A Simple Cost Code Framework That Won't Break As You Grow

Every contractor says that they want this, but they can't figure out how to make it work. And if you've ever tried it, no one understands it but you. Here's the problem with your cost codes. First of all, you probably don't have them because you don't know where to start or do have them, but no one can memorize them. Complex cost code structures lead to mistakes in job costing, which means your data isn't accurate. And if your team can't simply explain how your cost codes work, then they won't use them, which creates gaps in information between the field and the office, and that always leads to lost profit. But there is a way to design your cost code so that your team can use them. And this simple system right here won't break as you grow from 1 to 2 million dollars in revenue, or 4 to 10 million and beyond. This structure works because it mirrors how you do construction jobs and how they actually run in a sequence, phase by phase. And within each phase, you're spending money on one of these types of labor, materials, subcontractors, equipment, and a fifth bucket, the catch all bucket. Direct project costs. Your field team and your office team, they don't have to memorize dozens of different complex codes. They just need to know these five types in general and the numbers that are associated with each type. That's it. You just have to learn it once you use it everywhere. And then your job costing isn't a chore anymore. It becomes a very simple system. Now, in the rest of this video, let's go take a deep dive into exactly how this cost code structure works. And I'll show you how we implement it for our bookkeeping clients. Why complicated cost codes just don't work. A lot of times when they are overly complicated or they don't exist at all, confusion abounds. And we get a lot of bad data or we get no data. Every contractor wants clean job costing, but they're not really sure how to set it up. And it gets really complicated really fast. If no one understands the system except for the owner, then that's going to create a bottleneck. Let's solve that problem. Here we are with a Costco structure. As you've seen before, there's five basic cost code types. Labor, materials, subcontractor equipment, and a catch all bucket called direct project cost. Now I'm going to show you how we take this simple framework, and it develops into something like this, the actual programming language. And this is what you're actually going to plug into your quickbooks and that's also what you're going to map out to your project management software. But we're not going to get into all of those details. We just want to give you the framework of how to start setting this up so that can be useful for your construction company. Okay. Where cost codes typically go wrong, number one, there's usually no structure at all. So if there aren't any cost codes, then everything is going to be a guess. Or what we find most times for our bookkeeping clients is that the cost codes are failing because they are overbuilt. And what I mean by overbuilt is there's too many codes to memorize. And that's usually because the codes are mapped out to or attempted to map out to the line items on the estimate. And that's one of the things that we help you break down is the estimating system is one system which needs to be very detailed. The cost code structure is something that sits behind the estimate. It's tied to the various line items in the estimate. But the cost codes are really the programming language between project management software and your accounting software. It's also the programming language between the field and the office. If the field crew can't memorize your cost codes and your cost code structure, then they're not going to use them. And you can replace field crew with management crew, office staff, doesn't really matter. If your people can't describe very simply how your cost code structure is formatted and how it works, no one understands it, then no one's going to be able to use it. Your cost code structure should be telling a story. Here's what happens when cost codes are too complex. They might be designed, they might be implemented out here in the field. But when purchases are made and when money has been spent, every dollar is going to show up over here in the office. Every transaction is going to end up in your accounting software. And if every dollar related to a project isn't assigned a project bucket and the cost code bucket, then that's where the information starts to leak and from the office side to your financial statements. If we don't capture every dollar related to a project, then there's going to be gaps in your margins and your profits, and then you're going to be left wondering, where did all the costs go? So complex structures cause coding mistakes. No, coding obviously is going to create mistakes. And, and mistakes create visibility gaps between the field and the office, and those gaps always lead to lost profits. Let's talk about the structure that's Going to work. The problem that's for a lot of contractors is they think every project is unique and every customer is different. But if you really break it down, the project is the product. And if you productize your business and think about your cost codes in a way of what do we do and in what sequence, then it becomes much simpler to develop what I call here the phases of construction. Think about every project as the phase, and within those phases, you're performing pretty much the same type of tasks. Those tasks are either you're performing labor. When I say labor here, I'm saying your internal employees labor. You're purchasing materials, you're hiring subcontractors, you're renting or using some kind of equipment. And then our fifth bucket here is kind of a catch all. If it's not labor, materials, subcontractors and equipment, then we put that into a bucket or a cost code called direct project cost. So an example here might be I have to hire an engineer for a project. Well, technically the engineer is a subcontractor to my business. But I don't want the money that I pay an engineer to be mixed in with all of my traditional subcontractor costs like my electrician, my plumber, my drywall guys. So that's what that catch all bucket of direct project costs is for. If it's not labor, materials, subcontractors, equipment, it lands in that bucket and we have a cost code for it for direct project costs. All of this to say is think about your projects in phases. Develop those phases in a sequence, and then within the sequence, the cost codes start to repeat themselves. And I'll show you what that looks like on the next slide. Think about what are the phases for your project. Not every project is going to use every phase. But as you can see here, in general, I like the phases to tell a story. The start of the project all the way to the end. Planning, pre construction, general conditions, site work, foundation, framing, roofing, windows, doors. Again, this is an example for a general contractor or maybe a remodeler. And you can see the earlier phases at the top. They go in sequence as the work that we're going to perform. In general, your phases should follow a sequence and tell a story of the project. Now let's break this down a little bit. You'll see over here we have our categories and sections. And again, in general, the numbers don't really matter as much. This is just a framework that I found that is very useful. We have our 01020-30405, just a sequence. And whatever you call your category or your section names, design and planning, project management, general conditions, site work, demo. You can see it. This just follows the sequence. Then we're going to number each of those sections in this framework. We call this the O1 section. I use a four digit number. I find that gives us flexibility and scalability down the road. So O100, O200, O300, O400 and so on. Now here's the real power of this system. You'll see the item number here and this is where it becomes very repeatable. So let's just focus down here on this section point 1. Again, we're looking at the general conditions section here. So this is, oh, 300.10 general conditions. It's always the name of that category. And then the 0.10 is labor, 0.20 is materials, 0.3 subcontractors, 0.4 equipment, 0.5, direct project costs. So those always stay fixed, at least from the numbers and the cost type. So you can see the repeatable pattern here. So if we're looking at site work, then it's 10, 20, 30, 40, site work, labor, material, subcontractor, equipment. You can see that the numbers start to repeat. We get down here to demolition, 10, 20, 30, foundations, 10, 20, 30. What you're going to end up with is a coding system like this. And I know this looks very complicated, but it really is just the section number, the 0200 section, the cost type number. 10, 20, 30, 40, whatever the name. And then labor, material, subcontractors, equipment, direct project cost. The main takeaway here is just to see the repeatable pattern. You're not asking your team to memorize a bunch of different cost codes. The only thing they need to memorize is 10 labor, 20, materials, 30, subcontractors, 40, equipment, 50 direct project costs. And then when they're performing those tasks out in the field, you will have to train them. What is this thing that we're doing? Is it labor for foundations, is it labor for framing, Is it labor for interior finishes? Whatever those sections are, there's really only four or five cost codes that they have to memorize because the sequence of the categories of the sections tell the story. So, so this is what a typical cost code structure that is scalable, that works, that doesn't break. This is what it looks like. This is a cost code structure that actually works because it is very simple in nature. As your business grows and scales and becomes more complex in other areas, the cost code structure won't. If you like to get simple cost code structure that won't break over time, where you only have to learn it once you use it everywhere, you get consistent coding and all of that data flows through you. Get clean reports and predictable job costing. If you'd like us to install that in your business, then go to data muledagency.com schedule your free operational assessment. We'll see if our bookkeeping and data management services are a good fit for you. Thanks for watching this video. Drop your comments down below. Like and subscribe for more operational systems so you can make more money and streamline your construction business. And if you're ready to fire your bookkeeper, then schedule your operational assessment with the Data Mule team today. Not only will you get clean books and clear data, you'll get integrated operational systems that won't break as you grow.