Best Practices for Tracking Cost of Goods Sold in Construction Projects

For construction projects to stay profitable and have good financial management, it's important to keep track of the cost of goods sold (COGS).  Understanding the details of tracking building costs can make a big difference in how you run your business, whether you're a contractor, project manager, or accountant. This article explores best practices and gives you useful advice to keep an eye on the money side of your project.

What Is the Cost of Goods Sold in Construction?

COGS in construction refers to the direct costs associated with building a project. These costs are integral to the completion of the project and include:

• Materials: All physical components used in the construction process, such as lumber, concrete, and steel.

• Labor: Wages and benefits paid to workers directly involved in the project.

• Subcontractor Fees: Payments to specialized contractors for specific tasks like plumbing or electrical work.

• Equipment Costs: Expenses for renting or purchasing machinery and tools necessary for the project.    

• Direct Overheads: Utilities, permits, and insurance directly tied to the project.

Read more: Understanding COGS in Construction for Financial Success

Why Is Tracking COGS Important?

Keeping track of COGS is important for keeping your project's funds under control. This is why:

1. Prevent Budget Overruns: Without exact tracking, it’s easy for expenses to go over your allocated budget, leading to reduced profitability of your project.

2. Tax Compliance: Accurately tracking your COGS makes sure you claim the right discounts, which lowers your tax bill and keeps you from having to go through audits.

3. Informed Decision-Making: Real-time cost info helps you make smart choices, like moving resources around or changing the due date of a project.

4. Improved Cash Flow Management: Knowing your cost of goods sold (COGS) helps you make better predictions and makes sure you have enough money to pay your bills.

You can get a better handle on your project's finances and set it up for long-term success by putting in place strong tracking methods.

Read more: How to Allocate Overhead Costs in Construction: A Beginner's Guide

Step-by-Step Guide to Calculate COGS

1. Identify Direct Costs

Direct costs are costs that are directly linked to a project. For workers, this includes things like lumber, concrete, wiring, and other tools needed for the job. 

• Materials: Lumber, concrete, wiring, and other job-specific supplies.

• Labor Costs: Wages paid to employees or subcontractors working on the project.

• Equipment Usage: Rental or depreciation costs of tools and machinery.

Read more: 4 Proven Strategies to Control Your Construction Material Costs

2. Separate Overhead Costs

It's important to have costs like office rent and general liability insurance, but they're not COGS. To avoid mistakes, separate these overhead costs  from the real project costs.

3. Track Job Costs

Accurate job costing for contractors is crucial. Use software or spreadsheets to record expenses for each project. For example:

Expense Type	Project A	Project B
Materials	$5,000	$3,200
Labor	$8,000	$4,500
Equipment	$1,500	$700

4. Use the COGS Formula

The basic formula for COGS is:

COGS = (Opening Inventory + Purchases) - Closing Inventory

For contractors, this might look like:

• Opening Inventory: Materials on hand at the start of the period.

• Purchases: Materials bought during the period.

• Closing Inventory: Unused materials at the end of the period.

5. Include Additional Direct Costs

Don’t forget to account for other direct costs like transportation fees or specialized subcontractor services.

Best Practices for Tracking COGS in Construction

1. Make a Clear Budget

Before you start a job, make a detailed budget that lists how much you think labor, materials, tools, and subcontractors will cost. Use historical data and cost estimation tips to come up with numbers that are reasonable.

2. Make Use of Specialized Software

Invest in COGS tracking software designed for construction. These tools streamline expense tracking, integrate with accounting systems, and provide real-time insights into project costs.

3. Implement Job Cost Tracking

Break down costs by specific tasks or phases of the project. This method, known as job cost tracking, allows you to:

• Monitor expenses for each activity.

• Identify cost overruns early.

• Adjust resources to stay within budget.

4. Track Labor Costs Accurately

In fact, one of the biggest costs in building is labor. Keep track of the hours your employees work with time-tracking tools and make sure their pay fits within your budget. This information is also used by your building accounting system to make sure that reports are correct.

5. Regularly Update Financial Records

Maintain up-to-date records of all expenses and revenue. Consistent bookkeeping ensures accurate cost reporting and helps you spot discrepancies quickly.

6. Keep An Eye On the Costs of Materials

The cost of materials can change, which can affect your spending. Keep track of your purchases and stock to make sure you don't buy too much or not enough. To lower costs, you might want to talk to sellers about bulk discounts.

7. Review Subcontractor Invoices

Subcontractor fees are a significant part of COGS in construction. Before making payments, make sure that the bills are correct by comparing them to contracts and project progress.

8. Do Cost Analyses On a Regular Basis

Analyze project costs periodically to identify trends, inefficiencies, or unexpected expenses. Use this data to refine your construction cost analysis processes and improve future budgeting.

Actionable Tips for Better COGS Management

• Put documentation in one place: Keep all of your contracts, invoices, and records in one place so they are easy to find.

• Make processes automatic by automating data entry with software to cut down on human mistakes.

• Ensure staff understand the importance of accurate expense tracking and how to use your tools effectively.

• Set milestones to stay in charge, divide projects into stages and keep track of costs against each milestone.

  
  

How Our Bookkeeping Services Can Help

Construction Cost Accounting is experts at making it easier for contractors and building companies to keep track of their money financial management. Our services include:

• Detailed construction bookkeeping.

• Implementation of COGS tracking best practices.

• Customized financial reports for better decision-making.

Our team understands the unique challenges of the construction industry and offers tailored solutions to help you succeed. With our expertise, you can:

• Save time on administrative tasks.

• Reduce errors in financial reporting.

• Focus on growing your business.

Conclusion

It doesn't have to be hard to keep track of the cost of goods sold (COGS) in building projects. Following best practices, like using specific tools, keeping accurate records, and keeping track of job costs, will help you keep your projects profitable and on budget. Are you ready to take charge of your building budget? We'll be here to help you every step of the way!