Originally published in May 2023. Last updated on December 17, 2024
For your business to be profitable, you need to make money on every job. But if you don’t know how much your expenses are, it’ll be hard to set the right markup to make money.
Job costing helps you calculate each expense associated with an individual job, so you know which jobs are the most and least profitable. That way you can review your expenses, adjust prices, and focus on your most popular services.
Learn how to use job costing to grow your service business and build an effective pricing strategy in this guide.
What is job costing?
Job costing is when you track all the costs associated with a specific job to determine its total direct cost.
For example, the total cost for labor, supplies, materials, and overhead you had to cover for a specific job, like mowing a lawn, cleaning a home, or renovating a kitchen.
Job costing is done after a job is completed and helps you identify which jobs are the most and least profitable so you can review costs and adjust prices as necessary.
Job costing vs service pricing
Service pricing is how you set prices before a job begins, like when preparing a quote. You estimate the total labor, material, and supply costs for the work based on previous jobs and current market prices. Then, you add in your profit margin and markup to ensure you not only cover costs but make money.
Job costing is done after a job is completed and shows you how much you actually spent to get it done. It can provide important insights into factors that can impact your overall profitability, like whether material costs were higher than expected or labor costs less than you estimated.
Job costing and service pricing work together by showing you which jobs are the most and least profitable, when and where you should adjust prices, and whether your current pricing strategy is effective. That way, you can build out or cut back your service offerings, negotiate costs with suppliers, or raise prices to stay out of the red.
Who should use job costing?
Job costing can be used by any service provider in any industry, but it’s particularly useful for businesses with variable costs where pricing varies between jobs—like construction, contracting, landscaping, HVAC, and tree care.
No matter what you offer, job costing helps you understand the true cost of your services so you can calculate the cost of jobs for profit.
How to calculate total job cost
To cost a job, you add up all the direct costs associated with it and compare them to the revenue it generated to determine whether you made a profit.
To calculate your job costs, use this formula:
Total job cost = direct materials and expenses + direct labor costs + estimated overhead
If you aren’t sure what your numbers are, follow these steps to calculate them before using the formula.
1. Calculate your labor costs
In job costing, labor costs are the wages and salaries of employees who worked directly on a specific job.
To calculate direct labor costs, you need to know how many hours each subcontractor or employee spent on the job and how much their wages are. If you use time tracking software like Jobber, you can find the information you need there.
If not, you’ll need to calculate your labor cost by adding up the hours it took to complete the job and multiplying it by your workers’ rates.
Here’s the formula you would use for each employee or subcontractor:
Direct labor cost = hours worked × wage rate
Add each worker’s direct labor cost together to get your total direct labor cost.
For example, let’s say you have one employee and one subcontractor on a three-hour job. Your employee’s rate is $30/hour and the subcontractor’s is $50/hr.
Direct labor cost = employee rate (3 x $30) + subcontractor rate (3 x $50)
So your total direct labor cost for the job would be $240.
FREE TOOL: Labor cost calculator
2. Add up material costs and expenses
Your material costs are what you pay for supplies to complete a job, like:
- Drywall, lumber, or insulation
- Appliance parts
- Cleaning supplies
- Disposable PPE, like masks, gloves, and shoe covers
- Fertilizer and grass seed
- Paint, caulk, nails, sandpaper
You can track these expenses using a business expense tracker like Jobber, or you can do it manually.
Here’s an example of what the formula looks like:
Material costs = (drywall) + (lumber) + (nails) + (sandpaper)
3. Estimate your overhead costs
The last costs you need to calculate are the indirect costs associated with a job. These are called your overhead expenses and are made up of things like rent, insurance, office supplies, and utilities.
While you don’t want to charge a single client for the total cost of your rent, you do need to calculate how much to add to each job to keep your business up and running.
The easiest way to calculate this number is by finding out your hourly overhead rate using this formula:
Hourly overhead rate = total monthly overhead costs / # of billable hours per month
For example, let’s say your total monthly overhead is $3000, and you have a total of 160 billable hours per month. Here’s how you’d determine your hourly overhead rate:
$3000 / 160 = $18.75
That means that for every billable hour your team works, you need to charge $18.75 on top of labor costs, material costs, profit, and markup to cover your overhead expenses.
To calculate that as a percentage or rate, here’s the formula you would use:
Overhead percentage = (hourly overhead rate / total cost per hour) × 100
So if your hourly labor rate was $75, here’s what that would look like:
$18.75 / $75 = 0.25 x 100 = 25%
So, your overhead rate would be 25%.
4. Calculate the total cost per job
Add up your total labor, material, and overhead costs for a specific job.
This is the total direct cost of a service.
Here’s the formula:
Total cost = total labor costs + total material costs + total hourly overhead rate
5. Determine your profitability
The purpose of job costing is to find out how profitable a job was. To do this, take the total direct cost of a given job and subtract it from the total revenue. Here’s a simple formula:
Profit = total revenue – total direct costs
If the number is positive, it means you’ve made a profit. But if it’s negative, it means you lost money on the job.
Either way, use this information to inform your pricing strategy in the future. For example, if you didn’t make a profit, or you barely covered costs, you may need to increase your prices.
Or, if you find that material costs were more than anticipated, it might be time to negotiate with suppliers or explore alternatives.
Examples of job costing
Job costing looks a little different for every service provider, but here are some examples you can use to see how it can be used to determine profitability and set future prices.
1. Using job costing to determine profitability
Service providers often use job costing to find out whether a job was profitable, and if so, by how much.
For example, let’s say a handyman contractor wants to calculate the cost of painting and installing a door to determine if this is a service they’ve priced profitably or if they should increase their prices.
The price they quoted the client was $500.
The handyman starts by looking at their labor costs. In this case, one contractor and one subcontractor performed the service. The contractor’s timesheet showed they worked 6 hours at a wage of $24 per hour, while the subcontractor worked 4 hours for $20 an hour. The total labor cost for this job is $224.
Next, they look at the material costs: one door with hardware, one gallon of paint, 2 paint brushes, and the fuel expenses for each worker to get to the job. In total, this adds up to $150.
Finally, the business owner applies a 10% overhead rate to each job, adding another $75.
All in, the total job cost for this job is $449.
Priced at $500, it brought in $51 in profit.
Using our profit margin calculator, that’s a profit of 10%.
2. Using job costing to set future prices
You can also use job costing to help you set future prices.
For example, let’s say a landscaper wants to use job costing to calculate the cost of installing a new garden bed so they can determine whether they need to adjust their rates.
They quoted the customer $700 and two employees worked on the job for eight hours. One at a rate of $30/hr and the other at $20/hr. That means the total labor cost for the job is $360.
The total cost of materials was $200 including mulch, soil, plants, and tools.
Finally, an overhead rate of 12% is applied, adding $60 to the total cost.
Altogether, that adds up to $620.
Since the job was priced at $700, that leaves a profit of $80, or 11.4%.
11% isn’t a great profit margin, so there’s room for the service provider to increase prices to turn a higher profit.
For example, if they were to price the job at $800 and adjust overhead accordingly, their profit margin would be a much healthier 21.6%.
The benefits of job costing
Job costing might sound like something you’d rather have your accountant deal with, but it’s an essential part of running a successful service business. By staying on top of it, you can:
1. Provide more accurate quotes to clients
When you understand the actual costs associated with a job, you’re in a better position to provide comprehensive, accurate quotes to customers. And the more accurate your quotes, the easier it will be for you to budget for expenses.
2. Improve cash flow
Knowing how much you’ll make from a particular job helps you have steadier, more reliable cash flow. And better cash flow ensures you can cover your costs on time and in full, keeping your business healthy and stable.
3. Boost efficiency and reduce waste
Job costing gives you an accurate overview of the costs associated with a specific job. This helps you reduce waste and boost efficiency by preventing you from ordering too many materials or allocating too many hours for a simple task.
4. Make better business decisions
Accurate business data and up-to-date reports ensure you always know how your business is doing so you can address small issues before they become major problems, like increasing job costs and decreasing profit margins.
Pro Tip: Use an AI tool like Jobber Copilot to get instant access to your business data and provide impactful suggestions to help you capitalize on opportunities and fix inefficiencies you might have missed.
Using software for job costing
Job costing is one of the best ways to ensure your business is running effectively and efficiently. But it does require time and effort to manage.
If your plate is already full, use job costing software like Jobber to track labor hours, material cost, and expenses for every job. Then review customizable profitability reports to see where and how you need to make adjustments to maximize the potential of every service.
That way, you can still reap the rewards of job costing without having to do all the manual labor yourself.