Materials and labour are normally easy to calculate for job costing purposes. Construction assets, which include plant, trucks, excavators and general equipment can prove more problematic. Accountancy systems normally depreciate equipment over the allowable tax write-off-period. This works well for financial accounting purposes and year-end audits but is problematic for job costing purposes. It is vital to have an accurate job costing system. Firstly to ensure costs are kept under control, and secondly to ensure estimators have up-to-date costing information when pricing tenders.
From my experience, the best way to price assets for job costing purposes is to calculate an internal hourly rate for each item of equipment. These rates can be calculated by discounting external hire rates, then separate asset management systems can be developed to ensure accurate costing of plant and equipment on site. These systems should include the cost of repairs, spare parts, diesel consumption, oil consumption and replacement. This information can then be compared to the discounted external hire rates already in use to ensure that they are accurate.
Calculating asset replacement costs acurately is the most challenging task and will always be a subjective exercise. These costs will need to be recalculated at least once a year as interest rates, currency values, and material costs can affect replacement costs.
Once a good system has been set up, the information can be used for a range of tasks; such as deciding on the most economical time to replace plant, whether the assets are purchased new or second hand, and the type and make of plant that should be purchased. This will help to reduce asset maintenance costs. The type of construction companies that will benefit most from a good plant management system are assets intensive and include groundwork, demolition, earthworks and pipe laying companies.
In conclusion, calculating accurately construction asset costs for individual jobs can be challenging but ultimately will lead to more profitable jobs.
Article by Duncan Stainer