Is that job making money? Job costing for small contractors
How to set a budget for a job, track what it has really cost as it goes, and spot the overrun while there is still time to do something about it.
By The Osmuch team · · 6 min read
In short
- Set a budget for each job, split into a few headings such as labour, materials and subcontractors.
- Count what you have ordered but not yet been invoiced for, not just what you have paid.
- Labour is usually the biggest cost and the easiest to leave out. Cost the hours, not just the parts.
- For a VAT-registered business, compare costs net of VAT, or every job looks worse than it is.
- Agree changes as variations, with a price for the customer and a cost for you.
Plenty of small contractors find out whether a job made money when the accountant does the year end, if at all. By then the lesson is a year old. Job costing simply means keeping a running total of what a job has cost against what you expected it to, while it is still going on.
Start with a budget
When you price a job, you already have a budget in your head. Write it down, split into a handful of headings. For most trades, five are enough: labour, materials, plant and hire, subcontractors, and other. More headings than that and nobody keeps them up to date.
Three numbers, not one
At any point in a job, there are three figures worth knowing for each heading:
- The budget: what you expected it to cost, plus any changes the customer has agreed.
- Committed: what you have ordered from suppliers but not yet received or paid for.
- Spent: what has actually been paid out or used, including your team's time.
Committed is the one people forget. A budget that looks healthy because the supplier's invoice has not arrived yet is not healthy. Once you have placed the order, that money is spoken for.
Do not forget the labour
Materials are easy to track because there is a receipt. Labour is usually the larger cost and the one that quietly goes missing. If your team log their hours against the job, multiply them by what each person costs you per hour and you have the real figure. A job that used half as many parts as expected but twice as many hours has not gone well.
Compare like with like on VAT
If you are VAT registered, you reclaim the VAT on what you buy, so the real cost of a part is the price before VAT. Compare your costs net of VAT against a budget set net of VAT. Mixing a net budget with gross receipts makes every job look 20% worse than it is. If you are not registered, the VAT is a real cost to you and the gross figure is the right one.
Variations: price them and cost them
Jobs change. The customer asks for an extra socket, or you find rotten joists under the floor. Record each change as a variation with two figures: what you will charge the customer, and what it will cost you. Only count it once the customer has agreed it. A job can look profitable on the price of its variations while losing money on their cost.
Look at it weekly
On a job lasting more than a week, a weekly look at budget against spent and committed is enough to spot trouble early. If labour is running ahead of budget halfway through, you still have time to ask why: the wrong people on the job, waiting for materials, or a price that was too low to begin with. That last one is worth knowing before you quote the next job like it.
Questions
What is job costing?
Keeping a running record of what a job has cost against what you budgeted for it, split into headings such as labour and materials, so you can see whether it is making money while it is still going on.
Should I include VAT in job costs?
If you are VAT registered, compare costs before VAT, because you reclaim the VAT on what you buy. If you are not registered, include it, because it is a real cost to you.
How do I cost my own team's time?
Have them log their hours against each job, then multiply by what each person costs you per hour. For salaried staff, divide the annual salary by the hours they are contracted to work.
Doing this in Osmuch
In Osmuch each project can carry a budget split by your own cost codes, each one filed under labour, materials, plant, subcontract or other. Expenses, timesheet hours, project items and purchase orders all roll up against it, showing the budget, what is committed and what has been spent, net of VAT if you are registered. Hours are costed from each person's pay rate, and anything nobody has coded shows as its own line rather than going missing. Variations carry a price for the customer and a cost for you, and only approved ones move the figures. Job costing is visible to administrators only, because it reveals pay rates.
Guide: job costing and variations · Guide: logging an expense · Guide: resource planning