How to Do Job Costing for Contractors: A Step-by-Step Guide
Job costing is one of the most essential tasks for any contractor, whether you’re in construction, water restoration, or another service-based industry. Knowing how much a job will cost, and then tracking those costs as they occur, helps you stay profitable, avoid overruns, and make informed decisions on future projects. If you're new to job costing or need a refresher, this guide will walk you through the key steps.
What is Job Costing?
Job costing is the process of tracking all the costs associated with a specific project. For contractors, this includes labor, materials, and overhead—basically everything that goes into completing a job. Effective job costing allows you to compare your estimated costs with the actual expenses, helping you understand your margins and profitability for each project.
Why is Job Costing Important for Contractors?
Improved Profit Margins: Accurate job costing ensures that you’re not underpricing your services or losing money on unexpected costs.
Better Estimations: It helps refine future estimates for similar jobs by providing real data from past projects.
Accountability: You can track where and how your resources are being used, making it easier to hold your team accountable.
Cash Flow Management: Job costing helps with better planning and cash flow management, ensuring that you can cover the costs as they occur.
Step-by-Step Job Costing Process for Contractors
1. Identify Direct Costs
The first step in job costing is identifying the direct costs associated with a job. These include:
Materials: Every piece of equipment, tool, or material you use for the job, from nails to heavy machinery. Ensure you account for delivery and any handling costs as well.
Labor: Track your labor costs, including wages, overtime, and any associated taxes and benefits. This is where tools like a labor burden calculator come in handy. Don’t forget to account for any subcontractor costs.
Equipment and Machinery: If you're renting or using specific equipment for the job, include those costs.
2. Factor in Indirect Costs (Overhead)
Overhead includes costs that are not directly tied to a single project but are necessary to keep your business running. These may include:
Administrative costs
Office rent and utilities
Insurance
Company vehicles
To allocate these costs, determine a percentage of overhead to apply to each project based on its size or duration.
3. Track Costs in Real Time
Once the project is underway, it's crucial to track costs as they occur. You can do this through:
Project Management Software: Tools like QuickBooks Online, Buildertrend, or CoConstruct can help track materials, labor, and overhead for each project.
Time Tracking for Labor: Use time tracking software or apps that integrate with your accounting system to log the hours your team spends on a job.
By tracking costs in real time, you'll avoid surprises at the end of the project and can course-correct if necessary.
4. Compare Actual Costs to Estimates
Once the job is complete, compare your estimated costs with the actual costs incurred. This is where job costing really shines—by understanding the discrepancies, you can refine your estimating process for future jobs.
If you notice a particular category, such as labor or materials, consistently running over budget, it may be time to revise your processes or renegotiate supplier contracts.
5. Evaluate Profitability
With your actual costs in hand, you can now calculate the profitability of the job. Subtract the total costs from the revenue to determine your profit margin. If the margin is smaller than expected, dig into where the overruns occurred.
Over time, this practice will help you identify the most profitable types of jobs and areas where you need to tighten control.
Tools for Accurate Job Costing
Job Costing Software: QuickBooks Online and other accounting systems offer job costing modules that allow you to tag costs to specific jobs and run reports.
Labor Burden Calculator: A tool like the one we’ve developed at Ledger Management helps you accurately calculate labor costs by factoring in not just wages, but also taxes, insurance, and other employee-related expenses.
Time Tracking Apps: Ensure accurate tracking of labor hours to each job, particularly useful for businesses where labor is a significant portion of total costs.
Common Job Costing Mistakes to Avoid
Not Tracking Indirect Costs: Don’t overlook overhead! Every job you complete shares in the cost of keeping your business running.
Forgetting to Adjust Costs as Needed: Prices for materials or labor can fluctuate. Ensure that your estimates reflect the most current data, and update your cost projections throughout the project if needed.
Not Reviewing Past Jobs: Use the data from completed jobs to refine your future estimates and identify patterns in overruns.
Final Thoughts
Job costing is essential for any contractor who wants to run a profitable, efficient business. By tracking your costs and comparing them to your estimates, you’ll have a clear understanding of where you’re making money—and where you might need to make adjustments. For contractors looking to streamline this process, Ledger Management offers bookkeeping and financial services specifically tailored to the unique needs of the industry.
Call to Action: Ready to refine your job costing process? Schedule a call with us today and let us help you take control of your project financials.