Job Costing vs Process Costing: Which Method Is Right for Your Construction Business?
- Cost Construction Accounting
- Mar 1, 2022
- 6 min read
Updated: Oct 30
Choosing the wrong cost accounting method can mean the difference between profitability and loss on every project. Understanding whether job costing or process costing fits your business model isn't just an accounting exercise, it directly impacts your bidding accuracy, project profitability, and long-term success.
While most construction companies naturally gravitate toward job costing due to the custom nature of their work, understanding both methods helps you make informed decisions, especially if you're diversifying into prefabrication, modular construction, or manufacturing building components.
In this comprehensive guide, we'll break down both costing methods, explain their key differences, and help you determine which approach aligns with your construction business operations.
In this Article:
What Is Job Costing in Construction?
Job costing is an accounting method that tracks all costs and revenues associated with a specific project or "job." For construction companies, this means monitoring every dollar spent on a particular project from the foundation to the final walkthrough.
How Job Costing Works:
Job costing involves tracking three main cost categories for each project:
Direct Labor: Wages for carpenters, electricians, plumbers, and other tradespeople working specifically on the project
Direct Materials: Concrete, lumber, fixtures, and any materials that become part of the finished structure
Overhead Costs: Project management, equipment rental, permits, insurance, and other indirect expenses allocated to the job
Construction Example:
Imagine you're a general contractor building a custom 3,500 sq ft home in Austin, Texas. With job costing, you'd track:
$85,000 in direct labor (framers, electricians, plumbers, HVAC specialists)
$142,000 in direct materials (foundation materials, framing lumber, roofing, fixtures)
$38,000 in allocated overhead (project manager time, equipment rental, permits, insurance)
Total project cost: $265,000
When you compare this to your contract price of $340,000, you can calculate a gross profit of $75,000 (22% margin). This data becomes invaluable for bidding on similar custom home projects in the future.
Why Job Costing Matters for Construction:
Job costing gives construction companies the ability to:
Track profitability on a project-by-project basis
Identify cost overruns before they spiral out of control
Create accurate estimates for future bids based on historical data
Make data-driven decisions about which project types are most profitable
Comply with percentage-of-completion revenue recognition requirements
What Is Process Costing?
Process costing is an accounting method used primarily by manufacturers who produce large quantities of identical or very similar products. Instead of tracking costs for individual units, companies track costs by production process or department, then divide total costs by the number of units produced.
How Process Costing Works:
In process costing, costs accumulate at each stage of production:
Department 1 accumulates costs for its activities
Department 2 receives the partially completed units and adds its costs
Department 3 completes the process and adds final costs
Total costs are divided by units produced to get the cost per unit
Manufacturing Example:
Consider a factory that manufactures standard pre-hung interior doors for residential construction. In one month, they produce 5,000 identical doors:
Department 1 (Cutting & Sizing): $25,000
Department 2 (Assembly & Hinging): $18,000
Department 3 (Priming & Finishing): $12,000
Total production cost: $55,000
Cost per door: $11.00 ($55,000 ÷ 5,000 doors)
Because each door is essentially identical, it doesn't make sense to track costs for "Door 2,847" individually. The company simply needs to know that each door costs $11 to produce.
When Process Costing Applies to Construction:
While rare, some construction-related businesses use process costing:
Prefabricated building components (wall panels, trusses, modular units)
Concrete block or brick manufacturing for construction projects
Standard millwork production (stock cabinets, standard moldings)
Asphalt or concrete production for paving contractors
Job Costing vs Process Costing: The 10 Key Differences
Understanding the distinctions between these methods helps you identify which one fits your business model.
Factor | Job Costing | Process Costing |
Product Customization | Each project is unique and built to client specs (e.g., custom homes, commercial build-outs). | Products are standardized and identical (e.g., mass-produced components, materials). |
Cost Assignment | Costs tracked to each specific job and its job code. | Costs accumulated by process/department, then divided by total units. |
Cost Reduction Opportunities | More limited gains come from better project management and learning curves. | Greater through process improvements, automation, bulk purchasing, economies of scale. |
Cost Transferability | Costs do not transfer between jobs; each project stands alone (own P&L). | Costs transfer across departments as units move through stages. |
Product Individuality | Every job has distinct requirements and specs. | Units lack individual identity; produced in high volumes with minimal variation. |
Industry Application | Construction, custom manufacturing, professional services, unique projects. | Mass production: chemicals, food processing, standardized building products. |
Loss Identification | Losses are attributed to the overall project (not stage-specific). | Losses can be isolated by process/department. |
May or may not exist at period-end, depending on timelines. | WIP typically exists at both the beginning and end of each period. | |
Production Scale | Suited to lower-volume, high-value customized work. | Designed for large-scale production (thousands or millions of units). |
Record Keeping | More detailed / time consuming (time sheets, material requisitions, overhead by job). | More streamlined (costs pooled by department/process). |
Which Costing Method Should Your Construction Business Use?
For most construction companies general contractors, specialty subcontractors, and custom builders job costing is the clear choice. Here's why:
Choose Job Costing If:
You build custom homes, commercial buildings, or unique structures
Each project has different specifications, plans, and requirements
You need to track profitability on individual projects
You bid on projects and need accurate historical cost data
Your contracts require detailed cost reporting
You use percentage-of-completion revenue recognition
Choose Process Costing If:
You manufacture standardized building products or components
You produce high volumes of identical items
Your business model is more manufacturing than construction
You need to know the per-unit cost of standardized products
Your production process flows continuously through multiple departments
Hybrid Approach:
Some construction businesses use both methods. For example, a company that builds custom homes (job costing) but also operates a truss manufacturing plant (process costing) would maintain separate cost accounting systems for each operation.
Implementing Job Costing in Your Construction Business
If you've determined that job costing is right for your business, here are the essential steps to implement it effectively:
1. Set Up a Job Cost Accounting System
Use construction-specific accounting software like QuickBooks Desktop Premier Contractor Edition, Foundation, Sage 100 Contractor, or Procore. These platforms are designed for job costing and integrate with project management tools.
2. Create Detailed Cost Codes
Develop a consistent chart of accounts with specific cost codes for different expense categories (labor, materials, subcontractors, equipment, etc.). The more granular your cost codes, the better insights you'll gain.
Implement daily time tracking for all labor. Field employees should log their hours against specific job codes and cost categories.
4. Monitor Material Costs in Real-Time
Require purchase orders for all materials and track them to specific jobs immediately. Don't wait until month-end to allocate material costs.
Develop a fair and consistent method for allocating overhead costs to projects whether it's based on direct labor hours, direct labor dollars, or another metric.
6. Generate Regular Job Cost Reports
Review job cost reports at least monthly, if not weekly, to identify cost overruns early when you can still take corrective action.
Common Job Costing Mistakes Construction Companies Make
Even with job costing in place, many construction businesses struggle with accuracy. Avoid these common pitfalls:
Delayed cost entry: Waiting weeks to enter costs makes the data useless for decision-making
Inconsistent cost code usage: Different people using different codes for the same expense category
Poor overhead allocation: Arbitrary or inconsistent overhead allocation methods
Ignoring small tools and supplies: Not tracking consumables that add up over time
No variance analysis: Not comparing actual costs to estimates to learn from differences
The Bottom Line
For construction owners, general contractors, and subcontractors, job costing isn't optional. It's essential for survival and growth. While process costing has its place in manufacturing standardized building products, the custom nature of construction work demands project-specific cost tracking.
By implementing robust job costing practices, you gain the visibility needed to bid accurately, manage projects profitably, and build a sustainable construction business. The investment in proper cost accounting systems and processes pays for itself many times over through improved profitability and reduced risk.
Ready to implement professional job costing for your construction business?
Construction Cost Accounting specializes in helping construction companies set up and maintain accurate cost accounting systems. Our experienced bookkeepers understand the unique challenges of construction accounting and keep your books financially organized.
Schedule a free 30 minute consultation to discover how our services can maximize the efficiency of your business income and expense tracking at an affordable price.
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