Job Costing Fundamentals
Job costing is how contractors know whether they made money on a project. Without accurate job costing, you're guessing — and guessing leads to pricing mistakes that kill profitability.
Contractors who implement formal job costing systems see an average 3-5% improvement in gross margins within the first year.
Source: CFMA Annual Financial Survey[1]
What Is Job Costing?
Job costing is a method of tracking all costs associated with a specific project or job. Unlike process costing (used in manufacturing), job costing treats each project as unique, with its own set of costs and revenue.
For contractors, job costing answers a critical question: Did we make money on this job, and if so, how much?
The Three Categories of Job Costs
1. Direct Labor
Direct labor includes wages paid to workers who physically work on the job. But here's where most contractors make their first mistake: they only count the hourly wage.
The true cost of labor includes the labor burden — additional costs the employer pays beyond the wage:
Labor Burden Components
Example: If you pay a worker $30/hour, the true cost is $30 × 1.35 = $40.50/hour (assuming 35% burden). Pricing jobs at $30/hour means you're losing $10.50/hour before you even account for overhead or profit.
2. Direct Materials
Direct materials are supplies and materials that become part of the finished project. This includes lumber, concrete, pipe, fixtures, etc. The key is that these costs can be directly traced to a specific job.
Don't forget to include:
- • Freight and delivery charges
- • Sales tax (if not exempt)
- • Waste factor (typically 5-15% depending on material)
- • Returns and credits (subtract these)
3. Other Direct Costs
These are costs that can be traced to a specific job but aren't labor or materials:
- • Subcontractor costs
- • Equipment rentals
- • Permits and fees
- • Job-specific insurance (bonds, builder's risk)
- • Travel and per diem (if job-specific)
Overhead Allocation
Overhead includes all the costs of running your business that can't be traced to a specific job: rent, utilities, office staff, insurance, vehicles, accounting, etc.
These costs are real and must be recovered through your jobs. According to CFMA data, overhead rates for contractors typically range from 10-25% of direct costs, with the median around 15%.[1]
Calculating Your Overhead Rate
Take your annual overhead costs and divide by your annual direct costs:
Overhead Rate = Annual Overhead ÷ Annual Direct Costs
Example: If your annual overhead is $150,000 and your annual direct costs are $1,000,000, your overhead rate is 15%.
The Job Cost Formula
Putting it all together, here's how to calculate the total cost of a job:
Direct Labor (with burden)
+ Direct Materials
+ Other Direct Costs
= Total Direct Costs
+ Overhead Allocation
= Total Job Cost
+ Profit Margin
= Job Price
Common Job Costing Mistakes
1. Forgetting Labor Burden
Using the wage rate instead of the fully burdened rate understates labor costs by 25-40%.
2. Not Tracking Time Accurately
Workers who estimate hours at the end of the week underreport by 10-15% on average. Use daily time tracking.
3. Ignoring Overhead
Pricing jobs based only on direct costs means overhead comes out of your profit — or worse, you operate at a loss.
4. Using Last Year's Numbers
Material prices, labor rates, and overhead change. Review your rates quarterly.
5. Not Reviewing Completed Jobs
Compare estimated costs to actual costs on every job. This is how you improve your estimating accuracy.
Implementing Job Costing
To implement job costing in your business:
- 1.Set up job codes in your accounting system — Every expense should be tagged to a job (or to overhead).
- 2.Calculate your labor burden rate — Include all employer costs, not just wages.
- 3.Calculate your overhead rate — Review and update quarterly.
- 4.Track time daily — Don't rely on weekly estimates.
- 5.Review job profitability monthly — Compare estimates to actuals while the job is fresh.
Sources
Construction Financial Management Association. Annual Financial Survey of the Construction Industry.
Internal Revenue Service. Employer's Tax Guide - employer tax obligations including FICA.
U.S. Bureau of Labor Statistics. Employer Costs for Employee Compensation.
Associated General Contractors of America. Financial management resources for contractors.