Activity-Based Costing May Benefit Some Contractors

In an uncertain economy, accurate and actionable job cost accounting is more important than ever. If you haven’t already, consider using activity-based costing (ABC) to obtain more precise and useful financial data.

ABC enables contractors to allocate expenditures—especially overhead and indirect costs—more realistically than traditional job costing. This can lead to better project cost insights and improved business decision-making.

ABC 101: How It Works

Traditional job costing often uses broad measures like labor hours to allocate overhead, which can distort the true cost of a project. ABC, on the other hand, allocates overhead based on specific activities that generate those costs.

Examples of activities include:

• Sourcing and ordering materials

• Preparing equipment for use

• Site cleanup

ABC assigns all relevant costs—labor, equipment, subcontractors, depreciation, etc.—to each activity. Then, those activity costs are allocated to jobs using cost drivers, such as:

• Equipment usage (for maintenance costs)

• Number of purchase orders (for procurement costs)

This method helps eliminate vague expense categories like “overhead” and assigns costs based on real project usage.

Benefits and Drawbacks of ABC

Advantages:

• Reveals the true cost of each job

• Highlights which activities consume the most resources

• Improves estimates, budgeting, and pricing

• Identifies profitable job types and where efficiencies can be gained

Challenges:

• Requires detailed data tracking by staff

• Demands training and buy-in from employees

• Risk of inaccurate inputs due to more complex data collection

Start Small: Try a Pilot Project

Implementing ABC doesn’t have to be overwhelming. Consider using it on one job as a pilot project. If successful, expand the approach to additional projects.

Need guidance? We can help you assess whether ABC is the right fit for your construction business and support implementation.