Blog Article

Job Costing for Contractors: How to Know Which Jobs Actually Make Money

Bid a job, win it, finish it, and the costs vanish into one big pile in your books. Job costing keeps them separated, so you can hold your estimate up against what the job actually cost and see exactly where the margin went.

Welcome, and thank you for joining me today. I am happy to dive into some things that are really important to contractors. So, what is that? That is going to be job costing. A lot of times companies are generalizing things, and we are going to dive into what job costing actually means, what you can gain from it, and the insight that is really helpful for you. Why do you want to listen to me? My name is Jenn Shaw and I am the founder of All Accounting. We specialize in contractors ranging from $500,000 to $10 million in revenue, and we like to help them understand where their finances are and what is going on with the day-to-day world of transactions, because we really feel that if you know your numbers, you can own your future. I like to take these times to dive into these topics, so let us go ahead and do that.

So, what is job costing? In normal day-to-day accounting, we do a lot of general accounting, and it depends on what type of business you have, but there are a lot of businesses that need to break their financials into more granular reporting. That is what job costing does. In general, the information you receive from the statement is going to tell you if you are overall profitable, but it does not tell you specifically if this particular job is profitable, or if this particular product is profitable. In order to do that, there has to be some more tagging and coding to get those reports to show what you really want. If you do not set it up at the beginning, what you are doing is going through mass amounts of data to compile this one financial for this specific job or product or whatever it is. We like to utilize this because when we go out to bid a job, we have a grand idea of what it should cost, all the things involved, how much labor, what the time is, all of the material. Then what may happen in your financials is that it all just gets lumped into one. So if we can do job costing and separate all of that out, we can look at our estimate and look at what is actually happening within the job once we have won it, and see how that compares. Is it doing well? Is it doing badly? What does it actually look like?

I also think that job costing, because it adds more administration work, let us be honest, is not fit for everyone. You may be a smaller company doing under a million, and your jobs are not as strenuous and not as large, to really take on that other administration cost. In general, maybe they do not last for six months to a year. Maybe you are a deck builder and you do jobs pretty quickly on a weekend, or it takes two weeks. Although that information can be helpful to see how exactly you did on that specific job, it is not as relevant and needed as when you are doing much larger scale projects for your company. General accounting is really telling you if you made money, and job costing is telling you where you actually made that money, so that it is not all lost.

Okay. So what are the things that actually go into job costing? We like to tell the big four in these scenarios. So high level, we have direct labor, subcontractors, materials and supplies, and overhead allocation. Let us talk about what those actually are. Direct labor is going to be the people that are physically on the job doing the work. They are hanging sheetrock. They are nailing the nails. They are pouring concrete. If you did not have them, you are not able to perform the work. This is also going to include not just their wages, but payroll taxes that the company has to pay on them, any workers compensation or workers insurance you need to pay on them, and any benefits that relate to that individual. It can get a little hairy when you have multiple projects going on, maybe three different projects at one time, and ensuring that all of the backend information you are doing is showing up for each specific job. So perhaps Larry shows up to work, and on Monday he works an eight hour job on job A, and on Tuesday he goes to job B, and on Wednesday he goes back to job A. In order to get the granular level of all of the labor, you do have to ensure that you have processes, or job tracking, or that your software is capable of breaking this all down. That is where I say it can be a little bit administration heavy. Okay, so what is next? Subcontractors. These are also people doing work on the job, but you do not have them as W-2 employees. Perhaps they are, or most likely they are, just 1099. So they are doing a big piece of the work. Perhaps you have done all of the things on the inside of the home, but they are the roofers. Or perhaps you are just a general contractor and you are hiring each position: you are hiring the roofer, and then you are hiring the plumber and the electrician. All of these are the subcontractors, and you want to make sure that information is ready. What gets tricky with them is that their timing may not be as quick and accurate as with your direct labor. With your direct labor, you are paying those people on a weekly basis or on a bi-weekly basis. Most of the time, you are not paying them any longer than that, so you have more real-time data. Whereas subcontractors may ultimately take a little bit longer to get you their invoice. And then, just like you bidding your job, they may have bid your job to you and then this pops up and that pops up. So just make sure that everything is tied in a bow with them.

Okay. So then we have materials and supplies. You are going to account for all of these specific expenses that go to a job and ensure that they are all tied in. So your raw materials, deliveries, and your estimated waste that you have with it. If you order in bulk, this can be a little tricky, but there is always a percentage, or just utilizing some sort of standard amount or process in which you are divvying all of your materials and supplies to a specific job. Sometimes it is really easy to just go ahead and say, oh yes, I have five sinks that I am putting into this home, and so you know what it is. But just ensure that everything is tracked appropriately. And then our overhead allocation. This one is kind of accounting jargon. I like it. But it is basically taking some of your indirect operational expenses. So your shop, your other administration office help that needs to invoice out or do vendor payments. You are basically taking some of their time, not all of their time, because a lot of what they are doing may be just general business things, and allocating it to that particular job. So perhaps Jane in the office does 5% every week into specific jobs, and so we will allocate that typically on a monthly basis, but depending on how much you are in your books you could look at it on a weekly or bi-weekly basis. Basically, if you are not tracking it, if it is not tracked as a job code, it is not costing. You are really just guessing in this whole thing. So we want to avoid that and really get more on that granular level of where things are going.

Okay. And then we have beyond construction. Like I mentioned, it can work for other industries, and for other situations like if you are selling a product. It is great for maybe event planners. You can track the venue, rentals and catering, the decor for that specific event, your staffing hours. Maybe it is a custom project business. Maybe there are IT installers, so they have smaller jobs but they have a high volume of what they are doing, and they want to see that granular level of: did this project, what we bid it out and what actually happened, did those numbers work? So it can very much be part of any industry. It is just a matter of what type of data you want to see, and how much you are willing to spend time or pay someone to make sure that this information is readily available for you.

Giving you some tidbits here. Your typical gross project margin for a construction company is going to be between 12 and 27%. What does that mean? So we have net profit margin and we have gross profit margin. When we do job costing, because it is very direct to what that project is, and we have all of these other expenses that might happen within the business, we call this the gross project margin. So at a high level, invoicing everything directly related to that job, again those labor, subcontractors, materials and overhead allocation, we can then see that ultimately we should have a good 12 to 27% gross project margin, so that we can cover the rest of the items that are in the business: regular insurance, equipment purchasing, paying yourself as the owner, and all these different things. Each company, like an electrician, is going to be slightly different than a roofer, and each one is just whatever you have created within your business. That is going to be your normal, but it is important to know what that number may be. Maybe yours is 17%. So when you do your job costing, you can see if you are over or under, and what you need to look at to see if maybe something did not happen, and maybe you need to dive in and get more. Maybe you need to bill out revenue, or maybe you need to slow down on your expenses. Not sure what that looks like.

So, identifying pricing flaws. You can really see if your estimates were aligned with what really happened in the real world. You can flag those scope creeps, make sure that you are issuing those change orders, because that can happen, so that you can ultimately ensure that you are getting that 17% gross project margin instead of maybe a 5% gross project margin. You definitely want to bring that up. And then it just maintains a good healthy cash flow and billing accuracy at every stage. So how can All Accounting support you? As we specialize in contractors, we can make sure that within your QuickBooks file you are really set up and have a process and have a system, so that everything is flowing correctly. We are really big on standard operating procedures, SOPs, to help and guide you. Although we may not be in there every step of the way, we are here to help and ensure that things are tied off. So we work hand in hand with who is in the office, maybe at your actual job site, and then us. We review your chart of accounts, make sure your coding is all set up, make sure your products and services are how they should be, make sure that you have the correct QuickBooks file subscription, and ensure that everything is mapping correctly. And when it is not mapping, we ensure that, hey, what does this need to go to? How can we tie this in so that we have that visibility into our financials?

And then we do not just look at the past. We really want to create financial insight and help you bid smarter. So we are constantly looking at those job margins. We are looking at that work in progress reporting, ensuring that that is in line, ensuring that your change orders are there and you are not having all of your expenses just go out the window, and that you are invoicing appropriately. We also do ongoing bookkeeping and cleanup, and can help with tax planning as well. We basically handle all the complexities of accounting so that you can handle the complexities of construction. So if you are ready to get some more information from your financials, and you are thinking, I know I need to do some job costing but I just do not know how, or I just do not have the time, or my books are a complete mess and I just need help, we are here to do that. Help at allaccountingllc.com. And that is it for today. I will see you next week. Enjoy this sunny weather.

Job costing is the practice of tracking income and expenses for each individual project instead of lumping them together. General accounting tells you whether your business was profitable overall. Job costing tells you which specific jobs produced that profit, and which ones quietly lost money. For contractors, that difference is where better bidding comes from.

This guide covers what to track and what good looks like. When you are ready to build it, we walk through the software side in how to set up job costing in QuickBooks.

What is job costing?

Standard accounting reports give you a business-wide view. They confirm that you were profitable, but they cannot tell you whether a particular job or product carried its weight. Getting that level of detail requires tagging and coding your transactions so the reports can break out by project.

The setup has to happen up front. If you do not code transactions to jobs from the start, producing a single project's financials means digging back through enormous amounts of data to reassemble it by hand.

Here is why it matters in practice. When you bid a job, you build a detailed picture of what it should cost: the labor, the hours, all the materials. Then the work happens, and in most books every one of those costs gets lumped into one pile. With job costing, those costs stay separated, so once you have won the job you can hold your estimate up against what actually happened. Did it perform? Did it slip? What does it really look like?

Is job costing worth it for every contractor?

No, and that is worth saying plainly. Job costing adds administrative work, and it is not the right fit for everyone.

If you are a smaller company doing under a million in revenue, and your jobs are not especially large or complex, that extra administrative cost may not pay for itself. A deck builder finishing jobs over a weekend or across two weeks gets less out of it than a company running projects that span six months to a year. The information is still interesting, but it is far more necessary at larger scale.

The distinction is simple. General accounting tells you whether you made money. Job costing tells you where you made it, so it does not get lost.

What are the four costs to track in job costing?

We group them into the big four: direct labor, subcontractors, materials and supplies, and overhead allocation.

Direct labor

These are the people physically on the job doing the work. Hanging sheetrock, driving nails, pouring concrete. Without them, the work does not happen.

Direct labor is not just wages. It includes the payroll taxes the company pays on those employees, workers compensation and insurance, and any benefits tied to that individual.

This is where it gets administratively heavy. Say you have three projects running at once. Larry works eight hours on job A Monday, moves to job B Tuesday, and comes back to job A Wednesday. Capturing labor at that level of detail requires real processes, job tracking, or software capable of breaking it down.

Subcontractors

Subcontractors also perform work on the job, but they are not W-2 employees. Most often they are 1099. Maybe you have handled everything inside the home and they are the roofers. Or you are the general contractor hiring each trade: the roofer, the plumber, the electrician.

The wrinkle with subcontractors is timing. You pay direct labor weekly or biweekly, so that data arrives close to real time. Subcontractor invoices can take considerably longer to show up. They also bid their portion the same way you bid yours, which means things come up on their end too. Make sure it all gets tied off.

Materials and supplies

Account for the materials tied to each job: raw materials, deliveries, and your estimated waste.

Bulk ordering complicates this, but you can handle it with a percentage or a standard method for dividing materials across jobs. Sometimes it is simple, like knowing five sinks went into one home. The goal is just that everything gets tracked to the right place.

Overhead allocation

This one is accounting jargon, but the idea is straightforward. You take a portion of your indirect operational expenses, like your shop or the administrative staff handling invoicing and vendor payments, and allocate part of their time to a specific job. Not all of their time, since much of it is general business work.

For example, Jane in the office spends about 5% of each week on specific jobs. That typically gets allocated monthly, though you can run it weekly or biweekly depending on how often you are in your books.

The rule underneath all four: if it is not tracked as a job code, it is not costing. You are guessing.

What is a good gross project margin for a construction company?

Typical gross project margin for a construction company runs between 12% and 27%.

Gross project margin is not the same as net profit margin. Because job costing captures only what is directly tied to the project (labor, subcontractors, materials, and overhead allocation), the resulting margin is your gross project margin. That margin has to cover everything else the business carries: general insurance, equipment purchases, paying yourself as the owner.

Your normal will differ from the next company's. An electrician's numbers look different from a roofer's, and yours reflect how you have built your business. Maybe yours is 17%. Knowing that number is what makes job costing actionable, because you can see when a job came in over or under and go find out why. Sometimes the answer is unbilled revenue. Sometimes it is expenses running hot. Comparing periods with a profit and loss comparison helps you spot which one it is.

How does job costing improve your bidding?

It exposes pricing flaws. Once you can see whether your estimates matched what happened in the real world, you can flag scope creep and make sure change orders actually get issued rather than absorbed.

That is the difference between landing at your 17% gross project margin and landing at 5%. It also supports healthier cash flow and more accurate billing at every stage of the job. Callbacks belong in this conversation too, since unpriced warranty work quietly eats the margin you worked to protect.

Does job costing work outside construction?

Yes. Any business that wants project-level detail can use it.

Event planners can track the venue, rentals, catering, decor, and staffing hours for a specific event. Custom project businesses and IT installers running smaller jobs at high volume can compare what they bid against what actually happened. The question is not your industry. It is what data you want to see, and how much time or money you are willing to put into making that information available.

Key takeaways

General accounting tells you whether you made money. Job costing tells you which jobs made it.
The coding and tagging has to be set up before the work starts, or you are reassembling data by hand later.
Track the big four: direct labor, subcontractors, materials and supplies, and overhead allocation.
Direct labor includes payroll taxes, workers compensation, and benefits, not just wages.
Typical gross project margin in construction runs 12% to 27%. Know your own number.
If it is not tracked as a job code, it is not costing. You are guessing.
It is not for everyone. Smaller companies with short jobs may not recover the administrative cost.

Frequently asked questions

What is the difference between job costing and general accounting?

General accounting reports on the business as a whole and tells you whether you were profitable. Job costing breaks results down by project, so you can see which specific jobs produced the profit and which ones lost money.

What costs should be included in job costing?

Four categories: direct labor (including payroll taxes, workers compensation, and benefits), subcontractors, materials and supplies (including deliveries and estimated waste), and an allocation of overhead such as shop and administrative time.

What is a good gross project margin for contractors?

Between 12% and 27% is typical for construction, though it varies by trade. An electrician's normal differs from a roofer's. The important thing is knowing your own baseline so you can tell when a job comes in over or under it.

Is job costing worth the extra administrative work?

It depends on your size and job length. Companies running long, complex projects get the most from it. If you are under a million in revenue with jobs that wrap in a weekend or two weeks, the administrative cost may outweigh the insight.

Can job costing be used outside of construction?

Yes. Event planners, custom project businesses, and IT installers all use it to compare what they bid against what a project actually cost. Any business wanting project-level visibility can apply the same approach.

How ALL Accounting supports job costing

Because we specialize in contractors, we make sure your QuickBooks file is genuinely set up for this, with a process and a system so information flows correctly. We are big on standard operating procedures to guide your team, and we work hand in hand with your office staff and your job site.

That means reviewing your chart of accounts, confirming your coding is right, setting up your products and services properly, making sure you are on the correct QuickBooks subscription, and checking that everything maps where it should. When something is not mapping, we work out where it needs to go so you keep visibility into your financials. A clean chart of accounts is what makes all of it possible.

We also look forward, not just backward. We watch job margins, keep work in progress reporting in line, confirm change orders are captured, and make sure you are invoicing appropriately so expenses are not going out the window. That forward-looking work is the heart of our Virtual CFO service, alongside ongoing bookkeeping, cleanups, and tax planning.

We handle the complexities of accounting so you can handle the complexities of construction.

Ready to get more from your financials?

If you know you need job costing but do not know how to start, do not have the time, or your books are a mess and you just need help, that is exactly what we do. Email help@allaccountingllc.com or reach out to All Accounting.

Know your numbers. Own your future.