How To Calculate Job Costs For Small Businesses
Learn how to calculate job costs. The result? Increased profits through more accurate billing and more informed future bids for your small business.
Trying to move from thinking you’re making money on projects to knowing? In this guide we’ll show you how to calculate job costs for your small business and give you some practical tips on tools you can use to save time.
Let’s get started.
What Is Job Costing?
Job costing is the accounting process of tracing the costs and revenue for each of your projects. This process breaks down the labor costs, materials, and overhead for each job (more about that in a moment).
It’s used in many industries, but markets like the construction industry benefit the most. That’s because the cost of any given project can vary from one job to another.
Why You Need Job Costing
Job costing is important because it tracks the costs of each job in great detail. There are many costs throughout a project that could slip through the cracks and not be counted. They could cost business owners significant amounts of money.
Knowing what your projects are costing has several direct impacts on your profitability:
- Seeing your project costs in real-time can help you compare costs and cut spending going forward.
- It can also be helpful in improving client billing and collecting more of the reimbursements your company has earned.
- Knowing project costs will help you get better at future estimates by comparing your budget to the actual cost of what you are spending.
Choosing The Right Method
Process costing and job costing are two popular methods for determining costs. We’ll cover the difference below, but the remainder of this guide will be focused on using job costing as a reliable method.
The Process Costing Method
Process costing is a common way of determining costs in a manufacturing job where the resulting products are identical. Think prefab homes, smartphones, or pens.
This method involves taking the assumed amount of parts and labor to complete a job, then assigning a cost to them based on past project costs. Take your averages and use them to come up with an overall budget.
For a business like construction where each project is unique, using the process costing method wouldn’t be a good fit. It could result in your business leaving a significant amount of money on the table.
For example, determining the project cost for a rewire comes down to knowing specific details about the job. How many rocker switches did your employees use on the job? How many feet of sheathed electrical cable was used?
For that reason, job costing and not process costing will be the method we explain in detail.
How Is the Job Costing Method Determined?
The job costing method is determined by accumulating exact information for the direct materials, direct labor, and overhead cost of a company. The best way to do this is as follows.
- Analyze all your in-progress and completed jobs.
- Put a billing system in place that correlates with your actual costs and the costs you’ve committed to.
- Look at all your jobs to find out if they were as profitable as you projected they would be.
- Based on the above, develop a more realistic breakdown of costs including any unexpected costs that were not included in the original bids.
- Categorize your costs. For example, specific direct labor costs, materials, overhead, equipment, subcontracts, and any other cost categories you might have.
- Don’t forget to include often-overlooked costs such as equipment upkeep, interest, or the salaries of construction managers as a few examples.
Your system should be able to track all your ongoing projects and store historical data, so you can accurately calculate the labor burden for each job. It should work to identify trends, job-specific issues, and identify cost-saving areas that could make your projections more accurate and profitable going forward.
Now, let’s dig a little deeper into how to calculate your job costs including direct labor, materials, and overhead costs.
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How to Calculate Job Costs
Several things factor into the formula for calculating your job costs— direct labor, materials, and overhead (which many people forget to include). That means you will need to calculate the total job cost and all related expenses including direct and indirect costs.
To make it easy, you can use this equation for job costing any project:
Total Cost = The Cost of Direct Labor + Direct Materials + Overhead
1. Calculate Direct Labor Costs
Employees
Determine how much it will cost each day (or by the hour) to have each of your employees on the job. You can estimate these projections on paper. To get the most accurate results, use construction time tracking software to collect accurate hours from all of your employees.
Even better if you’re using software that breaks down the hours by tasks they perform each day on individual jobs. You can then use that historical data on all similar projects in the future.
Multiply the rate determined above by the length of time the job or specific task will take to complete. Don’t forget to include all subcontractor estimates and any contingencies to cover unexpected expenses that will arise. This will give you your labor costs.
Employee Costs Defined
- Wages – These are the wages paid to your employees. Be sure to include all annual payroll taxes and annual overhead in this figure. This will help you determine how much an employee costs you each hour.
- Direct Labor Hours – This is the number of hours an employee will need to produce one unit of product or service. Don’t forget to include shift differentials and any overtime the employee worked.
- Direct Labor Costs – The difference between direct labor hours and direct labor costs is subtle. Labor hours refers to the actual work an employee performs to produce a product or service. Labor costs refer to how much money the employer must pay the employee to perform a task.
- Indirect Labor Hours – This is the cost of employees not involved in the planning or construction of a project. These are the employees involved in the day-to-day running of your business. For example, managers, foremen, human resources, accountants, customer service representatives, or other office personnel.
- Dollar Amount – This is the total dollar amount you spend on labor. This includes the pay for salaried and hourly workers. It includes taxes and employee benefits.
- Payroll Taxes – This is a percentage deducted from an employee’s pay that goes to the government.
- Salary – This is a form of employee payment according to a specified employment contract. It’s a fixed regular bi-weekly or monthly amount. This is different from piece wages where every job, hour, or other type of unit that is paid separately, rather than being paid periodically.
2. Calculate Material Costs
To get your total costs it’s also important to track the cost of goods that are used and scrapped during a project. This includes direct materials like wood, wiring, steel, and indirect materials such as caulking, fasteners, cleaning supplies, and miscellaneous tools.
You also must include the cost of any equipment rentals, delivery charges, and waste. That means you need to accurately track the material costs mentioned above for every aspect of every job this also helps you to build a construction profitability analysis report.
For example, let’s say you have to run rocker switches throughout a home remodel.
- If the project calls for 30 switches installed it would require $2.99 for each switch.
- $2.21 for each decorative wall plate.
- $1.98 for each PVC electrical box.
- We’ve intentionally left out the wiring required to each box.
- Therefore, the total direct material cost would be $215.40.
3. Determining Overhead Costs
Now you will have to determine all your overhead costs to reach your total job cost. Overhead includes things like equipment depreciation, facility rent, office administration, and expenses. These costs aren’t directly related to any given job, so this will be an approximation rather than being a calculation. In other words, overhead costs are all the indirect costs that go into a project.
Many believe that adding 10% as an overhead to each job is a standard. However, some general contractors report overheads of as high as 54% of revenue. Your accountant would be the best person to help you figure out the right overhead to use for your business.
Alternatively, you could calculate and use a predetermined overhead rate.
What Is Predetermined Overhead Rate?
Tracking your overhead costs is extremely difficult; therefore, you might consider using a predetermined overhead rate when job costing. A predetermined overhead allocation rate is a calculation that’s used to determine the estimated overhead costs for individual projects over a specified period of time.
Most business owners have an annual budget that includes estimated overhead costs and estimated activity for any given year. You can use your budget estimate to calculate your overhead rate and apply it to each job.
Here is an equation to help you calculate a predetermined overhead rate.
Predetermined Overhead Rate = the Estimated Overhead Costs / Estimated Activity
For example, let’s say you estimate that this year you will have $500,000 in overhead costs. Then you estimate your employees will work about 10,000 hours.
Your calculation would read:
500,000 overhead costs / 10,000 direct labor hours = $5 per direct labor hour.
So basically, this is your predetermined overhead rate, and you would apply that rate to each direct labor hour worked.
A Small Business Job Costing Example
Acme Contracting
Acme Contracting just completed a job. The direct labor cost for that job was $20,000. The material costs were $2,500. The overhead costs were $8,500.
These are all the figures you need to calculate your job costing.
Equation
Direct materials $2,500 + Direct Labor $20,000 + Added Overhead $8,500 = $31,000
The total job cost for this construction project is $31,000.
So, that is the end result, but how do you get there? You can use a spreadsheet for your job costing and calculate everything manually. The hardest part is actually collecting all of the data and ensuring everything is accounted for. If you want to streamline the process and make it easier and more accurate, you use job costing software to save yourself a whole lot of time and headaches (we’ll cover that next).
The Benefits of Using Job Costing Software
Job costing software streamlines your job costing process in the following ways:
- Job costs such as direct labor costs and materials are automatically captured and categorized for you. Your team uses the software to record their time, materials used and it takes care of the rest. Recording time can be as simple of as a couple of taps on a phone every day.
- Dashboards and reports give you a live view of how your job costs are tracking so you can make better decisions to come in on budget.
- Detailed job cost reporting enables you to drill in and understand specific components of your jobs that we either over or under budget. This help’s you improve your estimating and provides a data resource you can reference for future bids.
Here’s a quick overview of how job costing software works and its benefits:
Enhancing Job Costing for Small Construction Businesses
Job costing plays a critical role in managing your construction projects efficiently. Here are some valuable resources and strategies to enhance your job costing process and improve overall project profitability:
- Integrating Job Costing with QuickBooks Online
For a more streamlined accounting process, learn how job costing in QuickBooks Online can enhance your cost tracking and provide better financial insights, especially when managing multiple construction projects. - Using Construction-Specific Management Tools
Incorporating the right tools for tracking project costs can significantly improve your cost efficiency. Check out essential construction management tools that can help you better manage expenses, resources, and timelines on your job sites. - Automating Payroll for Cost Efficiency
A major component of job costing is accurate labor tracking. Implementing payroll automation can save time, minimize errors, and ensure that your job costing reflects real labor costs. - Utilizing Time Tracking Apps for QuickBooks Integration
Time tracking is crucial for accurate job costing. Consider integrating a time tracking app for QuickBooks to ensure labor hours are correctly attributed to each project, making job costing more precise and simplifying payroll processes. - Avoiding Common Time Tracking Errors
Accurate time tracking is key to correct job costing. Learn how to avoid time tracking errors that could lead to inaccuracies in labor costs and budgeting for your construction projects. - Job Costing Essentials for QuickBooks Users
Understanding the fundamentals of QuickBooks can be a game-changer for construction businesses. Learn more about QuickBooks essentials for managing job costs effectively and improving your financial management practices. - Tracking Construction Costs with Construction Cost Codes
For detailed cost tracking, construction cost codes can provide an organized way to manage expenses across different areas of your projects. Implementing these codes in your job costing process will help maintain accurate cost records and enhance project profitability.
By integrating these practices and tools into your job costing process, you can gain greater control over your project costs, enhance your profitability, and streamline your financial management.
What’s Next?
If you would like to make the task of job costing a lot more accurate, consider trying Workyard for free.
Workyard will track employee time and site visits, automatically calculate labor costs, show work progress, and give you real-time reporting on project costs. It will also make your payroll much simpler by providing you with a seamless payroll integration process.
Job cost estimation is influenced by various factors, including labor, materials, equipment, overhead, and profit margins. Labor costs encompass wages, benefits, and payroll taxes. Material costs consider both the quantity and price of materials required. Equipment expenses include rental or purchase costs and maintenance. Overhead is indirect costs like office rent, utilities, and insurance, spread across all jobs. Lastly, profit margin is the mark-up added to ensure the business remains profitable. Accurate estimation depends on collecting and analyzing these factors for each project, ensuring no hidden costs are overlooked.
To allocate overhead, identify all indirect costs associated with running your business (e.g., rent, utilities, administrative expenses) and decide on a method for spreading these costs across jobs. A common approach is the “percentage of labor cost” method, where you calculate overhead as a percentage of total labor costs for each job. Another option is the “rate per labor hour” method, where overhead is applied based on the number of hours worked. Consistently applying the chosen method helps accurately reflect the real cost of each job.
Tracking actual job costs is crucial for several reasons: it ensures profitability, helps identify discrepancies between estimated and actual costs, and allows for better budgeting in future projects. By comparing the estimated costs against actual spending, you can uncover inefficiencies or areas of overspending. This real-time monitoring also helps make informed decisions quickly, such as adjusting resources or materials to stay within budget. Accurate cost tracking supports better job estimation over time, improving financial outcomes and client satisfaction.
Several software tools assist in tracking job costs effectively, including project management software like QuickBooks, Xero, and Procore. These tools often offer functionalities like expense tracking, labor cost monitoring, and invoice management. They can also generate reports to analyze cost variances across different jobs. The benefits of using software include real-time data entry, reduced errors from manual calculations, and better visibility into job profitability. Choosing the right tool depends on your business size, project complexity, and required integrations.
Including contingency costs helps account for unexpected expenses that arise during a job, such as material price increases, delays, or design changes. Typically, a contingency is a set percentage of the total estimated cost—often ranging from 5% to 15%, depending on the project’s complexity and risk level. Adding contingency costs to your job cost estimate ensures that you have a financial buffer to handle unforeseen issues without affecting your profit margin or requiring renegotiation with clients. This practice improves both job planning and client trust.
