Develop the Right Cost Code Structure

Read the article in Construction Outlook, page 39

January 2022

Greg Norris, B2W Software


Improve Reporting, Analytics and Performance


Cost codes may not seem like the most critical topic for construction executives, but developing a good code structure and applying it consistently across estimating, operations and accounting is essential to reporting on, analyzing and improving performance.


Cost codes essentially organize activities and items into logical categories so they can be tracked and measured, preferably across workflows and without cumbersome, manual effort.


Developing the right cost code structure can be tricky. Depending on size, software systems used or type of work performed, each company must match its unique requirements, balancing practical usability in the field and the office with a level of detail that will provide meaningful insight. While there is no one-size-fits-all solution, there are some best practices to consider.


Where do we start?

For most contractors, it’s not necessary to actually code and track every item or activity that could be coded and tracked by accounting, estimating or operations systems. Rather than rushing into a highly detailed structure that may be impractical, it’s better to first step back and assess exactly what kind of information and level of detail (see below) will provide valuable insight into running the business more effectively. The answer will center on getting a better picture of actual production rates, bidding more accurately, analyzing equipment costs and finding out precisely which activities are making or losing money.


Involving estimators, project managers, field personnel and other hands-on employees along with accounting specialists and executives in this process is a good idea. They provide important perspectives and often have the best sense of the everyday logistics of using and assigning codes. Getting non-financial users involved in the development process also enhances buy in. Employees will be more likely to use codes properly if they had a role in developing them and understand why they are important to their co-workers and the company as a whole.


How detailed should we get?

This is the top challenge contractors face in developing an effective cost code structure. The ‘sweet spot’ between too much detail and too little will vary widely from company to company.


In the example below, three codes to differentiate between ‘small’, ‘medium’ and ‘large’ pipe could be sufficient for one utility contractor. There may be no measurable difference in the process, equipment or labor that company would use to install six-inch or a ten-inch pipe. Another contractor, however, may need 15 different codes to track 15 specific pipe diameters and types that its crews install in order to analyze and adjust operations.




A complex coding structure with an excessive volume of codes, however, can be an unnecessary burden on those who have to use it. Employees can end up wasting a lot of time looking up and trying to precisely assign the right code just to generate information at a level of detail that isn’t useful or not worth the effort it takes to get it. Extremely granular or specific options also create more opportunities for coding errors, which lead to misleading reporting.


Agreeing on reporting goals at the outset can minimize the level of detail and the volume of codes. Starting with the basic codes required and then adding more, as needed, is almost always a better approach than starting with a high level of detail and then trying to eliminate and consolidate codes later.


What is the best scheme for characters and categories?

Contractors can use virtually any combinations of numbers or letters in their cost codes, depending on individual preferences and requirements. However, there are some proven approaches that make structures more effective and prevent unforeseen problems related to sharing codes across systems or expanding the list of codes to add detail in the future.


Five digits tends to be a good minimum length for numeric cost codes. This provides room to add items under a main category or sub-category signified by the first one or two digits. Alphanumeric codes may also be a good option, as long as they are accepted by the accounting systems. A code like EXC470, for example, makes it easy to identify that the item is related to excavating.


Making sure the numerical or alphanumerical concept is compatible with the accounting and ERP systems as well as any reporting systems is also a critical first step. This means being conscious of things like character count limits and the use of dashes, periods or other special characters.

Organizing cost codes into logical categories makes a more sense than assigning them arbitrarily or in a random numerical succession. Categories make it easier to recognize quickly where an activity or item belongs without having to remember or look up dozens or even hundreds of codes.


The basic structure illustrated below presents a good example. All items in the “10000” category are related to General Conditions, all items in the “20000” category involve Land Clearing/Demo, and so on.


This is also a flexible concept, making it easy to increase the level of detail in a parent-child relationship under each category. In example 2, Electricity and Internet have been added to provide more specific detail for coding Temporary Utilities.

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