Plenty of trade businesses are flat out all year and still wonder where the money went. The usual reason is simple: they know what each job was priced at, but not what it actually cost. Without that, you can’t tell which jobs make money, which ones lose it, and why.
Job costing is the habit of recording what each job really cost and comparing it with what you estimated. It doesn’t need fancy software or an accountant. It needs a bit of discipline, every week.
Estimate versus actual
Every job has two sets of numbers:
- The estimate: the hours, materials and other costs you allowed for when you priced it
- The actual: what really happened, once the job is finished
The gap between them is where you learn. If the actual cost was well over the estimate, you either priced it wrong, ran it badly, or the job changed and you didn’t charge for it. If it was well under, you might be pricing too high on that type of work, or you got lucky.
To compare the two, break the costs down the same way in both. A single lump-sum estimate can’t be compared with anything useful.
Tracking labour hours properly
Labour is usually the biggest cost and the hardest to track. Most jobs that lose money lose it in hours.
- Record hours against the job, every day. Not at the end of the week from memory. Memory always rounds down.
- Include all the time. Travel to and from site, picking up materials, setting up and packing down, and return visits all belong to the job.
- Count your own hours too. If you’re the owner working on the tools, your time has a cost. If you leave it out, every job looks more profitable than it really is.
- Use a cost rate, not your charge-out rate. For employees, the cost rate is their wage plus on-costs such as holiday pay, levies and contributions. For yourself, use the wage you need to pay yourself.
- Split hours by stage on bigger jobs, so you can see which part ran over.
Materials and returns
- Put every supplier invoice against the job it belongs to. Ask your suppliers to put the job name or number on the account.
- Record materials taken from the van or yard stock, not just what was bought for the job.
- When you return unused materials, credit them back to the job. Otherwise the job looks more expensive than it was.
- Watch for small purchases on a card or in cash. They add up and are easy to lose.
Subcontractors
Record each subcontractor’s invoice against the job. Compare it with the written price you got before you quoted. If they charged extra, find out why. It may be a variation you should have passed on to the client.
Overheads
Overheads are the costs of running the business that don’t belong to one job: vehicle, insurance, phone, software, accounting, tools, advertising and your office time. Every job needs to carry a share of them.
A simple way to share them out is per labour hour. Add up your yearly overheads, divide by the hours you expect to work on jobs in a year, and you get an overhead rate per hour. Then each job carries that rate for every hour worked on it. It’s not perfect, but it’s far better than ignoring overheads and only looking at direct costs.
Variations
Variations are one of the most common reasons a job loses money. The client asks for something extra, you do it, and it never makes it onto an invoice.
- Write down every variation as it happens, with the time and materials it took
- Get it approved, in writing, before you do it where you can
- Keep variation costs and income on the job record, so you can see if extras were charged properly
Gross profit and margin per job
Once a job is finished, work out two numbers:
- Gross profit = the price you charged (before tax) minus the direct costs of the job
- Gross margin = gross profit divided by the price, as a percentage
Then take off the job’s share of overheads to see what was really left.
Here’s an example with made-up round numbers. The labour cost rate is $65 an hour and overheads are shared at $25 per labour hour. All figures exclude tax.
| Estimate | Actual | |
|---|---|---|
| Labour | 40 h x $65 = $2,600 | 52 h x $65 = $3,380 |
| Materials (after returns) | $2,400 | $2,650 |
| Subcontractor (electrician) | $900 | $900 |
| Skip and consumables | $300 | $350 |
| Total direct costs | $6,200 | $7,280 |
| Price charged | $9,000 | $9,000 |
| Gross profit | $2,800 | $1,720 |
| Gross margin | 31.1% | 19.1% |
| Overheads (hours x $25) | $1,000 | $1,300 |
| Profit after overheads | $1,800 | $420 |
On paper this job was priced to make $1,800 after overheads. It actually made $420. The extra 12 hours did most of the damage, because each extra hour cost both labour and overheads. That’s $90 an hour in this example, or $1,080 for the 12 hours. Materials came in $250 over, which is worth looking into as well.
Reviewing finished jobs
The numbers are only useful if you look at them. When a job finishes, spend fifteen minutes asking:
- Did we make the margin we priced for?
- Which line was furthest off the estimate?
- Why? Bad estimate, slow work, waiting on others, rework, or unpaid extras?
- What would we change on the next quote for this type of job?
After a few months, patterns appear. You might find that bathrooms always run 20% over on hours, or that small jobs lose money once travel is counted. That is exactly what you need to fix your pricing.
A simple weekly habit
You don’t need to do this all at once. Pick a set time each week, such as Friday afternoon, and do the same few things:
- Check every timesheet has hours against a job
- Match the week’s supplier invoices and receipts to jobs
- Record any variations and make sure they’ve been invoiced
- Compare running costs with the estimate on every open job
- Close off finished jobs and write down one lesson from each
Half an hour a week is enough for most small businesses. Software helps here. If your quotes, timesheets and invoices are in one place, such as TradeFlow, the estimate and the actual sit side by side without extra data entry.
Mistakes that hide losses
- Not counting the owner’s own hours
- Tracking hours at the end of the week from memory
- Leaving travel and return visits off the job
- Forgetting to credit returned materials
- Ignoring overheads
- Doing variations without recording or charging them
- Never looking back at finished jobs
Knowing which jobs make money lets you quote with confidence, chase the work that pays, and stop doing the work that doesn’t.