While managing construction cost codes can be complex, Lentune is helping simplify the process with its Project Cost Management software.
Also known as activity-based costing, cost codes can be difficult to manage if not done correctly. But, with the help of Lentune’s Project Cost Management software, cost codes are an extremely useful tool.
Lentune CEO Jono Bonifant explains cost codes as the ultimate measure of the success of a project. “Many emerging construction businesses don’t utilise cost codes, they utilise a general ledger,” says Bonifant. “A general ledger will provide a financial overview of project expenses in broad categories, such as materials or payroll, but won’t provide the granularity of cost codes.”
By using cost codes to budget costs into specific categories, the business can compare, for example, the actual cost of concrete used on a project to the budgeted cost for concrete. What often gets missed without the use of cost codes, says Bonifant, is back-costing to ensure the business delivered on its project estimate.
By organising these expenses, cost codes provide complete visibility of project spend and help businesses to understand why they made a profit or loss. This in turn can improve a business’s future bids by enabling it to develop more accurate project estimates based on past project data.
With over 20 years’ experience working across the construction and financial industries, Ingrid Kerr works closely with Lentune as a consultant. If a construction business is using cost codes, she says, it will have a budget and a measure of how its tracking against that budget. “Looking at a project’s overall profit or loss is not going to help a business understand what cost areas had a blowout or in what areas a project didn’t go well,” she adds. “You might have estimated a 25 per cent profit on a job, but only made 20 per cent, and if it’s not what you estimated then the project didn’t go well.”
“Being able to identify a project’s weak points, such as why your budget for electrical work went over or why more labour hours were required for a particular task, is crucial for future success – understanding the ‘why’ behind business spend is what guides business growth.
“When we bring to light this understanding of where things have or haven’t gone right, you can start to make decisions around how you can do it better in the future,” says Kerr.
With this level of accurate costing information, businesses can start to mitigate risk and make sure that they are delivering to the expectation of what they quoted.
Cost codes also enable businesses to understand their profit areas, identify the types of jobs that are earning the most money and let go of the lower-performing activities. “They can help you make decisions around what your business should be,” says Bonifant. “If a business is really good at particular elements of a construction project, they can then focus on tendering for projects that require those high-performing activities.”
Bonifant says having good metrics in any business is essential to surviving in tough markets. With the construction industry facing thin margins, increased insolvencies and lowest price tendering among scores of other challenges, the businesses failing to use data to their advantage are those at highest risk of coming unstuck.
The question then is, why are construction businesses still not using cost codes?
The short answer, says Bonifant, is that cost codes can be a lot of work for businesses without the support of a good system. Cost codes can be time-consuming and expensive to implement. Small companies may not have the resources to invest in a cost code system, the staff with the expertise to implement and use a cost code system effectively or be reluctant to adopt a new system.
Costs need to be actively linked to cost codes as they come in, which can involve hours of manual data entry and result in further work if not done correctly. Finding a system that can effectively manage cost codes can also be challenging.
Ultimately, says Bonifant, the lynchpin is smart automation. “Lentune’s smart automation technology alleviates the need for manual or tedious tasks associated with cost management,” he explains. “The engine can automate the population of costing information to simplify the approval process.”
“Lentune links direct costs from purchase orders, supplier invoices, labour costs and plant hire to cost codes as they flow, which means you can start to analyse project performance.”
Lentune also provides that insight instantly. As soon as documents hit the inbox, Lentune captures the data and links it directly to the relevant project and cost code. This means the business has an instant snapshot of performance as compared to the budget.
The ship sails quickly when a business starts to get behind on something, Bonifant says, and when something like labour costs start to blow out, there’s no superhero to come in and fix it.
“But if you get visibility of that slippage early, then you at least have the opportunity to make active decisions around resolving it as the project’s running,” Bonifant adds. “Whereas a lot of the time, that insight doesn’t happen until the end of the project.”
For even further business insight, Lentune’s reporting tool allows the operator to view what the budget was for each cost code, what was spent so far, and to click on, review and physically see all the invoices that are related to that cost code.
The next step, which adds another layer of insights to how a job is tracking, is the forecasting tool, which sits within the Job Costing feature. This allows the operator to edit their cost to complete figures, allowing them to log costs that they know are still to come. This will give them a much clearer idea of how the project is likely to perform and an estimate of what it will look like at completion.
Businesses should also start small and not try to implement a complex cost code all at once. Many construction companies use the CSI MasterFormat list to build their cost code structure. Although Bonifant warns that having too many or unnecessary codes can create confusion.
“As a construction business, you should create a custom cost code list specific to your operations,” he says. “You want to have a master list of codes that your workforce can utilise.”
“When tendering for a new project, you’ll use your master cost code list to produce an estimate and when you bring that project in, you’ll only bring in the cost codes that you have an estimate or a budget against, and they in turn should be the only ones that you’re spending against.
“There should be a direct correlation between how you estimate it, and then how you want to track it – if those two things aren’t aligning, then you’ll have no way of measuring how your business performed.”
Another vital step to ensure the successful implementation of cost codes across a business is to ensure there is buy-in from management. Making sure that management is on board with the cost code system will help to ensure that the system is implemented and used effectively. Further, employees should be trained on how to use the cost code system to help ensure that the system is used correctly, and that the data is accurate.
“Businesses also need to look for a software company that provides support with onboarding and has a support team who will always answer their phones – at Lentune, we pride ourselves on our exceptional customer support and comprehensive onboarding and implementation processes.”
By sorting all construction project costs in one place, Lentune enables businesses to take full advantage of cost codes.
Lentune helps construction companies streamline the way they handle project finances, improve business performance and drive growth.
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