Job Costing Basics for Contractors: Know Which Jobs Make You Money
Without job costing, you're bidding and operating blind. Here's an introduction to tracking profitability by project.
What is Job Costing?
Job costing means tracking all costs — labor, materials, subcontractors, equipment and allocated overhead — against a specific job or project, then comparing that total to revenue from that job to determine profitability.
Why General Ledger Reports Aren't Enough
A standard P&L shows total labor cost, total materials cost, etc. across your whole business for the month. It doesn't tell you that Job A was hugely profitable while Job B lost money — information critical for future bidding.
Setting Up Job Costing in QBO or Xero
Most accounting platforms support "jobs" or "projects" as a tracking dimension on every transaction. The setup work is in consistently tagging every expense — labor hours, material purchases, subcontractor bills — to the correct job.
Allocating Overhead
Costs that aren't directly tied to one job (insurance, office rent, equipment depreciation) still need to be allocated across jobs — often based on labor hours or revenue — to get a true picture of job profitability.
Using Job Costing Data for Better Bids
Once you have historical job costing data, you can identify patterns — certain types of jobs, clients, or project sizes that consistently run over budget — and adjust your bidding and estimating process accordingly.
WIP Reporting Connection
Job costing data also feeds into Work-in-Progress (WIP) schedules, which bonding companies and lenders require to assess your financial position on active contracts.
Change Orders and Job Costing
When a project scope changes mid-job, change orders need to be tracked both for billing purposes and for job costing — otherwise a profitable change order can get lost in the overall job numbers, masking whether your original bid vs. the changes were each profitable.
Labor Burden Rate
When job costing labor, the "burden rate" — payroll taxes, workers' comp, benefits and other costs beyond base wages — needs to be included to get a true labor cost per job. Using only base wage rates in job costing significantly understates true labor costs.
Comparing Estimated vs. Actual by Job
The real value of job costing comes from comparing your original estimate for a job against actual costs once complete. Reviewing these variances across multiple jobs reveals patterns — certain cost categories that are consistently underestimated, for example — that improve future bids.
