The how-to job costing guide that every tradesperson should read
Job costing is one of the necessary parts of running a successful trade business. To put it simply, you need to know your job costs, whether a job will turn you a profit or a loss and what factors within your business will contribute to that outcome.
But the reality is that many trade business owners don’t revisit their job costing system nearly as often as they should. Even something as minor as a dollar increase on your manufacturing costs can have huge knock-on effects that threaten your profitability. But the fact of the matter is that job costing isn't the most interesting topic. Revenue reports, in comparison, are a joy to read, as they let you see how much money is flowing into your business because of your hard work. Job costing sheets are the exact opposite, and many tradespeople simply don’t want to know the truth behind profit sappers such as labour and overhead costs.
However, times change, and what was once a good source of work could see you losing serious money if you don’t know ahead of time whether the cash cow is still paying out. That’s why it’s crucial to have a steady hand on your job costing process while being ready and willing to adjust on the fly to get your profitability back on track if things aren’t going as planned.
This quick guide will cover everything you need to know about job costing by answering six common questions on the topic. Read on for a refresher before we get to the nitty-gritty of creating a system that helps you master job costs and supports your ability to turn over profitable jobs consistently.
What is job costing?
Job costing is the process of documenting and tracking all the costs associated with a particular job, counterbalanced by the revenue gained by completing the work. These days most job costings are done with job costing software, but that doesn't mean you can't use a pen and paper to cost your jobs, it's just not as efficient! Job costings differ across every job, dependent on factors such as the size of the project, how long it will take, how many clients are involved and even whether other trade businesses will be involved in the work.
What are the goals of job costing?
a). To understand the direct costs of each job and how it affects the future of your business.
b). To compare and analyse job estimates, refine your business practices, and price jobs with increased accuracy.
c). To uncover inefficient business practices and unnecessary costs that are affecting your bottom line.
Why is accurate job costing important for trade businesses?
What you charge for your services is one of the most impactful decisions you’ll make as a trade business owner, and it’s a delicate balancing act that requires a lot of consideration and research to get right.
Job costing allows you to settle on a pricing structure with complete confidence that your actual costs will be met and exceeded by your business’s profits. The more accurate your overhead costs are, the further forward in time you’ll also be able to plan. Imagine a world where you can almost certainly say that a business commitment you make today will still be bringing in profits a decade down the track. This is the power of a rock-solid job cost system, and it places your business leagues ahead of your competitors who don’t value the benefits of good costing.
Consider also that your accountant and bookkeeper will benefit significantly from accurate actual costs (even more so if the data you provide them is from a job costing software instead of manual entry job costings). It helps them better analyse your business data and advise you on changes and trends that could affect your bottom line. Now combine all the factors we’ve covered in this section, and you’ll quickly see that accurate job costing is so much more than just a method of seeing whether your next job will come in at a profit or a loss.
What is Job Costing vs Process Costing?
To properly understand job costing, it’s important to know how it differs from process costing.
Where job costing lets you calculate all the costs associated with a single job, process costing does the same with multiple jobs.
You may ask how this is possible, and the answer is that process costing requires all jobs to be identical in both direct costs, indirect costs, and requirements. It makes sense then that process costing is much more applicable to trade business owners who work in manufacturing rather than core trades who work on one unique job after another.
Core trades can also adopt a process costing system. But the work involved must be consistent in cost, execution, and time-to-delivery; so it’s rare to see it used outside of core trade businesses that offer recurring maintenance as part of their services.
How do you calculate job costing?
If you’ve traditionally left your job cost sheet to another member of your staff or just want a quick refresher, here are the three costs you need to factor into your costings to make it accurate:
This includes indirect material costs (materials that don’t directly go into the finished product) and direct material costs (materials you turn into the finished product). It’s important to distinguish between indirect and direct materials costs as this helps prevent reusable materials like tools and machinery from affecting the accuracy of your system.
The total sum of hours payable hours worked by your employees to complete a job sounds simple to calculate. However, once you throw in overtime rates like time and a half and double time, you’ll quickly see how calculating average labour costs for your overall job costings can get tricky. We’ll discuss how to simplify complex labour costs in the next section. Without a digital system to do the hard work, though, it’s worth asking your accountant or bookkeeper to help you calculate an average labour cost and apply it to your job costing sheet.
Calculating overhead costs isn’t as simple as labour and material costs. For one, overheads require a trade business owner to break down their daily operating costs and then attribute a portion of the total costs to each job individually. The goal of overheads is to capture any outliers that don’t fit under materials or labour and combine them to create an accurate costing figure.
What does a great job costing system look like?
So far in this guide, we’ve talked about creating a job costing system by hand. However, the process of costing jobs doesn’t have to be something you do manually every single time you want to take on work. A job costing software platform like ours can help take most of the cost out of your next job cost. By automating the parts of the job costing process which don’t require your constant attention, you’ll have much more time to focus on the parts that do.
AroFlo also offers a comprehensive reporting system that lets you pull information on profitability, stage-specific costs and employee overheads in seconds. You can then turn any collected data into detailed reports you can use to track expenses and further refine your job costing system.
We recommend checking out what a job management software package can do for your costing process if you haven’t already.
You now know everything you need to know about job costing as a trade business owner.