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Jun 16, 2021

Job Costing Basics for your Skilled Labor Business

As you already know, you have your traditional handyman and then you have specialized services, like plumbers, electricians, and HVAC. Handymen are great for some jobs but when the project gets more complicated, you want someone that has more experience with your situation.

The same thing is true with accounting. While there are plenty of accountants out there who do a little of everything, you will want to work with a professional that understands tradesman businesses. Especially ones that require job costing.

Job costing may not sound familiar to you at first but there is no doubt you have experience running your job costing report.

In this article, we will be discussing job costing basics for your contractor business. We will discuss what is job costing and how it could save you on the bottom line. Which is why we are all here, right?

 

What is "job costing" and how it could save YOUR bottom line?

Job Costing is the process of looking at a detailed breakdown of a project's income, labor, materials, and overhead. By looking at all the information for a single project you can monitor things like:

  • Profitability per job (or customer)

  • Overused Materials

  • Labor Efficiency

  • And so much more. 

This can be helpful when making decisions about what types of projections (customers) you should be focusing on and where you need to invest more attention.

Maybe you are finding you spend too much on labor and need to train your employees more or you need to update your equipment. You can monitor materials used on a project and dig into why one team uses significantly less to get the job done. Are they more experienced or cutting corners?

Having this sort of data can help you make better business decisions.

Let’s dive into some of the elements that build up job costing

 

Calculating Job Cost

There will be three (3) main elements you want to consider when calculating job cost

  1. Direct Labor

  2. Raw Materials

  3. Overhead.

Each section below will discuss those 3 elements and some points you should consider.

 

1) Direct Labor

Typically labor is one of the largest expenses for contractor businesses in the service industry. People pay for our knowledge and ability to get the job done right the first time. We know this is going to be the most expensive part of the project but as managers of the project, it is important we monitor efficiency and profitability.

Labor may or may not be difficult to track depending on how you pay your workers. If they are W-2 employees on salary, you will want to ensure they are reporting what projects they worked on and for how long. If you have hourly employees it can be easier to separate your job costs.

You will also want to include any reimbursements issued for the project. Some jobs can take us far from our home base and end up crushing our bottom line. 

If you work with any contractors, be sure to include them in the job cost as well. 

Not sure whether a worker is an employee or an independent contractor? Download our Free Ebook, the Independent Contractor Checklist. This quick list will walk you through how to determine whether someone is a W-9 or W-2.

 

2) Raw Materials

Raw materials can vary depending on the type of job but are still important to track. This sort of information could assist you with quoting and determining how much is needed for a specific job. 

Raw materials will go into everything that makes up the project. In the example of an electrician, it may be wires, screws, or light bulbs. You can also include things like spoilage or delivery costs in your raw materials total. 

 

3) Overhead Applied

This is going to be the most difficult number to calculate. The concept is that each project, job or customer should “absorb” a percentage of the Operating (or General & Administrative) costs to run your small business. 

Overhead will include everything from your Facilities, Selling & Administrative costs. There are various ways to calculate the amount to apply to each job and may change over time, so we do our best to estimate it when it comes to quoting and then relying on more accurate reports once the project is completed. 

To calculate overhead you will want to take your total overhead “expenses” and divide it by the number of projects you will be working on for any given period of time. For example, let’s say your total overhead equates to $40,000 and you have 40 projects. The overhead for one project would be:

 

Total Overhead / Number of Projects = Overhead Allocation

 

$40,000 / 40 = $1,000

 

Summary: These (3) elements make up job costing and what you would want to compare your job revenue to. Be sure to account for things like a profit when considering quotes. Different industries have different expected profit margins so consider what relates to your business when putting together a quote.

 

Applications

One of the easiest parts of implementing job costing into your business is most accounting applications like Quickbooks and Xero already have job costing tools that make it easy to quickly generate reports. There is no need to calculate labor, raw materials, or overhead. When you apply job codes all the information is stored and easily filtered.

Have you ever been on a job and wondered whether it was all worth it? Job costing answers that question. It can help your business become more efficient and save money in the long run.

If you are ready to begin implementing job costing but still not sure where to begin, consider scheduling a consultation with one of our ProAdvisors at the button below. 

 

Sources:

https://www.irs.gov/newsroom/irs-to-recalculate-taxes-on-unemployment-benefits-refunds-to-start-in-may

 

 

Disclaimer:

This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.

This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.

This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.

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