Smart Construction's Guide to Cost Codes

Using consistent cost codes to organize your construction company's costs is a great way to organize expenses, track progress and costs, and plan for the future. Read on to learn more.

What Are Construction Cost Codes? 

Due to the continually changing nature of construction projects, accurately managing construction costs is critical to the project’s financial outcome. Many construction companies use an accounting method called activity-based costing to measure the cost and performance of activities. Cost codes are the standardized alphanumeric numbers assigned to the specific types of work a company performs. They allow managers to organize expenses into common categories and are a key component to a good work breakdown structure (WBS).  

Why Should You Implement Cost Codes? 

The primary reason organizations use cost codes is to monitor their performance and evaluate project health. Understanding exactly where money is being spent is crucial for ensuring financial success on projects. An alarming number of construction companies have only a rough idea if they made or lost money on a particular job once the project is completed. To compound the issue, when a project does go over budget, managers have no idea where the money went or how to avoid the problem on the next project.

Adopting a cost code system allows organizations to see which activities are doing well and provides the insight needed to make corrections to tasks that are falling short of expectations before it’s too late. 

Source: Dodge Construction Network

Budgets and Scheduling

The first step in performance tracking is planning and goal setting. When a project is being estimated, assumptions are made about how long each scope of work is going to take to complete, as well as what resources are going to be used. However, this is not necessarily organized the same way the project is going to be built.  

The next step after a bid has been awarded is to break the project down into phases and tasks. These phases and tasks are then used to create a baseline schedule for visualization and planning the sequence of work. After the baseline schedule has been created, each task is linked to a cost code for the type of work being performed and assigned a budget consisting of labor, equipment, materials, subs, overhead, etc.  

For example, when bidding on a task for installing 18” RCP storm drain, the estimator would look at the entire quantity of that item and estimate how long it would take to complete all of the 18” RCP pipe on the project. Realistically, when the pipe is being installed it is going to be broken up into different sections based on how the project is being built. These sections would be individual tasks in the schedule all sharing the same cost code. The budget on each of these tasks might include: a foreman, two operators and a pipe layer (labor); excavator, loader, rock box, and a water truck (equipment); pipe, bedding stone, and miscellaneous supplies (materials); and a subcontractor that comes to inspect the pipe after completion. 

Source: Concrete Construction

Crew Performance and Project Health

Once budgets have been established, understanding true project cost is the critical component of performance tracking. Without understanding these costs, project managers can’t forecast profit or loss. If crews are simply clocking into a project and not individual tasks it is impossible to tell where those costs went, making it impossible to know if you’re going over budget until it’s too late to make changes. However, when organizations utilize cost codes to categorize their activities, they are now able to see more clearly where money is being spent and identify issues as they arise.  

Foremen are typically responsible for documenting their crews’ efforts and task progress. Traditionally, this means manually creating and submitting a time sheet for each day with a list of:

• The tasks/cost codes the crew worked on;
• How much work was performed;
• Who worked on each item; and
• What equipment was used and who operated it.

Once the timecard has been submitted, managers can then compare the amount of actual cost incurred to the amount of expected cost based on the daily production amounts. 

While tracking this level of detail requires additional effort and time on behalf of the foreman, project managers are now able to get an accurate picture of job costs, view profit and loss by task each day, and accurately forecast the remaining costs to complete the project. Utilizing software such as Smart Construction Field and Office can automate much of this, reducing the burden placed on your foreman and office staff while improving cost accuracy.  

Below is an example of a daily cost report from Smart Construction Field. It shows the daily production and cost for each task broken down by labor and equipment and shows the total cost per unit both for the day and for the whole task. If the unit cost of a task is more than the budgeted amount, steps should be taken to either reduce the cost or increase production. Perhaps the crew is using a larger, more expensive machine than was in the estimate and instead of a four-person crew there is a five-person crew. In this case, production would have to be higher than the estimate to accomplish the same cost per unit. If higher production is not possible, then it might make more sense to reduce the crew size and switch to a less expensive machine, if possible.  

Improve Bidding Accuracy

The second reason for utilizing cost codes is to improve bidding accuracy by creating a historical cost database. Since production data is being collected on each task as it is completed, estimators can look back at production rates from all previous projects. Having historical job cost data gives a better understanding of how much effort is required for each item of work in the estimate. This will ensure bids are backed up by data, not just intuition, giving estimators more confidence the bid is accurate. Having this confidence on bid accuracy reduces the overall risk of the project estimate. During difficult times, organizations can tighten up estimates to assure gaining more work, ensuring long-term success of the organization. 

How to Create Your Cost Code System

At first glance, cost codes may appear to be random numbers, but they are part of a numbering system that breaks each code down into division and activity codes which are unique to each company and organized by the types of work they perform. Cost codes are not project specific and should be grouped by common types of work performed by each organization. For example, a utility contractor would have a group of cost codes for installing storm drain. They would have a library of all the different types and sizes of storm drain that could be referenced when bidding to ensure the estimated production rates are in line with what can realistically be done in the field.  

There are standardized formats used in the industry such as CSI Masterformat, which is a great starting point and used by many general contractors. However, since CSI is designed for all construction, the scope is very broad and doesn’t have the level of detail required by heavy civil and site work construction. For this reason, most contractors typically create their own numbering system to cover the type of work they do broken down in the same way they will bid on future projects. In this article we show each cost code with the dashes for clarification, but you may choose to write them without the dashes, and it means the same thing.  

As a general rule, cost codes should be prefaced with a division code, indicating the category of work, followed by an activity code, which is specific to each task type being performed. It is important to utilize a numbering system that will allow you to add codes later as you encounter different types of work. Using a 2 digit division and 4 digit activity code should give most organizations more than enough available codes to adequately cover any scope of work the company may encounter.  

 Here are a few examples.

Divisions 

Divisions are a list of all the different types of work a company may encounter. Not all divisions or cost codes will be used on all projects, and the list will grow as more work is awarded and performed.   

Here is a sample of some custom divisions that may be used for site construction.  

Here is a list of the CSI Masterformat divisions 

Activity Codes 

Activity codes are designations for each type of work that will be performed within each division. For example, under division 52 - Concrete Pipe, there would be codes for 12” RCP, 18” RCP, 24” RCP and so on. These numbers can be broken down even further, because the production rate of pipe installation often depends on the depth of the trench required. Deeper pipe requires sloping or shoring, slowing production and would skew the data of the shallower pipes. Here are some examples.  

52-1810 → 18” RCP Shallow (<5’ depth) 

52-1820 → 18” RCP Average (5’-10’ depth) 

52-1830 → 18” RCP Deep (>10’ Depth) 

It is important not to get too detailed when creating activity codes because having too many codes makes it harder for field crews to track their time accurately and makes it harder for estimators to reference. For example, when making codes for setting a storm drain box, it would not make sense to have separate codes for excavate hole, place bedding, place box, place top, install steps, install grate. This is an unnecessary level of detail because A) estimators don’t need this much detail, and B) crews would be inundated trying to put this much detail on their timecards. A more sustainable method would be to have a single code for each type of commonly used box and include all the items mentioned above rolled into that one code.

How Can Smart Construction Help? 

If you’re not familiar with cost codes, this can seem very overwhelming. You’re probably thinking “I don’t know where to start.” Smart Construction has a team of experienced optimization consultants ready to help assist you in creating your own cost code structure customized to your business. You might also be thinking “I can barely get my employees to clock in, they will never give me this much detail on their timecards.” The good news is this practice is standard with large construction companies. Every single expense is tracked and accounted for. How do they do this? They use expensive project management platforms and pay their foreman, superintendents, and engineers to do a lot of manual data tracking and entry. Unless they’re using Smart Construction… 

Smart Construction Field is an affordable and intuitive mobile app that automates much of this manual data collection and makes it easier than ever to stay on top of your project’s progress. Employees simply clock into the app, select the task they are working on and go about their work. Equipment hours are automatically added to their timecards with no manual entry utilizing BLE (Bluetooth Low Energy) technology. Instead of spending an hour or more filling out time sheets, foreman simply review and approve worker’s time, record daily progress, and fill out notes for what was accomplished. Managers get detailed daily reports showing a complete picture of what happened yesterday to ensure profitability, safety and much more.  

All of this data seamlessly flows into Smart Construction Office, which is a comprehensive and intelligent project management and scheduling platform. Smart Construction Office allows you to plan your projects and track your progress automatically, eliminating the hassle of manually gathering relevant project information. Smart Construction Office gives you a complete picture on how your project is doing with intuitive dashboards, AI assistance and near real time automatic updates to your schedule, budgets, equipment hours, labor hours and progress quantities. All with less manual entry than any other solution on the market.  

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