Job costing for contractors: tracking profit on every job

Why job costing matters

A contractor's profit and loss can show a good year while some jobs lose money. The winners hide the losers. Job costing means tagging income and costs to the job they belong to, so you can see each job's profit on its own. That is how you learn which kinds of work to bid on, which to price higher, and where the money leaks.

Set up each job

• One job per contract. Set each job up under its customer, for example "Patel – Kitchen remodel". A customer who hires you three times has three jobs, each with its own profit.
• Start from the estimate. The estimate is the budget. Break it into the same lines you will track costs in: materials, subcontractors, labor and other costs.
• Use cost of goods sold accounts for job costs. Materials, subcontractors and job labor go above the gross profit line. Office rent and insurance stay as overhead below it. See the chart of accounts guide.

Get every cost onto the job

Job costing is only as good as its tagging. Every bill, cheque and card charge for a job needs the job on the line, at the moment you enter it. Months later, nobody remembers which job the $412 lumber run was for.

• Supplier bills: tag each line to the job. One supplier bill can cover several jobs, so tag line by line.
• Card charges and cheques: same rule. Crews buying on the company card is where most untagged costs come from.
• Permits, dump fees, equipment rental: these are job costs too, and they are easy to leave in overhead by mistake.

Labor, with the burden

Labor is the cost contractors most often understate. An hour of a worker's time costs more than the hourly wage. On top of it you pay:

• Employer payroll taxes: in the US, the employer's 7.65% share of Social Security and Medicare plus federal and state unemployment tax. In Canada, the employer's CPP and EI contributions.
• Workers' compensation, which varies a lot by state or province and by trade.
• Benefits and paid time off, plus non-billable time such as driving and loading.

Add these up for a year, divide by the wages, and you have a burden rate. Here is a worked example with an illustrative 28% burden. A kitchen remodel, estimated at $48,000, with a $2,400 change order:

At the bare wage, labor would have shown as $6,600 and the job as 37.0% profit. The $1,848 gap is real money, and it repeats on every job. Bid from burdened rates.

A note on AcboBooks: paychecks are not split across jobs. Log crew hours against each job in Time Tracking, which totals hours by job. Then multiply by your burdened rate to get the job's labor cost. Bills, cheques and card charges tagged to the job flow into the Job Profitability report automatically.

Billing: progress invoices and billable costs

Progress invoicing bills a large job in stages instead of all at the end. On the $48,000 remodel you might bill 30% at the start ($14,400), 40% at rough-in ($19,200), and the rest plus the change order on completion. Each invoice is drawn from the estimate, so you can always see how much of the job is billed and how much is left. In AcboBooks you choose a percentage of the whole estimate or bill selected lines. The estimate shows the percentage billed so far.

Billable costs are costs the customer reimburses, such as an owner-selected fixture you bought for them. Mark the bill or card line as billable to the job. When you next invoice the customer, pull it onto the invoice, with a markup if your contract allows one. Nothing billable is forgotten, and nothing gets billed twice.

On commercial work, the customer may hold back retainage until completion. Track it per job, separate from ordinary receivables, so the job does not look half-collected forever. AcboBooks has a Retainage screen for this.

Every invoice goes out from the same customer and job, so its income lands on the right job too. See invoicing in AcboBooks.

Reading the job report

• Run job profitability every month for open jobs, not only at the end. A job that is 60% billed but 85% spent is in trouble while you can still act.
• Compare with the estimate line by line. If materials always come in 10% high, your estimates are 10% low.
• Look for jobs with income but few costs. Usually that means costs went to overhead untagged, not that the job was unusually good.
• Close the loop at the end. Once the final invoice is paid, review the job's margin against your target and note why it differed. That note is worth more on the next bid than any report.

Job profit is also an accrual idea. Cash-basis numbers move with when customers pay, not with how the job went. See cash vs accrual.