Cracking the Code: Understanding Cost Codes in Construction for Efficient Project Management

December 19, 2023 by Michael Gober & Denis Gritsiyenko

In construction, it’s imperative that everyone involved in a project speaks the same language, especially regarding costs.

Enter construction cost codes — the key to efficiently comparing and forecasting construction costs so that you can accurately manage your cash flow.

But, what exactly are cost codes, how do they work, and why are they beneficial to your company?

We answer all of that and more.

CM Fusion: Cost Codes for Construction Cost-Tracking Made Easy
What Are Construction Cost Codes?
Creating Your Own Construction Cost Codes in 10 Steps
Factors To Consider Before Creating a Construction Cost Code Structure
8 Benefits of Using Cost Codes in Construction
4 Things to Keep in Mind When Creating and Using a Construction Cost Codes List
CM Fusion Makes Utilizing Construction Cost Codes Simple With Our Cost Tracking Software

CM Fusion: Cost Codes for Construction Cost-Tracking Made Easy

Construction cost codes don’t have to be complicated. With CM Fusion, contractors can create their own custom cost codes or choose from a library of standard codes.

Our construction management software offers a full suite of tools available, including cost-tracking software that allows construction companies to:

Stay on budget with real-time cost-tracking data
Monitor project spending with easy-to-use cost-tracking solutions for all costs
Use custom or standard construction cost codes to track material costs
View your cost-tracking from anywhere with a cloud-based, mobile-ready platform
Easily download and print all cost-tracking data as needed

Forget clunky spreadsheets, human error, and antiquated processes, and move into the future of cost-tracking with CM Fusion.

30-Day Free Trial

What Are Construction Cost Codes?

Construction cost codes are the fixed set of codes used for managing, tracking, and reporting all costs, quantities, and profits associated with a particular project.

Cost codes are used to simplify project data management across all levels of a job. Everyone involved in a project, be it estimators, administration, accounting, general contractors, and more, can use the codes as a universal language to communicate costs.

Construction cost codes are intended to be used throughout the project and enable full visibility for project managers.

What Is a Standard Cost Code?

Standard cost codes are typically numeric or alphanumeric and follow a predefined coding structure. The structure may vary between organizations, but it generally includes codes for different cost categories, such as:

Labor
Materials
Equipment
Overhead; and
Specific tasks or phases of the construction process

Standard Construction Cost Codes List

The Construction Specifications Institute (CSI) provides a standard construction cost code list called a MasterFormat, which is one of the most popular lists available.

The list has been separated into these divisions:

00: Procurement and contracting requirements
01: General requirements
02: Existing conditions
03: Concrete
04: Masonry
05: Metals
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

However, it’s common for construction companies to create their own list of standard construction cost codes if CSI’s list isn’t fitting.

Creating Your Own Construction Cost Codes in 10 Steps

Creating a construction cost code structure involves developing a systematic and organized framework for categorizing and tracking costs associated with various aspects of a construction project. Here are steps to guide you through the process of creating a construction cost code structure:

Step 1: Identify Cost Categories

Labor:
- 100-199: Skilled Labor
- 200-299: Unskilled Labor
- 300-399: Supervision
Materials:
- 400-499: Concrete
- 500-599: Steel
- 600-699: Wood and Framing
- 700-799: Finishes (paint, flooring, etc.)
Equipment:
- 800-899: Heavy Equipment
- 900-999: Light Equipment
Overhead:
- 1000-1099: General Overhead
- 1100-1199: Project-Specific Overhead

Step 2: Break Down Each Category

Example for Concrete (Material Category):

410-499: Concrete Subcategories
- 410-419: Ready-Mix Concrete
- 420-429: Formwork
- 430-439: Reinforcement
- 440-449: Concrete Placement
- 450-459: Curing and Finishing

Step 3: Consider Phases or Project Tasks

Site Preparation:
- 1200-1299: Demolition
- 1300-1399: Site Grading
- 1400-1499: Excavation
Foundation:
- 1500-1599: Footings
- 1600-1699: Foundation Walls

Step 4: Add Specific Tasks or Elements

Concrete Foundations (within Foundation Category):
- 1620-1629: Concrete Footings
- 1650-1659: Foundation Wall Concrete

Step 5: Include Specialized Costs

Permits and Fees:
- 2000-2099: Building Permits
- 2100-2199: Inspection Fees

Step 6: Align with Industry Standards

Consider using industry standards like MasterFormat or UniFormat as a reference. This can help ensure compatibility and consistency across the construction industry.

Step 7: Document and Communicate

Create documentation explaining the purpose and structure of each code. Share this documentation with the project team to ensure a common understanding.

Step 8: Flexibility for Updates

Build flexibility into the structure to allow for updates as the project evolves. Consider incorporating a mechanism for adding new codes or modifying existing ones.

Step 9: Consideration for Regional or Company-Specific Needs

Adapt the structure to meet regional or company-specific requirements. Consider cultural, regulatory, or organizational differences that may impact the cost code structure.

Step 10: Test and Refine

Pilot the cost code structure on a smaller scale or on a project with less complexity. Gather feedback from the project team and refine the structure based on lessons learned.

Example of a completed code:

Code: 1625
Description: Concrete Formwork for Foundation Wall
Category: Materials
Subcategory: Concrete
Task/Element: Foundation Walls
Specific Task: Formwork

The above structure is just an example, and the specifics may vary based on the nature and scope of your construction projects. Customizing the structure to fit the unique requirements of your organization and projects is essential for its effectiveness.

Factors To Consider Before Creating a Construction Cost Code Structure

Before creating a construction cost code structure, several critical considerations should be taken into account:

Understanding the scope and complexity of your projects is essential. Consider the types of construction projects your organization undertakes, and ensure the cost code structure is scalable and adaptable to varying project sizes and complexities.
Collaboration and stakeholder involvement are crucial. Engage key stakeholders from different departments, including project management, estimation, and accounting, to ensure the cost code structure meets diverse needs. Gather feedback from end-users who will interact with the structure regularly.
Consider any industry-specific requirements or considerations that may impact the cost code structure, and pilot-test the structure on a smaller scale or less complex project before implementing it across larger projects.

By carefully addressing these considerations, you can develop a construction cost code structure that enhances accuracy, transparency, and efficiency in cost management.

8 Benefits of Using Cost Codes in Construction

Construction cost codes benefit everyone involved in the cost-tracking of a project. But beyond that, cost codes create efficiency by improving processes, assisting companies in staying on budget, and increasing profitability on every project.

#1: Clear Budget Management

Utilizing construction code codes can improve efficiency in every aspect of budget management.

For example, estimators often divide projects into defined roles or activities, assigning a code to each and then calculating the individual line items to determine the estimated cost of a project. If and when the scope changes, line items can be easily added or deleted to recalculate the cost.

Additionally, cost codes reveal important spending trends that allow companies to control purchasing, labor costs, and the use of materials. By pinpointing exactly where costs are being generated, companies can stay on budget and ensure that every cost is linked to profit.

#2: Real-Time Cost Tracking

Construction cost codes allow stakeholders and management to have a real-time overview of expenses and keep everyone engaged in the project.

Real-time cost tracking gives companies the luxury of detailed, easy-to-read costing information, allowing for easy adjustments that will improve project efficiency before spending gets out of hand.

#3: Data Standardization

Having a standard construction cost codes list will simplify your data. Unfortunately, you can’t count on every person associated with a project to use the same terminology for a cost, but a code is unmistakable.

For example, rather than using the code “16100” for “electrical contractor,” why not just use the terminology to describe the cost?

Because it’s not a standardized term.

If your general contractor mistakenly enters “electrician” and your accounting department searches your data for “electrical contractor,” the expenses won’t align. However, universal codes allow construction companies to standardize data and minimize human error.

#4: Precision Estimating for Future Projects

Construction costs, such as materials and labor, are dynamic. Commodities can cause massive fluctuations in budgets, but with cost codes, it’s easy to clearly see how much certain tasks and materials are really costing.

This data collected by using standard construction cost codes makes it easier for estimators to accurately and competitively bid on future projects.

#5: Pinpointing Profitable Activities vs. Weak Points

When working across multiple construction jobs, cost code lists help stakeholders determine which portions of the project are most profitable and which are not.

This makes the decision to increase investment in the areas where a company is most productive much easier since it’s based entirely on concrete data.

Conversely, when a project is taking way longer than expected, or incurs excessive costs, using cost codes will make it easier for managers to identify overspending and proactively brainstorm solutions.

#6: Analyzing Variances

Variance analysis involves comparing the planned or budgeted costs with the actual costs incurred during a construction project. In the context of cost codes, variance analysis is performed by examining the differences between the budgeted costs associated with specific cost codes and the actual costs recorded for those codes.

Here's why this process is crucial:

Identifying deviations: By comparing actual costs against the budget for each cost code, project managers can easily identify any discrepancies or deviations.
Root cause analysis: Variances provide valuable insights into the factors contributing to cost differences, but with root cause analysis, project managers can understand why costs deviated from the plan.
Timely correction: If a cost code is experiencing a negative variance, indicating cost overruns, project managers can take corrective measures to bring the project back on track.

#7: Allocating Resources

Cost codes help in allocating resources efficiently by providing a clear breakdown of costs associated with labor, materials, and equipment for each task or phase.

This information is valuable for optimizing resource usage and ensuring that the right resources are allocated to the right activities.

For example, cost codes help project managers identify the labor costs associated with specific activities. With this information, project managers can optimize labor resources by assigning the right number of workers with the necessary skills to each task.

As the project progresses and actual costs are recorded, project managers can compare the actual resource usage with the planned resource allocations for each cost code. If there are deviations, adjustments can be made.

#8: Improving Communication

Effective communication is essential for the success of any construction project involving collaboration among various stakeholders, including project managers, contractors, subcontractors, suppliers, and other team members.

Cost codes play a crucial role in facilitating clear and efficient communication by providing a standardized framework for discussing project finances in the following ways:

Creating a standardized reference system for project costs
Contributing to clear and consistent documentation of project costs
Simplified reporting of the financial health of specific project components
Providing a clear framework for discussing and documenting change orders

Cost codes contribute to transparency in project communication. Transparent communication is crucial for building trust among stakeholders. When everyone has a clear understanding of project costs through standardized cost codes, it fosters transparency in financial matters.

4 Things to Keep in Mind When Creating and Using a Construction Cost Codes List

If you’re planning to create your own construction cost codes, there are a few things to consider.

Making unique codes works for many companies, but only when done properly. It’s important to:

Keep it simple
Consider who will be using the codes
Think beyond cost tracking; and
Implement a quality construction management software

#1: Making Unique Cost Codes? Stick to the Essentials

Not all companies use or need a list as comprehensive as MasterFormat. Many companies have created their own list of cost codes and get away with using just a fraction of what CSI’s list has covered.

Look at it this way:

If you’re running a smaller operation and want to keep things simple, you can easily assign a code to a particular subcontractor, such as “electrical,” and assign that single code to everything associated with the electrical work on a given project.

There is no need to have individual codes for every aspect, such as labor, materials, rentals, etc.

You may even consider tailoring the cost codes list to the specific needs and characteristics of the project. Consider the size, complexity, and nature of the construction work. A cost codes list for a residential construction project, for example, may differ from that of a large commercial development.

When sticking to the essentials you can avoid the constant consolidating of expenses by keeping them under one code from the start.

#2: Consider All Stakeholders’ Needs

Before you sit down and create an extensive list of cost codes, first think about who will be using and referencing these codes the most and what their role is in the project. You may want to involve key stakeholders, including project managers, estimators, accountants, and relevant team members, in the development of the cost codes list.

Collaborative input ensures that the list reflects the diverse perspectives and requirements of the project team.

However, the level of detail needed will vary between stakeholders and teams, so you should only provide enough information to empower your team to make real-time decisions with confidence. This is where industry standards can be helpful because they provide a widely accepted framework for organizing and categorizing construction information.

Adhering to industry standards enhances consistency and interoperability across projects, while creating your own construction cost codes may enhance the usability and accessibility of those codes for all stakeholders.

#3: Don’t Stop With Cost-Tracking

Construction cost codes are a must for cost tracking, but it doesn’t end there. All the information collected on cost, time, and profitability allows companies to identify areas where sustainable growth can happen.

Detailed information on almost every aspect of a job site empowers construction owners to make decisions that will help grow their businesses. Cost codes provide a crystal clear picture of where growth is possible, the rate at which growth can happen, and how much that growth will cost.

Not only that, but the data provided assists in time and cost management, allowing companies to revolutionize efficiency and productivity.

#4: Use Construction Management Software

With so many moving parts in a construction project, having a massive list of codes can be difficult to manage and remember.

Who really wants to be fumbling around with manual lists and outdated spreadsheets these days, anyway?

Investing in construction management software is one of the quickest ways to streamline your cost-tracking processes. Whether you create your own codes or use what’s offered by the software, having remote and instant access to your cost codes will save you time and money.

CM Fusion Makes Utilizing Construction Cost Codes Simple With Our Cost Tracking Software

Construction cost codes are easy with CM Fusion’s cost-tracking software.

Just one of many features of our construction management software, cost-tracking allows you to choose from our existing cost codes or create your own unique database of codes.

Your team can access cost codes in real time, empowering them to make informed decisions on the job site when it matters the most.

Our permissions settings allow you to control who can create or assign cost codes, which eliminates confusion and the risk of human error.

In addition to cost-tracking, CM Fusion offers construction companies a fully integrative, cloud-based management software that allows owners to stay better connected to the field with features such as:

Document management
Scheduling
Daily field reports
Time tracking
Project tasking
Change orders
Submittals
RFIs and RFPs
Estimating/bidding; and
Image management

Access your projects from anywhere, on any device with CM Fusion. Click here to see how it works.