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 values – typically numerical – 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) as a means of ensuring their documents can be easily-interpreted by outside sources (i.e. fellow contractors).
However, it’s also not uncommon for companies to create their own standard cost codes for construction projects if they believe the CSI’s list is unsuitable.
Benefits of using construction cost codes
Next, let’s look at the benefits of using cost codes rather than other methods.
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 actually the most important and productive.
Easy identification of profitable activities
By extension of facilitating activity-based costing, standard construction cost code lists help professionals figure out which activities are profitable. This opens the door to increased investment in those productive areas since it provides concrete data with which to make 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 over-spending 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 simply 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 absent-mindedly substitute parts of the code with synonyms.
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:
00: Procurement and contracting requirements
01: General requirements
02: Existing conditions
06: Woods, plastics, and composites
07: Thermal and moisture protection
13: Special construction
14: Conveying equipment
21: Fire suppression
25: Integrated automation
28: Electronic safety and security
32: Exterior improvements
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
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 both Canada and the United States for commercial and institutional projects.
Tips for using cost codes
Next, let’s look at some tips for using construction cost codes effectively.
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. In fact, 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 having to frequently consolidate expenses that should have been categorized together, to begin with.
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 as well. 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 to you if you’re frequently reviewing it via your construction project management software.
Construction cost codes greatly help simplify the project accounting process. We hope this article has been helpful in showing 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.