3 Ways Activity-Based Costing Can Benefit Your Construction Company

By Donald Hoffman

Activity-based costing ("ABC") is a job-costing system that construction companies can use internally to identify the costs associated with each activity involved in a project. Activity-based costing assigns cost codes to each activity based on the resources consumed using the following steps:

• Identify all activities your business performs to complete a job, defining each activity so there is no overlap between them.
• List all resources used for each activity, including equipment, material, labor hours and subcontracting costs (if applicable).
• Choose a standard and measurable unit for each resource and calculate the price per unit. You may calculate a resource's average cost based on purchase receipts for a specific period if necessary. The measurable unit for labor hours would be the wage paid per hour with benefits.
• Multiply the cost per unit of each resource by the number of units consumed, then add indirect costs to determine the total price. 

Benefits of activity-based costing for construction companies

Using activity-based costing can help construction companies learn what is working for them and what's not. For each task related to a job, activity-based costing will quantify the materials used, pieces of equipment deployed and the number of labor hours used to complete the task, allowing you to track job progress in real time. If a job takes longer than expected or costs more than anticipated, you know why.

Activity-based costing can also help you control purchases by uncovering excessive spending trends. The process can help you understand what types of jobs and activities are likely to boost your bottom line and help grow your business, as well as assess whether your current product mix needs to be modified to improve profits.

Lastly, having jobs cut up into well-defined activities with a price attached helps estimators provide a more accurate overall project estimate that they can quickly recalculate if the project scope changes.

Construction companies can make more informed decisions and improve profitability by accurately tracking and allocating costs to specific activities. Activity-based costing helps businesses better understand their projects' actual costs and allocate resources more effectively. Remember that activity-based costing cannot replace your traditional cost accounting system; it is merely a supplement to benefit internal management. Used correctly, it is a valuable asset. 

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