Contractors & tradesJob Costing for Contractors: Know Which Jobs Make Money

Quick question: which job made you the most money last year?

Most contractors can answer which job was the biggest, which one had the nicest client, and which one had the basement that flooded twice. The profit question is harder. The books show the company made money, but whether the bathroom remodels are carrying the kitchen jobs (or the other way around) is mostly a hunch.

Job costing replaces the hunch with a number. Here's how it works, how to set it up, and a worked example that shows why it matters.

What is job costing?

Job costing is the practice of assigning each cost to the specific job that caused it. Instead of one big "materials" line on the P&L, you can see that the Hendricks kitchen used $14,600 of materials and the Lopez deck used $6,200.

The costs that typically get tracked by job:

• Labor, at a burdened rate (wages plus payroll taxes, workers' comp and benefits)
• Materials and supplies
• Subcontractors
• Equipment rental, or an hourly charge for equipment you own
• Permits, dumpsters and job-specific fees

Overhead like the office, the bookkeeper and the owner's truck usually stays out of job cost, or gets allocated with a simple rate. Start without the allocation. You can add it later.

Why job costing for contractors changes how you bid

Without job costing, a contractor can grow revenue for years while some job types lose money. The company looks healthy because the good jobs cover the bad ones. Then the mix shifts, and the profit disappears with no obvious cause.

Job costing shows you:

1. Gross profit per job and per job type.
2. Where estimates were off, and by how much.
3. Which crews or project managers bring jobs in on budget.
4. What to change in the next bid.

It also makes larger reporting possible. Once you're tracking costs by job, you can build a work-in-progress schedule, which lenders and bonding companies often ask for. Our guide to the WIP schedule for construction and over-billing vs under-billing picks up from there.

A worked example: estimate vs actual

Say you run a remodeling company and you won a kitchen job at $68,000. Here's the hypothetical estimate compared to what actually happened:

The job still made money. But margin dropped nine points, and nearly all of it came from labor. Now you can ask the useful question: was the labor estimate too low for this kind of kitchen, or did something specific go wrong? Maybe the cabinets arrived late and the crew waited two days. Maybe every kitchen with custom cabinetry runs over. If it's the second one, it belongs in the next bid.

How to set up construction bookkeeping for job costing

Construction bookkeeping doesn't need fancy software to start job costing. It needs consistency. A practical setup:

1. Create every job as a customer or project in your accounting system before any costs come in.
2. Tag every bill, expense and receipt to a job at the moment it's entered. Fixing it later takes three times as long.
3. Get labor hours by job from timesheets or your field app, and apply a burdened rate.
4. Use a short list of cost codes (labor, materials, subs, equipment, other) so estimates and actuals line up.
5. Enter the estimate for each job so the system can compare.
6. Review open jobs monthly and closed jobs within a couple of weeks of completion.

In QuickBooks Online, jobs usually live as projects or sub-customers. Classes can add a second dimension, like a division or job type. If you're unsure which to use, our article on classes vs locations in QuickBooks lays out the options.

Calculating a burdened labor rate

Labor is usually the biggest variance, so it's worth getting the rate right. A burdened rate adds the employer's costs to the hourly wage.

Say a carpenter earns $32 an hour. Employer payroll taxes, workers' compensation insurance and health benefits add about $10 an hour. The burdened rate is about $42.

If you cost the job at $32, every job looks better than it was, and you'll keep underbidding labor. (It's like budgeting for a vacation using only the flight price.) Recalculate the rate at least once a year, and whenever insurance or wages change.

Common job costing mistakes

A few that come up often:

• Materials bought for stock (the shop shelf) and later pulled for a job never get moved to that job.
• Change orders are billed but the extra costs aren't tagged, or the reverse.
• Labor hours get entered weekly as one lump, with no job attached.
• Small jobs and service calls get dumped into one "misc" job. That's fine for $200 calls, but not for $8,000 ones.

Service businesses have their own version of this. If you run HVAC or plumbing calls alongside install work, our guide to bookkeeping for HVAC and plumbing companies covers how to cost service work without drowning in tickets.