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Online Exclusive: Accounting Basics for Small Contractors — Job Costing

May 21, 2014
Proper job costing includes all costs associated with a job They include materials, labor, permits, subcontractors, equipment rentals and overhead costs applied to the job How do we allocate the proper amount to the job? Single-source overhead allocation Dual-source overhead allocation I am a strong supporter of job costing every job your company does

One of the most common financial issues I find contractors dealing with is properly determining what it costs them to be in business. Without that proper financial foundation, any pricing calculated from it will be a shaky structure at best. We’re not going to talk about proper pricing in this column. We’ll set that aside for another time. Let’s focus on proper job costing.

If you’re not job costing your work, how do you know if you’re making any money or which jobs or types of jobs are making you money? Proper job costing includes all costs associated with a job. They include: materials, labor, permits, subcontractors, equipment rentals and overhead costs applied to the job.

Materials — The cost of all materials used on the job including any sales taxes, shipping and delivery fees associated with that material.

Labor — The cost of employees’ wages who worked on the job. This is not just the hourly wages you paid the employees’ on the job. It’s the total cost to the company for those wages paid on the job. See a sample of the labor cost to a company below. NOTE: In this case, it costs the company $37.43 to pay the employee $25 per hour plus the benefits listed.

Direct Labor Cost Per Hour:

Hourly Wage $25.00

Social Security Taxes (6.2%) $1.55

Medicare Taxes (1.45%) $0.36

Federal Unemployment (.6%) $0.15

State Unemployment (5.0%) $1.25

Workers' Compensation (8.0%) $2.00

Holidays (6 Days) $0.58 (6 days×8 hours×$25=$1200÷2080 hours/year)

Vacation (10 Days) $0.96 (10×8×$25=$2000÷2080)

Health Insurance ($500/month) $4.33 ($750×12) ÷2080

Retirement/Pension (5%) $1.25 ($25 ×2080)×.05) ÷2080

Total Direct Labor Cost Per Hour = $37.43

Permit(s) — The cost of the permits required for the job. If there are any other regulatory fees directly attributable to the job, they should be included as well.

Subcontractors — The cost to the company for any subcontracted work included in the job.

Equipment Rentals — The cost of any equipment rented specifically for the job. This cost should also include any delivery and pick-up fees charged by the rental company.

Overhead — As defined in an earlier column, overhead costs are those costs incurred by the business whether or not a job is sold. They are costs that can’t be assigned to any specific job. They don’t directly relate to the providing of a service or the installation of materials.

With overhead, the question becomes how do we allocate the proper amount to the job? There are a couple of methods for allocating overhead.

Single-source overhead allocation — With this method, overhead is allocated based on one aspect of the company. Some of those are: sales revenue, material costs, labor costs and labor hours. For purposes of actual job costing, I suggest using labor hours. I don’t recommend recovering any of your overhead via your material costs because many times the customer is providing the material (garbage disposer, water heater, etc.). When that happens, you lose whatever overhead was allocated to that material.

Dual-source overhead allocation — With this method, overhead is allocated based on two components of direct costs of the job: labor and the rest of the direct costs (i.e. materials, permits, equipment rentals, subcontractors). While more accurate, dual-source overhead allocation requires the contractor to have accurate, up-to-date financial data for the company. Since this is often not the case, I recommend you start with the single-source overhead allocation method using labor hours.

One important note on the difference between single-source and dual-source overhead allocation. Under the single-source overhead allocation method, if a job is labor-intensive (mostly labor with little or no materials), it’s possible the job may be overbid because all of the overhead has been recovered through labor. If a job is material-intensive (mostly material with little labor), you may underbid the job and lose money because a low amount of overhead will be recovered through the labor component and no overhead is recovered through the materials.

So, in most cases, I would recommend the overhead costs be recovered through the labor hours worked on the job. You would determine the overhead cost per labor hour by taking the total overhead costs for the company and dividing them by the labor hours worked. Then, take the hourly amount calculated and multiply it by the hours worked on the job. That will give you the total overhead that should be allocated to the job.

At this point, you total up the amounts for each part to come up with the total costs for the job (i.e., Material Cost + Labor Cost + Permit Cost + Subcontractor Costs + Equipment Cost + Overhead Cost allocated = Total Cost of the Job). A really basic job cost worksheet is shown below.

Job Cost Worksheet:      

Materials:    Quantity      Item Description       Cost per Unit       Total Cost

Total Material Cost =

Labor: Hours Employee(s)       Hourly Cost        Total Cost

Total Labor Cost =      

Equipment Cost:      

Subcontractor Cost:      

Permits, Misc. Costs:      

Total Job Cost =    

You then compare the total cost of the job to the price you quoted the customer for the work to determine the amount of profit (or loss) on the job. With this information, you can now determine if you need to adjust your pricing for future jobs similar to the one just completed. 

I am a strong supporter of job costing every job your company does. It’s much easier to do today thanks to all the software programs available to contractors. Even if you don’t have software to automate the process, I still encourage you to cost out all the jobs you perform.

Proper job costing is an important component of a contractor’s financial foundation. Without it, your “guesstimating” (best guesses) or “ball parking” your job costs and pricing could mean your business is “circling the drain.”

Michael Bohinc is a Certified Public Accountant in Cleveland, Ohio, and the owner of Keeping Score Inc. He has served as the Chief Financial Officer of Norhio Plumbing Inc., his family’s plumbing company in Aurora, Ohio, since 1988. He also currently serves as the Interim Director for the Service Nation Alliance – Plumbing Group. You may contact him via e-mail at [email protected]

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