Let's talk about job costing today. What is job costing? Well, job costing is actually going to be looking at specific jobs, customers, or projects—they are kind of all interchangeable—but really diving in specifically to the revenue that's brought in with that one specific job and then the expenses that are also associated with it. The goal is to categorize pretty much every expense that you have to it so that you can see what your true profit margin is. This is going to include your direct labor, the materials that you purchase, and your subcontractors if you have them. If you really want to dive in, you can also do a great overhead allocation, but sometimes that's a little bit too deep in the weeds. As long as you're doing your direct costs, that's always a great indicator of how you are creating profit for a specific job.
You might think, okay, should my business be doing this? Because it does add on more administration work than your typical accounting. Yes, if you are project-based, then you will want to do this. Industries that might benefit include construction, marketing agencies with long projects, consultants, or event planners. Obviously, if you have a product that is very specific to one client—you're building something for a one-time purpose—this is helpful. You should consider whether you are project-based or if you perform bids and quotes where you do estimations. At the end of the day, you want to know if your estimate was good or not, and if you have variable labor from project to project, it can be very helpful to dive in and make sure that your numbers are matching and that you're billing out the client correctly.
Job costing matters financially. Once you have enough revenue or enough jobs happening, you will see that when you have all your financials jumbled into one, it's hard to understand what job is actually creating issues or not. Job costing can help you catch if your estimate was underpriced. Perhaps you estimated the job would cost $20,000, but in reality, it's costing $25,000; you want to make sure you are billing that back to the client and not absorbing those costs yourself. It can help you improve your bidding process by understanding the dynamics of how many hours a job takes, and it allows you to get your true profit margin for that specific job. Not every job is the same, so you can see if one job was at 15% and another was at 40%, and evaluate if you overcharged or undercharged a client.
It becomes really critical when you are feeling super busy and not profitable, or if you feel that cash flow is tight but don't understand why. With job costing, you can pinpoint exactly which projects are the problem. If you don't know what your gross margin is per job, you should start looking at that to ensure you are building a very profitable business. Instead of just using a gut check to see if a bid is good, job costing provides verification.
How do you implement this? Depending on your accounting software—like QuickBooks—there are different subscription levels you can utilize. Use software that helps you create these reports so you aren't guessing all the time. In QuickBooks, there are projects, classes, and divisions, as well as custom fields. Beyond setting up the software, you need to create the process in the real world. Ensure that when you track hours, employees say exactly which project or client they are working on so you can put that toward the specific job when running payroll. For any expenses or bills, there should be a process of noting which job it is for. Once you've tagged everything, you can run reports to see if a job was profitable, allowing you to make decisions on pricing, bid structure, or improving labor efficiency. If you can measure it, you can manage it.
In QuickBooks, I really love the "Projects" feature. It allows you to have specific reports for a job, such as profitability reports, tracking time and effort, or identifying unbilled time and expenses. If you aren't ready for that level of subscription, there is also an easy way to create a workaround using custom fields. Your tagging structure remains similar, and while reporting might be more limited, you are still able to pull that information to figure out your profitability.
That's it for today. Thank you for joining me. I hope you have a great weekend, and if you would like to know more or want guidance on how you might be doing, I'm happy to have a conversation with you. Thanks, and we'll chat next week.
