5 benefits of using Activity based costing in your construction business

Workbench is designed as a Job Costing solution that makes extensive use of Activity codes to help Project Managers and Operational staff manage the costs involved in delivering a wide range of construction projects. In our experience Activity-based costing (ABC) brings a huge amount of value to a construction business but it is often not well understood. We have summarised below what Activity-based costing (ABC) is about and 5 benefits it can bring to your business.

Activity-based costing (ABC) is a method of accounting that assigns overhead and indirect costs to specific activities, and then assigns the cost of those activities to products or services. In a construction business, ABC can be used to more accurately assign costs to specific projects, as well as to identify cost savings opportunities. Labour and Equipment are two of the areas which benefit significanlty from Activity-based costing as it allows you to include a range of indirect costs within the cost rate.

For instance an hourly labour rate may be made up of the following components:

  1. Wage Rate
  2. Super Contribution
  3. Payroll Tax
  4. Unrecoverable time e.g. Leave

Some examples of Labour Activities used in Construction:

  1. Project Management
  2. Site Supervision
  3. Plant Operator
  4. Site Labour

Some specific advantages of using ABC in a construction business include:

  1. Improved cost accuracy: ABC allows for more accurate assignment of overhead and indirect costs to specific projects, which can help identify cost overruns and improve budgeting and pricing decisions.

  2. Better understanding of cost drivers: ABC helps identify the specific activities that drive costs, allowing for better cost management and identification of potential cost savings opportunities.

  3. Better decision-making: By providing more accurate and detailed cost information, ABC can aid in better decision-making regarding project bids, cost management, and resource allocation.

  4. Increased efficiency: By identifying areas where costs can be reduced, ABC can help a construction business become more efficient and improve its bottom line.

  5. Cost allocation: ABC is useful in allocating costs to specific projects or clients, which can aid in accurately billing clients and pricing future projects.

It's worth noting that ABC does take a bit of effort to setup, but knowing that your indirect costs are reflected within your projects and understanding what it really costs to deliver a project provides a huge benefit to a business. Being confident in being able to deliver profitable projects and in turn that equating to being a profitable business is something everyone strives for so it is worth the extra effort.

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