Are you worrying about how to keep your service business profitable? If you are, you’re definitely not on your own. Profitability is a concern for trade businesses of all sizes, especially in this time of economic instability.
If you’re focused on making a profit, chances are you’re up to your elbows in spreadsheets, trying to work out where you can cut costs and how you can accurately cost your work going forward to cover the true value of your work.
We want to make things easier for you, so we’ve created this guide to help you understand profitability through accurate costing and accounting, helping you achieve goals and make better management decisions from the ground up.
Read on to discover what job costing is, how to calculate it with a simple formula, and our top tips for streamlining the job costing process as you go.
What is job costing?
Job costing is a key aspect of job management. It involves tracking and calculating the costs and revenue associated with a job as precisely as possible. Accurate job costing can help you deliver your project successfully, efficiently, on time and within budget – so you can focus on the next big project, rather than tying up administrative loose ends.
Typically job costing can be broken down into three main components, each of which needs to be tracked continuously as a job progresses. These elements are:
- Labour, which covers employee wages for anyone working on the job, as well as any third-party vendors.
- Materials, which covers the raw materials that make up the finished product as well as any equipment required to get the job done.
- Overhead, which covers any indirect costs related to running your business, such as office rent, software subscriptions and admin staff wages.
What is the difference between job costing and process costing?
Some field service managers wonder whether they should use job costing or process costing to understand their expenses and profit margins. The two methods look quite similar at first glance, but relate to different types of output.
Job costing is the right choice for any business that works on a job-by-job basis, and is more applicable to field service work. It involves working out the cost of materials, labour and overheads required for a single job output. Job costing lends itself to specific projects involving multiple workstreams, such as construction.
On the other hand, process costing is more suited to work where products are created at scale, such as factory or production work. This involves adding up all the operating costs for regular and large-scale production of identical items. The end goal is to calculate the cost of labour, materials and overheads per unit rather than per job.
What are the advantages of job costing?
If your business doesn’t already have a job costing process in place, it’s time to change that. Job costing is central to running a healthy and profitable trade business, as it can help you understand profits and losses, and work to increase profit margins.
By breaking down your job costs into labour, materials and overheads, you can get a better understanding of each element involved in a project and track their relative profitability. This also allows you to discover areas where you can cut costs, such as repetitive work that could be automated, or outsourced labour that could be done by your team.
You can also compare your actual costs to your estimated costs ongoingly, and give more accurate quotes in the future. If a particular aspect of a project is consistently taking one day longer than you budget for, make sure that’s covered in your quote – that way costs will be covered up-front and customers will have realistic expectations.
Why is accurate job costing important?
Perhaps your business already has a system for defining job costs, but you’re worried that things are slipping through the cracks. In that case, there are simple ways to make your job costing process more accurate.
Accurate job costing is key to understanding what to charge for a particular project, improving your profit margins and informing key decisions about how to run your business with reliable real-time data.
Building up a database of actual costs for historical projects can help you plan better for future jobs. Not only can you estimate costs and timescales better, improving customer satisfaction, but you can also reduce the likelihood of unforeseen costs going forward by understanding where they’ve cropped up in the past.
Do you always dread the first week of April? With accurate ongoing job costing, you don’t have to. Itemising costs as you go along makes filing taxes, budgeting and forecasting easier than ever, as you can realistically analyse project expenses as part of your overall company finances.
How to calculate job costing
Job costing is, in essence, the addition of labour costs, material costs, and overheads. However, truly accurate reporting calls for a more in-depth analysis of each area.
Your labour costs need to include the wages you pay your own fieldworkers, as well as any third party vendors or subcontractors working on the job. To understand the total labour cost, you need to multiply each payroll daily or hourly rate by the total number of days or hours worked.
Material costs need to include direct material costs, such as wood and concrete, that make up the finished product, as well as indirect material costs like tools, which are used for the job but aren’t part of the finished product. It’s best to keep track of any materials used in real time for total accuracy.
Overhead costs are the daily operating costs of your business, appropriately attributed to the project at hand. It’s often difficult to do this exactly, as costs such as office rent, electricity and internet are key to keeping your business running but hard to portion out to different projects. Many businesses solve this by charging a blanket overhead fee, such as 10% per job.
What is the job costing formula?
Written as an equation, job costing is calculated like this:
- Total Job Cost = Materials + Labour + Applied Overhead
To work out your accurate labour costs, you can use the following equation:
- Number of Working Days x Daily Pay Rate x Number of Workers
When should job costing be used?
Many businesses work out their actual job costs at the end of a project, when all their costs have been accounted for. This may look like it makes job costing easier, but it can lead to a lot of problems slipping through the net.
Accurate job costing needs to be ongoing throughout the life cycle of a project in order to give you a real-time picture of how your budget is unfolding. This can help you to spot issues and make adjustments for them on the go, before unforeseen costs eat into your profit margins.
It can also help you make sure that all overhead costs spent over a certain period are allocated to the jobs done during that time, giving you a higher potential for overall profitability.
How to keep track of your job costs
Are you ready to start tracking your job costs more accurately? Here’s how.
- Initial estimation: Start by working with your team to internally estimate the total cost of a potential job.
- Ask who needs to be working on the project and for how long, as well as whether you’ll need any subcontractors for specialist work.
- List the materials, tools and assets that will be required for the job and figure out their respective costs.
- Come up with as accurate an estimate as possible for how long the work will take, and make sure a portion of your company’s overheads are allocated to this time.
- Think about any circumstances that could change between making the estimate and the time you’re due to work on the project. For example, if utility prices are due to rise, you need to make sure this is accounted for.
- Quotation: Take your total cost estimation, as well as an itemised breakdown, and send it to your potential customers.
- Your quotation should include direct costs, overheads, and your profit margin.
- By making your quote as accurate as possible, you can set realistic customer expectations.
- Cost sheets: Once the project is due to begin, make sure all your fieldworkers have access to cost sheets. By completing these on the go in real-time, you can keep an eye on whether your actual material and labour costs are more or less than you quoted for.
- If you see any big differences between estimated and actual costs, you can look for the cause and make adjustments to keep on budget.
- Aftermath: Once the job is completed, take some time to compare the final actual costs with your initial estimate. This will help you understand the true cost of the job as well as your actual profit margin.
- You can use this information to make sure your next estimate is on the right track.
Tips for keeping track of job costs
Keeping track of the changing situation can be tricky, but with a few tips from our experts you can stay on top of cost tracking.
- Keep an eye on committed costs. Don’t just track expenses that have already been paid, as this can make you underestimate your actual costs, and result in last-minute invoices that you hadn’t accounted for. Instead, make sure you track all your purchase orders and subcontracts – both paid and outstanding – to avoid any nasty surprises.
- Anticipate changes. A lot of things can change over the life cycle of a job, and every change can affect your costs. A tool could need servicing, the site could pose an unexpected problem, or your customer could request a change. You need to watch these issues as they develop and ensure costs are covered. If you play your cards right, you can turn a change into a source of additional revenue rather than a loss of profit.
- Track labour in real-time. Labour is typically the most costly and changeable part of a job. If you’re still using weekly time cards, you’re only getting limited visibility into how your fieldworkers’ hours are stacking up. Use mobile time-tracking software instead, to gain a full picture of labour costs before they run away with you.
Software for job costing
Accurate job costing means spinning many plates at once. You need to be keeping an eye on labour hours, inventory, quoting more to make sure estimates are met and jobs are profitable.
Give yourself a break by investing in job management software like Workever, which makes job costing simpler by keeping all your key data in one place. Take complete control with full visibility of every aspect of a job and its expenses, from initial estimates to final invoices.
Workever automatically attributes employee expenses to jobs for better and more accurate cost tracking in real-time, so you can see the true costs of a job unfolding and make adjustments on the go.
The benefits of using software for job costing
If you’re still poring over Excel spreadsheets and trying to make sense of your expenses, it’s time to try something new. Job costing software takes large, complex costs and automatically breaks them down into workable units, so you can gain true understanding of your finances at a glance via one user-friendly interface.
Your job costing software will use precise predefined rules to assign costs to jobs, as well as using real-time data from your fieldworkers’ mobile apps. The result is completely consistent and accurate cost sheets, beyond human abilities.
Real-time reporting also allows you to make on-the-go decisions about scheduling employees, allocating resources, cutting costs and adjusting estimates. This decreases the risk of runaway costs and ensures efficiency at every stage of the job.
With all your historical data in one place, you can plan better going forward, viewing actual costs of similar jobs before making a new estimate, and finding areas where costs can be reduced. The outcome is better estimates, realistic customer expectations, and an accurate idea of how much work you can realistically schedule.
Automated processes such as revenue recognition and reporting save you and your team time. This makes your business more productive and efficient as a whole, as well as allowing more time for family, friends and work-life balance.
Take control of job costing with Workever
If you’re ready to get on top of your job costs, it’s time to check out Workever. Our all-in-one field service management software streamlines your job costing process, giving you new levels of confidence and understanding when it comes to making a profit.
Save yourself and your team hours of admin work, and let our automated tools provide accurate insights in real time.
Start your free trial today and look forward to a profitable tomorrow.