Understanding cost codes in construction

Now that you understand the structure in which your costs are categorized, it’s time to identify your costs with cost codes. By using them correctly with job costing, cost codes will allow you to accurately and efficiently track all costs associated with your projects. 

Beware of the little expenses. A small leak will sink a great ship.
- Benjamin Franklin

Here we will discuss what cost codes are, the benefits of using them, and how to create an effective coding system that works for your business. Let's get started!

What are cost codes?

Cost codes are unique identifiers that allow you to track specific costs within categories related to a project, such as labor costs, material costs, and other expenses associated with a job. Each code is identified by a number that corresponds with its cost category. 

Using the cost code example referenced in the previous chapter, 03-000 represents the general labor costs associated with concrete work, where 03 is the division for the concrete cost category, and 000 is the code for general costs. 

Cost codes are used for accounting, to track expenditures, and by project managers who need real-time data to track the actual costs during their projects.

What are the benefits of using cost codes?

First and foremost, cost codes help streamline the construction process by providing clear insight into how much money has been spent on each aspect of a project. For example, if you want to know exactly how much it was to lay the foundation for your project, you can easily look up the associated cost category and see exactly how much was spent on materials, labor, and any other related costs for this one particular task.  

This makes it easier to keep track of actual costs during a project to make sure that overspending isn’t happening or to be aware of the culprit if it does. It also makes it easier to stay organized and keep tabs on where the budget always stands.

Using cost codes helps reduce errors when creating estimates, invoices, or change orders since each code is associated with its own set of information. These codes can be quickly referenced without having to manually input all the details every time something needs to be changed or added onto a job site. This saves time and reduces human error, which can lead to costly mistakes down the road.

What are examples of the type of costs being used with cost codes?

Here are some examples of cost codes that are commonly used in construction:

Labor-Related Cost Codes: These codes are used to track the costs associated with labor, including salaries, wages, overtime pay, benefits, and taxes. Labor-related cost codes can be further broken down by specific job roles, such as carpenters, electricians, or masons.

Equipment-Related Cost Codes: These codes track the costs of construction equipment, such as heavy machinery, generators, and backhoes. This includes each piece of equipment's purchase, rental, maintenance, and repair costs.

Material-Related Cost Codes: These codes are used to track the costs of construction materials, such as concrete, steel, wood, and piping. Material-related cost codes can be further broken down by specific types or grades of materials.

Subcontractor-Related Cost Codes: These codes track the costs of subcontractors hired by the construction team, such as electricians, plumbers, and HVAC technicians. This includes the fees and expenses associated with subcontractor services.

Administrative-Related Cost Codes: These codes will track the general administrative costs associated with the construction project, such as legal fees, insurance, and office expenses.

Standard construction cost code lists

While each division, or cost category, is going to have its own unique set of costs, there are a few common cost codes that could be used in every category, such as 000 - General. 

To give you an example, listed below are a few categories and codes that you’ll commonly see:

01 - General Requirements

• 000 - General
• 001 - Permits
• 002 - Design
• 003 - Estimating
• 004 - Survey/Layout
• 005 - Office

03 - Concrete

• 000 - General
• 001 - Foundation
• 002 - Footings
• 003 - Slab
• 004 - Foundation Waterproofing
• 005 - Concrete Finishing

09 - Finishes

• 000 - General
• 001 - Wall Finishes
• 002 - Tile
• 003 - Carpet
• 004 - Interior Paint
• 005 - Exterior Paint

As you’ll notice in the examples above, 000 - General was the only code used in every category. Depending on how you choose to categorize your costs to fit your business, it’s certainly reasonable to have other codes that are a part of multiple categories as well. While there are suggested practices, it is ultimately your decision on how you structure your cost codes.    

How do you create a cost code system?

Creating cost codes that work best for your business is a vital step in the job costing process. The good news is that it doesn’t require an accounting degree to accomplish, and it’s something you’ll continue to improve over time. Here are the steps you can follow to create cost codes for your construction business:

Protip: Download our free job costing template to use as you work through the steps outlined below.

Develop the scope of a project

The first step is to outline the scope of a typical project. You could create this from scratch or refer to your previous projects to gather all of the project requirements. This project scope will help you identify the key components, phases, and tasks of a standard project and serve as the basis for creating your initial set of cost codes.

Analyze the costs

Next, you’ll need to analyze all the costs relevant to this project. This involves breaking down the project cost into labor, materials, equipment, subcontractors, and overheads. Each of these components will help you begin to define your categories and unique costs.

Develop a list of cost categories 

After analyzing the costs, the next step is developing your coding system, which begins with creating cost categories. As referenced in Chapter 2, you could follow the MasterFormat by CSI or create your own categories based on what aligns best with your projects and costs. 

The coding system should be intuitive and easy to use. It should also provide sufficient detail to track expenses accurately. A typical coding system includes a code for each cost component, followed by a unique identifier for each individual cost item.

Categorize and name your costs

Once the cost categories are established, you’ll want to start grouping the individual costs and creating naming conventions for each item. The naming conventions should include both a code name and code number. You may also want to create a description to clearly identify individual items. Here’s an example:

Category: 09 - Finishes

Code Name: Wall Finishes

Code Number: 001

Description: Drywall, plaster, paneling, etc

Implement the cost code system 

After all of your costs have been categorized and coded, it's time to implement them. You can do this in a few easy steps:

1. Share your new coding system with all team members and stakeholders to ensure everyone understands and can use it consistently across all project activities.
2. Add or import your codes into your software to create estimates and manage project financials.
3. Add or import into your accounting system. 

Monitor and refine 

Once your cost code system has been implemented, you’ll want to actively monitor and refine the cost codes as necessary. Continuously evaluate the system's effectiveness and refine the coding system if required. This helps to ensure accuracy, efficiency, and profitability across all of your projects.

By following these steps, you’ll have developed a comprehensive cost coding system that allows you to maintain an organized and trackable library of all your costs.

Creating your cost library

With all your project costs now categorized and coded, there is just one step remaining to complete your job costing system — to create a cost library (sometimes called a price book).

In the next chapter, we’ll discuss what a cost library is, which factors influence its items, and how to create one of your own to use across your projects.