Your ultimate guide to construction cost codes

Ultimate guide to construction cost codes. Categorize expenses, track project costs, allocate budgets, and enhance financial control. Understand standards, software integration, and best practices for accurate cost coding.

Your ultimate guide to construction cost codes

Construction cost codes greatly simplify accounting within the industry, ensuring various stakeholders speak the same language regarding the categorization of expenses. Keep reading to learn more about construction cost codes and how to use them more effectively.

What are construction cost codes?

Construction cost codes are standardized, typically numerical values that help professionals organize expenses into common categories. Often, companies will simply use the construction cost codes list provided by the Construction Specifications Institute (CSI) to ensure their documents can be easily interpreted by outside sources (i.e., fellow contractors).

However, it’s also not uncommon for companies to create standard cost codes for construction projects if they believe the CSI’s list is unsuitable.

Benefits of using construction cost codes

Next, look at the benefits of using cost codes rather than other methods.

  • Cost codes are central to activity-based costing and resource management
  • Easy identification of profitable activities
  • Easy identification of weak points
  • Cost codes allow for strict standardization of data

Cost codes are central to activity-based costing and resource management

Construction cost code lists are an essential part of activity-based costing. This accounting strategy helps construction management professionals attach costs to outcomes, referred to as cost drivers.

Handling project financials in this way meshes very well with a coherent construction resource management strategy because it helps companies determine where money is being spent relative to which activities are the most important and productive.

Easy identification of profitable activities

By extension of facilitating activity-based costing, standard construction cost code lists help professionals determine which activities are profitable. This opens the door to increased investment in those productive areas since it provides concrete data for capital allocation decisions.

Easy identification of weak points

The categorization made simple with a standard construction cost codes list also helps management professionals identify which activities are hogging way too much capital.

Let’s say, for example, a particular aspect of a job is taking way longer than it should, incurring excessive costs. The use of cost codes will help professionals identify this overspending much faster. It will also let them identify a more appropriate cost for the item based on what others using the same code have reported on past projects.

One common scenario related to this benefit involves contractors identifying cost drivers they don’t have the resources to optimize. In such a case, it may make sense to start subcontracting that portion of projects out to better-equipped professionals.

This data may also help with future feasibility studies.

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Cost codes allow for strict standardization of data

Why not just use basic words to describe costs? For example, instead of using “01010,” why not use the cost driver? It represents “building permits” as a descriptor?

Well, the standardization of data is one reason. What if one construction management professional mistakenly inputs “construction permits” rather than “building permits” when categorizing an expense using words?

Anyone searching for data on “building permits” within construction management software would miss that expense (and any others similarly miscategorized) because such software is generally not intelligent enough to recognize that the phrase “construction permits” means the same thing as “building permits” unless a user specifically points that out.

Cost codes make the process of categorizing expenses very simple. There’s little opportunity for someone to substitute parts of the code with synonyms absent-mindedly.

Standard construction cost codes list

One of the most popular standard construction cost code lists is CSI’s MasterFormat. Resource management tools that create their own code lists often do so in a way that aligns with MasterFormat (as is the case with Procore, which confirms this convention on its website).

MasterFormat uses the following divisions:

CodeConstruction Cost Code Description
00Procurement and contracting requirements
01General requirements
02Existing conditions
06Woods, plastics, and composites
07Thermal and moisture protection
13Special construction
14Conveying equipment
21Fire suppression
25Integrated automation
28Electronic safety and security
32Exterior improvements
35Waterways and marine construction
40Process interconnections
41Material processing and equipment handling
42Process heating, cooling, and drying equipment
43Process gas and liquid handling, purification, and storing equipment
44Pollution control equipment
45Industry-specific manufacturing equipment
46Water and wastewater management
48Electrical power generation

Within each division, CSI provides codes for specific cost drivers, which you can purchase directly from the firm.

A Brief History of MasterFormat

MasterFormat emerged following World War II as construction projects grew more complex, involving a wider range of materials than ever before. In 1948, the CSI was formed as a national association in the United States to improve communication across projects.

In 1963, they published the first version of what would later become MasterFormat. It contained just 16 divisions until the number was bumped to 50 in 2004 (although many divisions are empty and serve as placeholders for future expansion, which is why the list above contains gaps in the numbers).

MasterFormat is currently used in Canada and the United States for commercial and institutional projects.

Tips for using cost codes

Next, look at some tips for effectively using construction cost codes.

Use project management software

One challenge construction professionals face with cost codes involves ensuring they’re accessible to professionals. After all, codes consisting of numbers aren’t particularly memorable, especially in the fast-paced environment of your typical job site.

Thankfully, construction accounting management programs typically store cost codes and allow you to access them remotely. No more having to memorize hundreds of codes or refer to extensive manuals and spreadsheets!

Don’t go overboard with cost codes

While MasterFormat comes with hundreds of cost codes, you don’t necessarily need to use all of them. Many construction companies get away with using only a dozen or so codes.

For example, professionals often use a single code to reference all work done by a particular subcontractor rather than having individual codes for the labor itself, the materials, etc.

By sticking to the bare essential cost codes for your company, you’ll avoid the hassle of frequently consolidating expenses that should have been categorized together.

Carefully consider who will be referencing the cost codes

When deciding how granular your cost codes need to be, carefully consider who will ultimately be referencing them. Different stakeholders and teams will require different levels of detail.

You should provide just enough detail for the team referencing the data to make confident, informed decisions.

For tips on improving communication, check out this article.

Don’t forget to review the data

While cost codes are great for organizing project financials, don’t forget to utilize them in your management decision-making. Remember, cost codes offer valuable insights into which aspects of a project amount to bottlenecks and which ones are the most productive. This information is only useful if you frequently review it via your construction project management software.

Construction Cost Codes FAQ

What is the importance of cost coding?

Cost coding helps you to manage and control project costs by having a standardized system. This makes it easy to see where money is being spent and to communicate effectively with suppliers. 

How do cost codes work in construction?

Each type of expense is assigned a number which is its cost code. Code codes can track expenses like materials, labor, and other expenses. It’s then possible to see how much each part of the project costs.

What is an example of a cost code?

An example of a cost code could be “01010” for building permits. This code helps keep track of all costs related to getting the permits needed for construction.

What is the difference between a cost code and a phase code?

A cost code tracks specific expenses, like materials or labor. A phase code, on the other hand, tracks different stages of a project, like planning or construction.

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Construction cost codes greatly help simplify the project accounting process. We hope this article has helped show you what cost codes are and how you can use them efficiently. For more construction project management tips, visit our blog. Lastly, find out why businesses need a start-up mindset to progress further in the construction industry.

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Michel Richer

Michel Richer is the Manager of Content and Product Marketing at Bridgit. He started in the construction industry early on with a local restoration company. Michel is driven to propel the construction industry forward by helping to eliminate outdated, ineffective processes.

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