How to Reduce Cost of Goods Sold (COGS) in Construction

In the competitive world of construction, managing the Cost of Goods Sold (COGS) is critical for maintaining profitability. Reducing these costs can be challenging, especially for beginners. This article provides detailed, practical strategies to help you effectively manage and reduce your COGS, ensuring your projects are profitable and your business thrives.

What is COGS in Construction?

The Cost of Goods Sold (COGS management) in construction includes all direct costs associated with producing a construction project. These costs typically include:

• Direct materials: Raw materials used in construction, such as concrete, steel, and lumber.

• Direct labor: Wages paid to workers directly involved in the construction process.

• Subcontractor costs: Payments made to subcontractors for specialized tasks.

• Equipment and tools: Costs for machinery and tools used on the project.

• Indirect costs: Overheads like utilities and insurance related to the construction site.

Managing these costs efficiently can lead to significant construction cost savings and improved profit margins.

Read more: Understanding COGS in Construction for Financial Success

Tip 1: Efficiently Planning And Managing The Project

Here are some strategies for efficient project planning:

1. Accurate Estimation and Budgeting

• Collect Historical Data: Review past projects to understand the actual costs involved. This data can help you figure out how much new projects will cost.

• Use Estimation Software: Software like Sage 100 Contractor can provide accurate cost predictions, reducing the risk of unexpected expenses.

• Include Backup Plan: Always include a backup plan in your budget to cover costs that you did not expect. For most projects, this should be between 5 and 10% of the total cost.

2. Project Management Software

• Implement Software Tools: Use project management software to track expenses, timelines, and progress. These tools help projects stay on budget and give real-time info.

• Regular Updates: Update the software regularly with actual costs and progress to ensure accurate tracking.

3. Categorize Your COGS Accounts by Cost Type

Break down your COGS general ledger accounts into detailed categories like materials, labor, labor burden, and subcontractor fees. This approach provides better visibility into expenses and simplifies account reconciliation and audit preparation.

Tip 2: Strategically Managing Suppliers

Building strong relationships with suppliers and negotiating better terms can lead to substantial cost reductions. Consider these procurement strategies:

1. Bulk Purchasing

• Negotiate Discounts: When purchasing large quantities of materials, negotiate discounts with suppliers. Bulk buying often results in lower per-unit costs.

• Supplier Relationships: Develop strong relationships with key suppliers. Consistent business can often lead to better pricing and priority service.

2. Alternative Suppliers

• Research Options: Don’t rely on a single supplier. Research and compare prices from multiple suppliers to ensure you’re getting the best deal.

• Quality vs. Cost: Ensure that alternative suppliers provide materials that meet your quality standards. Sometimes a cheaper option might end up costing more if it results in lower-quality work or rework.

3. Just-in-Time Inventory

• Reduce Storage Costs: Implement a just-in-time inventory system to reduce storage costs and minimize waste. This involves ordering materials only when they are needed and in the right quantities.

Implementing these procurement strategies can effectively reduce material costs and contribute to overall construction cost savings.

Tip 3: Optimize Labor Costs

Labor costs are a major component of COGS reduced management. Here are some tips to manage these costs efficiently:

1. Hire Skilled Workers

• Invest in Training: Hiring skilled workers can reduce the time and errors on a project. Invest in training programs to enhance their skills further, improving overall productivity.

• Performance Incentives: Offer performance-based incentives to motivate workers to complete tasks efficiently and on time.

2. Strategic Use of Subcontractors

• Specialized Tasks: Use subcontractors for specialized tasks that your team may not be equipped to handle. This can be more cost-effective than training your team for these tasks.

• Negotiate Rates: Build long-term relationships with reliable subcontractors and negotiate favorable rates for their services.

3. Avoid Overtime

• Proper Scheduling: Plan work schedules meticulously to avoid overtime, which can significantly increase labor costs. Use project management tools to track labor hours and avoid over-scheduling.

Focusing on these areas can significantly reduce labor costs and improve project profitability.

Tip 4: Use of Materials Efficient 

Effective material management is crucial for reducing COGS. Here are some best practices:

1. Accurate Material Takeoff

• Detailed Plans: Create detailed material takeoff lists based on accurate project plans. This ensures you order the right quantity of materials, avoiding excess and shortages.

• Often Audits: Conduct monthly audits of material usage to ensure accuracy and adjust orders as needed.

2. Recycle and Reuse

• On-Site Recycling: Implement recycling programs on-site to reuse materials wherever possible. This can include reusing concrete, wood, and metals.

• Salvage Materials: Identify and salvage materials from previous projects that can be used in new projects.

3. Strict Inventory Controls

• Implement Tracking Systems: Use inventory management systems to track materials and prevent theft and loss. Tools like RFID tags or barcodes can help maintain accurate inventory records.

• Regular Counts: Conduct regular physical counts of inventory to ensure accuracy and prevent discrepancies.

Step 5: Apply Technology and Automation

Embracing technology and automation can lead to remarkable improvements in cost management. Consider these technological advancements:

1. Construction Management Software

• Real-Time Tracking: Use software like Procore or Buildertrend for real-time cost tracking and project management. These tools help keep projects on budget by providing up-to-date information on expenses and progress.

• Integration with Accounting Systems: Integrate these tools with your accounting software to streamline financial management and reporting.

2. Building Information Modeling (BIM)

• Reduce Errors: Implement BIM technology to create detailed 3D models of projects. This helps in identifying potential issues before construction begins, reducing errors and rework.

• Collaborative Planning: BIM allows for collaborative planning and coordination among different teams, ensuring everyone is on the same page.

3. Drones and Automation

• Site Surveys: Use drones for site surveys and monitoring. This can reduce the time and cost associated with traditional surveying methods.

• Automated Equipment: Invest in automated equipment for tasks like excavation and material handling. This reduces labor costs and increases efficiency.

Step 6: Monitoring and Analyzing Costs

Regularly monitoring and analyzing costs is essential for maintaining control over COGS. Here are some steps to take:

1. Review Financial Statements

• Identify Areas of High Costs and inefficiencies by always review 

• Detailed Reports: Use detailed cost reports to understand where money is being spent and identify opportunities for savings.

Read more: The 4 Essential Financial Statements for Contractors

2. Implement Corrective Actions

• Address Issues Quickly: When high costs are identified, implement corrective actions promptly to mitigate their impact.

• Continuous Improvement: Use cost analysis to continuously improve processes and reduce COGS in construction

3. Benchmarking

• Compare with Industry Standards: Benchmark your costs against industry standards to ensure you’re competitive and identify areas for improvement.

• Adjust Strategies: Adjust your cost management strategies based on benchmarking results to stay ahead of competitors.
  

Conclusion

Reducing your Cost of Goods Sold (COGS) in construction requires a combination of effective planning, strategic procurement, accurate cost tracking, and the use of technology. By implementing these strategies, you can significantly enhance your project profitability and overall business performance.

Our bookkeeping services at Construction Cost Accounting can assist in managing and reducing your COGS. We specialize in accurate cost tracking, efficient expense management, and seamless financial reporting using software like QuickBooks and Sage 100 Contractor. Contact us today for a free consultant.