and reliable.
2. Determine how to set up your construction cost codes
One of the biggest tips Buildertrend shares with new users is to build out your list of project cost codes in the same order you would build a house.
If you’re formatting your framework using numbers, this means that the earliest phases of the project will be show up first on your expense reports. As a bonus, your reports are much easier to understand and take action on.
Your categories should not be overly complicated or specific. You don’t want just a single item within each category. It should include a range, so don’t worry about getting too in the weeds. If you want to create more levels of detail, you can do that later with an effective cost catalog.
A standard construction cost code list could include categories like:
- Exterior materials
- Interior materials
And so on.
Remember, every expense in a project should be covered within a category. That means products and services, labor and logistics.
3. Pick the right construction budgeting software
Once you’ve nailed down your list of must-have categories, it’s time to build it out in your construction software.
From there, you can build out your cost catalog for even more detailed reporting. You can even integrate your cost code systems with third-party accounting software. This helps simplify invoicing, as you’re able to view expense and purchasing information alongside the right accounts.
Start improving expense management
Buildertrend’s financial software uses cost codes to make managing and tracking your unique expenses easy. Once you have a clear picture of what you’re spending per project, budget tools help reduce overspending and increase profitability. When facing down uncontrollable material and supply costs, that’s something you need.
It’s the perfect system for always knowing where your business stands financially.
Want to see it for yourself? Request a demo today.