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Contractor glossary

Job costing

Updated

Definition

Job costing is recording what each job actually cost (materials, labor at its full hourly cost, subcontractors, permits, disposal and return trips) and comparing it with the estimate and the price, so you can see which jobs made money, which didn't and why.

Also called: Job cost tracking, Job cost accounting

What a job cost record holds

A job cost record puts two columns side by side: what you expected the job to cost when you priced it, and what it actually cost. Use the same categories in both:

  • Materials: every supplier invoice and receipt for the job, including the second run to the supply house, minus returns.
  • Labor: hours on the job times the full cost of an hour, which is the wage plus payroll taxes, workers' comp and benefits. How to set your labor rate shows how to work out that figure.
  • Subcontractors: each sub's invoice for their part of the work.
  • Job-specific costs: permits, equipment rental, dumpsters and disposal.
  • Return trips: a second visit for a missing part, or a callback on the same work, belongs to this job.

Costs that don't belong to any one job, such as office rent, marketing, the phone bill and software, are overhead. Keep them out of the job record; your margin has to cover them.

How it finds profit leaks

A job that finishes under your target margin tells you something went wrong. Comparing it line by line tells you what, because the overrun usually sits in one or two categories.

Example: A roofer prices a tear-off at $15,000 and expects $10,000 of cost: $6,000 of materials, $3,000 of crew labor and $1,000 for the dumpster, disposal and permit. That's a $5,000 gross profit. The finished job cost $11,800. Rotted decking added $800 of plywood, replacing it took 20 more crew hours at a full cost of $40 an hour ($800), and the extra debris needed a second dumpster haul ($200). Gross profit came in at $3,200, and none of the decking was billed, because the contract had no per-sheet allowance and nobody wrote a change order. The fix is a per-sheet decking line on every estimate and a signed change order before any decking comes off. The numbers are made up for illustration.

Once you have a few dozen jobs recorded, group them by job type, crew, estimator or lead source. The averages show what a single job can't: the kind of work that always runs long, the crew that's fast but gets more callbacks, the job type whose price hasn't kept up with material costs.

Common mistakes

  • Costing labor at the wage alone. Leaving out payroll taxes, workers' comp and benefits makes every job look better than it was.
  • Letting costs land in a general bucket. Truck stock, fuel and supply runs that never get tagged to a job make job costs look low and overhead look high. Pick a rule for stock and supplies and apply it every time.
  • Rebuilding it at month-end. Receipts get lost and hours get guessed. Record costs against the job the day they happen: a photo of the receipt, hours logged before the tech leaves the site.
  • Comparing totals only. A job can finish on budget while labor runs over and materials come in under. On the next job, without that cushion, the labor problem costs you.
  • Absorbing changed scope. If the customer asked for more, or a concealed condition changed the work, that's a change order to price and bill, not an overrun. How to handle change orders covers the paperwork.

How it connects

Job costs add up to cost of goods sold on your profit and loss statement, so the monthly P&L shows whether the business made its margin and the job records show where it didn't. A job's price minus its cost is its gross profit, and gross margin by job shows whether your markup is doing its work. On time and materials jobs, the same hours and material records back up the invoice. On flat-rate work, they show whether the times in your price book still match how long the tasks take.

Go deeper

GuideHow to Read a Profit and Loss Statement for ContractorsRead a contractor P&L line by line: revenue, job costs, gross margin, overhead and net profit, plus cash vs accrual and a 30-minute monthly review.GuideHow to Set Your Labor RateBuild your labor rate from real costs: billable hours, payroll burden, overhead and profit, with worked examples from HVAC, roofing, plumbing and other trades.GuideMarkup vs Margin: The Difference That Costs Contractors MoneyMarkup divides profit by cost; margin divides it by price. The formulas, an exact conversion table, the costly mix-up and how to price to a target margin.GuideHow to Handle Change OrdersA contractor's process for change orders: the contract clause, what to say on site, what the form must include, how to price changes and how to bill them.
EstimateAn estimate is a contractor's expected price for a job, based on the scope as it's understood before work starts. It tells the customer the price could change if the work turns out different, but whether it binds you depends on its wording, the customer's acceptance and your state's law.Cost of goods soldCost of goods sold (COGS) is what the work you sold in a period cost to deliver. For a contractor, that means direct job costs: materials, field labor with its payroll costs, subcontractors, permits and equipment rented for jobs. Revenue minus COGS is gross profit.Gross marginGross margin is gross profit as a percentage of revenue: what's left of each sales dollar after direct job costs (materials, field labor, subcontractors, permits), before overhead. A $10,000 job that costs $6,000 to deliver has a 40% gross margin.OverheadOverhead is the cost of running your business that isn't tied to a specific job: office and dispatch wages, rent, insurance, marketing, software, phones, accounting and similar costs you pay whether or not today's jobs happen. Your prices have to recover it.Change orderA change order is a written amendment to your contract that changes the scope of work, the price or the schedule, approved by the customer before the changed work starts. It records what changed, the added cost or credit, the new contract total and any new completion date.CallbackA callback is a return visit to fix a problem with work you already finished, usually at no charge because something about the original job didn't hold up. Each one costs labor, drive time and often parts, plus the paying job that time slot could have held.

See every term in the glossary