What are cost codes and how are they used in the construction industry?
Learn how and why to implement this important data management tool with our in-depth guide to construction cost codes.
What are cost codes in construction?
Cost codes are standardized numeric codes assigned to different types of labor and business functions.
In construction, cost codes help accounting teams closely track work hours and monitor expenses consistently across the entire organization. Accounting software provider Oracle explains, “Cost codes establish the link between your projects, jobs, tasks, and their related accounts.”
What are the benefits of using construction cost codes?
Cost codes are beneficial because they help businesses better manage their most valuable resources, including everything from equipment and materials to their workforces. Construction companies use cost codes to standardize and simplify time tracking, accurately assess productivity, and identify areas for improvement.
The main benefits of cost codes for construction companies include:
More accurate time tracking
Better productivity assessment
More accurate estimates
Standardize your process
Standardized cost codes make time and cost tracking easier and more efficient. Without cost codes, different managers and departments will track work time and costs using their own individual methods. They may use varying terminology or descriptions for similar tasks, causing miscommunications and inconsistencies when the data is reviewed as a whole.
When everyone in the company uses the same standardized cost codes, organizing time cards and tracking costs is a much simpler, more streamlined process. Stakeholders in charge of recording and providing data from the field can follow a pre-established process, and office teams who review and analyze that information don’t need to spend hours translating it before they can gain impactful insights.
Track time accurately
Cost codes improve the accuracy of time tracking efforts for construction companies. Using cost codes, field teams can provide highly detailed, granular time card data.
Instead of simply tracking all work hours into one or two generalized buckets, using a variety of cost codes helps contractors quantify the amount of time they spend completing each specific task.
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Assess project productivity
Using the granular data provided by attributing work hours to specific cost codes, project management teams can better assess productivity.
Do work hours tracked match up to estimates? If not, was there a problem with a particular task that delayed other phases of the project? With accurate cost code data, project managers can answer these kinds of questions in great detail.
They can quickly and confidently identify the cause behind most project delays and share that information promptly with all stakeholders to help prevent further delays, disputes, and litigation.
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Identify opportunities for improvement
Accurate, detailed cost code data also helps construction companies identify areas for improvement.
Cost codes make it easy to highlight inefficiencies and see where too much—or too little—time is spent in the field.
Improve estimate accuracy
Project managers can use cost code data to plan better estimates and draft more accurate bids for future projects.
Cost codes provide real insight to the way field crews work. Project managers can develop a deep understanding of their crews’ unique capabilities that goes beyond general standards and best practices. They can plan schedules and draft bids that speak to what their teams can realistically accomplish, instead of what they “should” be able to handle.
All of the benefits listed above ultimately lead to increased profitability for construction companies.
Because cost codes make time and cost tracking more efficient, consistent, and accurate, businesses that employ them save time and money. They can use cost code data to better plan projects, monitor progress, and correct inefficiencies that lead to lost revenue.
How to use construction cost codes
To implement cost code strategies at your construction business, you’ll need to create your cost code structure, add cost codes to the right documentation, communicate guidelines, and incorporate cost codes into your accounting processes.
1. Create your cost code structure
Determine the type of data you’ll use cost codes to track and outline how cost code data will be used by each department in detail.
Gather a group of invested stakeholders to create a cost code structure that makes sense for your business.
2. Add cost codes to the appropriate documentation
You’ll need to incorporate cost codes in your time tracking and progress tracking efforts. Field crews need an easy way to add cost code data to time cards and daily reports.
Determine how employees will incorporate cost code information in their reporting documentation. Consider implementing daily reporting software or digital time cards that simplify the way cost codes are tracked in the field.
You should develop a plan to implement cost codes into reports at this stage, but be sure to follow step 3 before any changes are made to the current reporting process.
3. Clearly communicate the purpose and procedures for cost codes
Let both your field and office teams know that you’re implementing cost codes for your business. Thoroughly explain the purpose of cost codes and share the entire list, providing information about the use case for each individual cost code.
Provide detailed instructions for how and when employees should provide cost code information as they document their work.
4. Incorporate cost codes into your accounting process
Provide your accounting team with guidelines for reporting on cost code data. Set clear expectations for how cost code data should be tracked and who this information should be shared with on a regular basis.
Establish procedures for adding new cost codes to your system or updating existing cost codes when needed.
Cost code structure
Determining how many cost codes your business needs and defining how you’ll structure them can be challenging.
On one hand, cost codes must be complex enough to communicate all the information your business needs when tracking time and progress. However, codes also shouldn’t be overly long or complicated, or you may sacrifice efficiency.
To get started, think through how cost code data will be used at your company by answering the following questions:
Who will use cost code information?
What data does accounting need throughout projects?
What information is most important for calculating future estimates?
How can I make it easy to apply cost codes on-the-go, while at a jobsite?
Once you understand what kind of information cost codes need to convey and how your business will utilize cost code data, you can start building your standardized structure.
Most construction companies will use different cost code structures to specify whether the tracked cost refers to labor, materials, equipment, or specific subcontractor work. You’ll assign a specific standardized number to each overarching category as well as any subcategories beneath them. The numeric sequences used in a cost code can be as short or long as needed. Sections of numbers can be separated by dashes to show that a tracked cost belongs in different categories and subcategories.
So, when tracking materials, cost codes may have a standardized structure of X00, meaning that all materials tracked will have a 3-digit cost code assigned that starts with a number and ends in two zeroes. Metals may be tracked with the cost code 100, drywall with 200, taping materials with 300, and so on.
Generally, construction companies won’t add more complexity than this to their cost code structures, but if you are working on a particularly large project, you may require more information from cost codes. For example, you may need to understand at a glance much of each material was used on individual floors of a building.
In this case, you can add a numeric sequence to each material cost code that specifies which floor of a building that material uses. So, drywall used on the third floor of a building would be tracked to the cost code of 200-003.
“A good rule of thumb to simplify project cost coding is that one cost code is usually sufficient for any trade that the contractor or subcontractor does not perform or outsource directly,” write the experts at Points North, a leading construction payroll software developer. Try to keep your cost code structure as simple as possible to start, and add more complexity as the need arises.
Standard construction cost codes list
If you’re having difficulty coming up with your own structure, using a prebuilt standard construction cost codes list makes implementing cost code strategies much easier.
The Construction Standards Institue’s (CSI) MasterFormat list is one of the most widely used cost code structures in the industry. It is separated using the following divisions:
00: Procurement and contracting requirements
01: General requirements
02: Existing conditions
04: Masonry metal
06: Woods, plastics, and composites
07: Thermal and moisture protection
13: Special construction
14: Conveying equipment
21: Fire suppression
25: Integrated automation
28: Electronic safety and security
32: Exterior improvements
35: Waterways and marine construction
40: Process interconnections
41: Material processing and equipment handling
42: Process heating, cooling, and drying equipment
43: Process gas and liquid handling, purification, and storing equipment
44: Pollution control equipment
45: Industry-specific manufacturing equipment
46: Water and wastewater management
48: Electrical power generation
CSI provides additional codes within each division for specific cost drivers. Consider purchasing this or a similar list to get a head start on the implementation process.
Construction cost code software
Cost codes work best when supported by digital tools. Both construction accounting and mobile daily reporting software help your business get the maximum benefits out of your cost code system.
How construction accounting software utilizes cost codes
Your cost code system will work hand in hand with your digital construction accounting tools.
Construction accounting software helps accounting teams digitally manage payroll, job costing, invoices, and other critical functions. Instead of working with individual spreadsheets or documents, your team can use tools built specifically to collect and process financial information, generating automated reports in a clear, standardized format.
When you pair accounting software with a cost code system, you can track financials more easily in greater detail. Cost codes work with digital accounting systems to help you further organize data by your specific cost code categories.
Many construction accounting software options even provide a list of standard cost codes to get you started.
How digital reporting increases the benefits of construction cost codes
It’s clear how cost code data helps businesses make more informed decisions, but how do you make sure your field crews will track cost codes accurately during already busy workdays?
Digital daily reports and time cards that can be completed and submitted in the field using mobile devices enhance your cost code strategy in the following ways.
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Fast, accurate data
Using a digital app instead of pen and paper to complete time cards and daily reports saves a significant amount of time over documenting project progress with pen and paper or a spreadsheet.
Using digital tools, busy field crews can use their phones or tablets to quickly record data through the keyboard or by using voice-to-text capabilities. Some information can be pre-populated, including cost codes, based on assigned tasks or project specifications.
Digital tools help field crews provide more detailed information without the hassle of paper reporting.
When time card or reporting data is collected in the field using a digital app that utilizes cloud storage, it can be shared immediately with all stakeholders.
With the cloud, digital documentation doesn't need to be attached to separate emails or text messages, and it doesn't need to be submitted in person like pen and paper methods. Instead, the office has access to all information as soon as it’s turned in.
This real-time reporting helps accounting teams monitor cost codes in real-time. Catch delays early and correct potential issues before they develop into more complex problems.
Documentation and standardization
Digital documentation is standardized right from the start, meaning accounting teams don’t need to spend hours translating, organizing, and entering hand-written data in the accounting system. Likewise, when a new cost code is added to the system, it will be automatically shared with the digital data capture tools—no need for duplicate data entry.
Digital tools save hours of work each week and eliminate repetitive tasks.
Cost codes are an essential accounting tool for every construction company. Using them effectively provides a deep understanding of how resources are utilized so you can accurately monitor project progress and make informed purchasing and hiring decisions.
When paired with the right reporting software, cost codes help construction companies make the most out of field data. Whether you create your own cost code structure or implement an industry-standard list, you’ll be able to better grow and scale your business.
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Our construction time card software helps contractors record and review detailed, accurate time cards with the click or tap of a button.