Keeping everyone on the same page is essential for assuring that construction projects run smoothly. That is especially true when it comes to the budget. In this article, we explain the benefits of using construction cost codes, how to make them work for your business and everything you need to get started.

Click on a link below to jump straight to the section you’re most interested in:

• What are Construction Cost Codes?
• Why Use Cost Codes for Construction Projects?
• How to Use Job Cost Codes in Construction
• Where Can I Find the Standard Construction Cost Codes List?
• Do I Have to Use the Standard Construction Cost Codes List?
• How Many Construction Cost Codes do I Need?
• More Tips for Using Construction Cost Codes

What are Construction Cost Codes?

When everyone working on your residential construction project is speaking the same language, things get easier. Construction cost codes provide that universal language when it comes to costs. Contractors use them to track and manage the costs associated with a project. They are typically broken down by equipment, materials, subcontractors, labor and other costs. 

One of the most frequently used construction code lists is called the MasterFormat, and is available through the Construction Specifications Institute. Some home remodelers and builders often opt to make their own cost code list that better fits their needs. Whatever you choose, here are some tips and things to consider when using construction cost codes.

Why Use Cost Codes for Construction Projects?

Using construction codes assures that documentation regarding the costs of a project is standardized and can be understood by those outside your company as well as your internal team. Additional benefits include:

• Getting a Better Handle on Profitability - Construction cost codes make it easier to compare different projects over time and help contractors determine which activities produce a profit. Assigning a cost code to each activity and tracking the associated costs allows you to make informed decisions by identifying these productive areas to help you get the maximum return on investment. Learn more about how to price construction projects right the first time.
  
• Recognize Weak Areas - On the flip side, by using construction codes to track and compare, it is easier to spot areas that are sucking up profit and potentially stunting the growth of your business. Uncovering these weak spots is the first step toward finding solutions to improve the bottom line.
  
• See Budget Red Flags - Avoiding cost overruns is easier when using construction cost codes because they allow contractors to manage the budget more effectively. Tracking expenses with construction codes in real time allows construction pros to see which cost areas are outpacing the budgeted amounts, and to take action. 
  
• Make Future Estimates More Accurate - Analyzing and comparing projects and specific code areas provides information that can be used to compare how the costs matched up with the original estimates. This information can help businesses make estimates more accurate and realistic going forward.
  
• Create a Single Source of Truth - Having a standardized system of numbered codes keeps information consistent from project to project, and across your business and every stakeholder involved in the project. It also reduces errors because the codes are arranged by numbers instead of just terms, which can be misspelled or labeled differently depending on who is recording the information. This consistency helps streamline operations and provides an easier way to compare and analyze costs. 
  
• Provide Transparency - With everyone on the same page, cost codes provide transparency to your team, your clients, subcontractors and any others involved in the project.

How to Use Job Cost Codes in Construction

Here are four steps toward creating and implementing a cost code structure that works for your business:

• Define Your Cost Codes - Which cost codes are most relevant to the renovation or home building services you provide?  Review a standard list of cost codes and make a list of only the ones that will be most helpful in tracking and analyzing costs. Add others that are not on the standard list as needed. This is often the most challenging part of the process for contractors, and business software can make the task easier by automatically generating codes if you get stuck.  
  
• Share Your Cost Codes - Share the cost codes with anyone who is doing estimating for your  company, team members who are logging work completed and any other stakeholder who needs to be included. 
  
• Make Cost Codes Easy to Use - Making the process too complex will reduce the chances that the construction cost codes are being used to their full potential. Make them easy to access for those who need them, and keep them simply so that they are understood and easy to use. 
  
• Help Team Members Get it Right - Review your construction cost code documents to ensure that information is being logged correctly and everyone understands how to use them. 

Where Can I Find the Standard Construction Cost Codes List?

The Construction Specifications Institute provides a standard list of codes called MasterFormat, which is one of the most commonly used cost code lists by contractors, especially those doing commercial and industrial work. It’s not unusual for contractors specializing in residential renovation work to create their own list because they find the standard one is more than they need for their business.

A construction estimating software like Houzz Pro will automatically code your estimates. Then, you can save it as a template to reuse the code list over and over for future projects. 

Below is the full list of the 48 divisions included in MasterFormat. Contractors then often list more specific subcategories below each division. 

• 00: Procurement and contracting requirements
• 01: General requirements
• 02: Existing conditions
• 03: Concrete
• 04: MasonryMetals
• 06: Woods, plastics, and composites
• 07: Thermal and moisture protection
• 08: Openings
• 09: Finishes
• 10: Specialties
• 11: Equipment
• 12: Furnishings
• 13: Special construction
• 14: Conveying equipment
• 21: Fire suppression
• 22: Plumbing
• 23: HVAC
• 25: Integrated automation
• 26: Electrical
• 27: Communications
• 28: Electronic safety and security
• 31: Earthwork
• 32: Exterior improvements
• 33: Utilities
• 34: Transportation
• 35: Waterways and marine construction
• 40: Process interconnections
• 41: Material processing and equipment handling
• 42: Process heating, cooling, and drying equipment
• 43: Process gas and liquid handling, purification, and storing equipment
• 44: Pollution control equipment
• 45: Industry-specific manufacturing equipment
• 46: Water and wastewater management
• 48: Electrical power generation

Do I Have to Use the Standard Construction Cost Codes List?

For most jobs (government projects may be an exception) there is no requirement to adopt the standard construction code list created by CSI. Indeed, many contractors opt to customize their own list to better fit the type of work they specialize in and the size of their business.  

One of the benefits of using the standardized list is that the codes are laid out for you already so you don’t have to take the step of making your own list. And, since it is one of the standards used in the construction industry, the list is easily recognizable. 

However, for contractors specializing in home construction and remodeling, the MasterFormat list is so extensive that he can become unwieldy. It includes divisions that are not likely to be applicable to many businesses such as” waterways and marine construction” or “pollution control equipment.” Creating a smaller, more manageable list can simplify the process and avoid unnecessary work.

After all, the purpose of using construction cost codes is to make them work for you, so choose the path that gives your business the most benefit without becoming laborious.

How Many Construction Cost Codes do I Need?

There is no right or wrong number when it comes to creating your list of construction cost codes. That being said, one of the most common mistakes is the tendency to create too many codes. A long list of construction cost codes can make managing and accounting costs onerous without providing the benefit of learning from the data for the future. Updating very long and detailed lists can be quite time consuming.

But, making the construction cost codes list too short risks missing out on the usefulness that comes with understanding the costs of a project for each specific category. The number of codes should be extensive enough to gauge the project costs and help your business make informed decisions over the life of a project and for future ones after it is over.

Find a balance between getting too detailed and being too vague. Ask yourself which of the codes are relevant to you and the work you do. If you find you are over complicating the list with multiple sub-divisions, ask yourself if that information is really providing a benefit. Try your new list for one project and then, evaluate how it worked and revise your list for the next one, and soon you will have a list that works for every project. 

More Tips for Using Construction Cost Codes 

• Collaborate with Teams -Think about who will be using the construction cost codes. At the least, team members with access to them should include project managers, estimators and whomever is doing your accounting. This assures everyone is using the same method to record and compare costs. Contractors frequently also bring in sub contractors and others involved in a project. Learn more tips for collaborating on construction projects in our next article.
  
• Number Codes in Chronological Order -The most common way to set up codes is to arrange them in the same order as the work is done on a project. Number 1 may be the contract stage and the last number is the final work that completes the project. There, of course, may be some variants in this order, especially as simultaneous work is conducted on a job site. However, this is intended to be the simplest and most intuitive way to format construction cost codes.
  
• Format for Easy Comparisons - Make sure your system is set up for easy accounting of every project stage and from project to project. This makes it simpler to analyze and learn from the  cost data over the long run.
  
• Invest in Software - Tech tools simplify the entire process of using construction cost codes. A business software like Houzz Pro helps contractors build more accurate estimates faster. And, it automatically populates cost codes to estimates, invoices, daily logs, timelines and any other project documents. 

Learn More 

Tracking and managing project costs through construction cost codes can help contractors stay on budget, create a common language among everyone involved in a project and provide valuable insights on how to increase the profitability of their business. 

Read How to Do a Construction Estimate to learn more. Sign up for a free trial of Houzz Pro to explore our Takeoffs, Estimate Builder and Financial Reporting features, all of which can help construction businesses be more profitable.