The problem job costing solves
A construction company's accounts give one profit figure for the whole business. Nineteen percent, say. That's an average, and averages hide things. A roofing contractor we work with had a company margin of 19% and six regular customers. Split by customer, the range was 31% to minus 4%. Two housebuilders were losing money on every job and had been for years. Nobody knew, because nobody had ever split the number.
Year-end accounts tell you which jobs made money after they've finished, which is interesting and useless. Monthly margin by job tells you at month two that a job is slipping, while you can still raise the variation, change the crew, or renegotiate.
What job costing actually is
Three things, done consistently:
- A job register. Every live contract exists as a tracking category or project in your accounting software (Xero tracking categories or Xero Projects, or the job module in Sage or QuickBooks), with contract value and tender cost breakdown recorded.
- A job reference on every cost at source. Purchase orders carry the job number. Merchant accounts are set up with job codes. Timesheets allocate hours to jobs. Plant hire invoices quote the job. Subcontractor applications reference the job.
- Revenue on a certified basis. Each job's income is what's been certified, not what's been applied for. Applications are tracked separately so the gap is visible.
Where costs leak
The job costing system is only as good as the coding. The usual leaks:
- Fuel cards and credit cards coded to overheads because there's no job on the receipt. Fix: a weekly five-minute allocation by the person who used the card.
- Merchant accounts with one account for the whole company. Fix: ask the merchant for job sub-accounts or require a job number at the trade counter.
- Labour booked to the period, not the job. Fix: a timesheet app (ServiceM8, SiteTrackPro, Workever or similar) with mandatory job selection.
- Plant moved between sites without the hire being re-coded. Fix: plant allocation on the site diary.
Count last month's transactions with no job reference. Under 2% is good. Over 10% means the margin figures can't be trusted.
The monthly job margin report
| Job | Certified to date | Labour % | Materials % | Plant % | Subcontract % | Margin % | Tender % |
|---|---|---|---|---|---|---|---|
| Riverside Phase 2 | £1,184,000 | 31 | 24 | 6 | 15 | 24.3 | 23.0 |
| Ashford Depot | £642,500 | 36 | 25 | 7 | 13 | 18.8 | 22.0 |
| Crown Street | £398,200 | 42 | 24 | 8 | 15 | 11.4 | 21.0 |
Crown Street is the one to talk about. Same materials percentage as the others, labour eleven points higher. That's either productivity, rework, or extras being done without variations. The site diary showed £41,000 of instructed-on-the-phone extras with nothing raised. Submitted before the next valuation, the job recovers to about 19%. Left to final account, half gets disputed.
The fifteen-minute review
Once a month, for each live job, with the site manager in the room: certified value, the four cost percentages against tender, and three questions. Why is labour where it is? What's been instructed that hasn't been claimed? What's coming next month? Site managers know the answers. They've just never been asked in front of the number.
Work in progress
Cost incurred on work not yet applied for is WIP. Ignored until year-end, it makes monthly profit swing up and down for no operational reason. A monthly WIP adjustment (cost on unapplied work, carried as an asset until it's applied) smooths the figures and makes month-to-month comparison meaningful. Your accountant should be doing this; most aren't.
Margin by customer, too
Once every job is costed, roll them up by customer for the last twelve months. Rank by margin, not turnover. The customer at the bottom with 78-day payment and heavy retentions is the one to reprice, change terms with, or stop working for. Replacing a customer at minus 4% with nothing at all improves the business.
Sources
Questions people ask
Do I need special software for job costing?
No. Xero tracking categories or Xero Projects are enough for most contractors under £15m, especially combined with a job management app for timesheets and materials. The discipline matters more than the software.
Should revenue be the application or the certificate?
The certificate. An application is a request; until it's certified you haven't earned it. Booking applications as sales overstates profit and hides disputes. Track applications separately so the gap is visible.
How often should job margins be reviewed?
Monthly, within ten working days of month-end, with the site manager. Quarterly is too late to recover a job that's slipping.
What's a good margin by job for a contractor?
It varies by trade and contract type, but 18% to 25% gross margin on a certified basis is typical for £1m to £15m contractors. A job more than three points below its tender margin needs a reason.
About the author. Chris Neuman is the founder of Taxtful, accountants and advisers to UK construction companies turning over £1m to £15m. Taxtful is construction-only: every client, every template, every conversation. This article is general guidance, not advice on your circumstances; rates and rules change, so check the current position before acting.