Job Costing 101: Why Your Real Margin Isn't What You Think It Is

If your accounting system can tell you what your business made last year, but it can't tell you what each job made last month, you don't have a financial system. You have a tax-return generator. Job costing is the difference between those two worlds - and it's the cheapest, fastest upgrade most contractors can make.

What job costing actually is

Job costing is the discipline of capturing every dollar of revenue and every dollar of cost against the specific job that created it - so you can run a real P&L per job, not just per quarter. Done right, it answers the question every contractor should be asking: which jobs make us money, and which ones cost us money disguised as revenue?

The five buckets of job cost

• Direct labor - wages and burden for the people on the job, by hour.
• Direct materials - every invoice tagged to the job, including pickup runs and small purchases.
• Subcontractors - every sub invoice tagged to the job, including change orders.
• Equipment and vehicles - rented gear and a fair allocation of owned equipment.
• Direct other - permits, dump fees, port-a-potty, anything specific to that job.

Overhead - your shop, admin payroll, insurance, software - does not get job-costed line by line. It gets allocated as a percentage on top of direct cost to compute fully-burdened job profitability. Mixing the two up is the most common job-costing mistake.

How to set it up in a week

1. 1.Turn on job costing in your accounting system. QuickBooks Online Plus, QuickBooks Desktop, Sage 100 Contractor, and most modern construction ERPs all support it.
2. 2.Build a simple job-coding standard - every payroll hour, every PO, every credit card swipe needs a job code or a 'shop overhead' code.
3. 3.Train the office and the field. The discipline is in the daily entries, not the monthly close.
4. 4.Set an allocation percentage for overhead - usually 12% to 22% on top of direct cost - and apply it consistently.
5. 5.Close every job within 30 days of completion and run a job P&L. Compare actuals to bid.

What changes when you finally have it

Three changes I see in every contractor who commits to it: bids get sharper because they're informed by real history; weak job types get walked away from instead of repeated; and the company stops being a mystery to the person running it. That third one is the prize.

The Cash Flow Cowboy's™ rule of thumb

“Without job costing, you're not running a business. You're running a series of expensive experiments and hoping the average works out.”

Job costing is not glamorous, but it's the foundation under every other financial improvement you'll ever make. If you don't have it, that's the next thing to fix.