Job Costing

Job costing is an accounting method that enables contractors and construction companies to track, budget, and manage the costs associated with individual projects. Unlike traditional accounting, which focuses on overall business financials, job costing assigns expenses and revenue to specific jobs. This gives contractors a detailed view of profitability, cost management, and resource allocation, allowing them to make informed decisions, provide accurate estimates, and maintain project profitability.

What is Job Costing in Construction Accounting?

In construction, job costing involves tracking and allocating all costs and revenues to specific projects or jobs. This method assigns expenses—such as materials, labor, equipment, subcontractors, and overhead—directly to individual projects. By doing this, companies can track the profitability of each project and ensure that actual expenses align with estimated budgets.

Since construction projects often vary significantly in size, scope, and complexity, tracking financials separately for each project is critical. This is especially true for companies managing multiple construction projects, each with its own timelines, phases, and budgets.

Job costing provides contractors with a clear, project-specific view of their business. By allocating costs to individual jobs, contractors can easily identify where money is being spent, which ensures accurate billing and prevents undercharging for time and materials. Additionally, project-level data allows companies to assess the profitability of individual jobs and improve their estimates when bidding on future projects.


Examples of Job Costing in Construction

1. Independent General Contractor Using Job Costing to Track Multiple Projects

An independent general contractor often manages several small projects at once, such as a $50,000 bathroom remodel and other renovation jobs. Job costing is essential for contractors to track the specific costs associated with each project separately. This ensures that labor, materials, and overhead for one job don’t get mixed up with the expenses from other projects.

For example, while working on the bathroom remodel, the contractor can use job costing features in their accounting software or project management software to isolate all the costs tied to that specific job—labor hours, materials like tiles and fixtures, and any subcontractor fees. At the same time, the contractor tracks costs for other ongoing projects independently, allowing them to see how profitable each job is on its own.

Without job costing, it would be easy for the general contractor to lose track of expenses across multiple jobs, potentially underbilling or failing to manage project budgets effectively. By separating and tracking costs for each project, job costing helps contractors ensure that each job stays on budget and can be analyzed for profitability once completed.

2. Residential Homebuilder Using Job Costing with Cost Codes

A residential homebuilder managing a custom $500,000 home build can use job costing to track expenses at each stage of the project. For larger projects like this, it’s crucial to categorize costs in detail to ensure accurate budgeting and cost control. This is where cost codes come into play. Cost codes are a method of categorizing expenses—such as labor, materials, and subcontractor costs—into specific categories, which can apply to different aspects of the project, whether by task, type of cost, or phase.

For example, during the framing phase, the contractor can assign cost codes to track specific costs like lumber, labor, and equipment. By inputting these details into their accounting or project management software, the contractor can monitor actual expenses compared to the initial budget. If framing costs exceed the estimate due to increased material prices, the contractor can immediately adjust future phases of the project to ensure the overall budget stays balanced.

When the homeowner requests an upgrade to the flooring material, the contractor can issue a change order and use job costing to capture the new costs. Because each expense is assigned a cost code, the additional labor and material costs for the flooring upgrade are automatically categorized and reflected in the project’s financials.

Using job costing in combination with cost codes gives the contractor a clear view of where the project stands financially at all times, ensuring that any cost overruns are identified early and that the project stays on track.

3. Commercial Contractor Using Job Costing for Change and Subcontractor Management

A commercial contractor managing a $5 million office building renovation must deal with multiple subcontractors, each responsible for different parts of the project—such as HVAC, plumbing, and electrical work. Job costing helps the contractor assign and track costs for each subcontractor, ensuring that every expense is properly allocated to the right part of the project.

Throughout the project, subcontractors submit RFIs (Requests for Information) when clarifications are needed for design specifications. For instance, if the electrical subcontractor submits an RFI to clarify wiring placement in relation to HVAC ducts, this could impact both the timeline and cost. The contractor uses job costing to track the labor and materials related to these changes, ensuring that the financial impact of additional work is captured immediately.

Similarly, when subcontractors send submittals for materials or equipment—such as HVAC units or plumbing fixtures—the contractor reviews and approves these submittals. If approved materials come at a higher cost than initially estimated, the contractor issues a change order to account for the added expense. The job costing system allows these changes to be reflected in the project’s overall budget and provides clear visibility into how submittals affect total costs.

By integrating job costing with RFIs, submittals, and change orders, the contractor can ensure that every cost is tracked accurately. This level of oversight is crucial in large-scale projects with multiple subcontractors, helping the contractor manage the financial impact of design changes and material upgrades while preventing budget overruns.


How to Calculate Job Costs

Once contractors have allocated costs to a project, they can calculate the overall expenses for that job using a simple formula. The formula ensures that no costs are overlooked:

Total Job Cost = Direct Costs + Indirect Costs + Overhead Costs

  • Direct Costs include labor, materials, and subcontractor fees directly tied to the project.
  • Indirect Costs refer to shared expenses like equipment or utilities that span multiple jobs.
  • Overhead Costs cover general business expenses like office rent or administrative salaries.

By applying this formula, contractors ensure that all relevant costs are captured, allowing them to monitor job-specific profitability and keep projects financially on track.


How Job Costing Compares to Other Accounting Methods

While job costing is the primary accounting method used in construction, there are several other approaches that apply in different industries or situations. Understanding how job costing compares to these methods can help contractors choose the right approach for their projects.

1. Process Costing

Used in industries where products are homogenous and produced in large quantities, such as manufacturing or food production, process costing accumulates costs over continuous processes. For construction companies, process costing might be used when performing repetitive tasks in large-scale developments, like building identical houses in a subdivision. However, job costing is still preferred for tracking costs by project phase or specific tasks.

2. Activity-Based Costing (ABC)

Activity-based costing allocates overhead based on the activities that drive costs, making it a more refined version of traditional cost allocation. While ABC is less common in construction, it could be applied to large, complex projects where activities like project management or safety inspections generate significant overhead. Job costing is still favored in construction because it offers a more straightforward way to track project-specific costs.

3. Standard Costing

In standard costing, expected costs are set in advance for labor, materials, and overhead, and actual costs are compared to these standards. This method is commonly used in manufacturing but may apply to construction in cases where companies frequently repeat similar projects. Contractors might use standard costing to identify variances in material prices or labor costs across repetitive builds, although job costing offers more flexibility for custom projects.

4. Percentage of Completion Method

The percentage of completion method is often used in long-term construction projects to recognize revenues and costs based on the project’s progress. This approach is used primarily for revenue recognition rather than cost tracking. Job costing complements percentage of completion by providing detailed cost breakdowns for each phase of the project.

5. Target Costing

Target costing starts by setting a target cost for the project, based on market conditions and desired profit margins. The project is then designed and executed to meet that target. This method can be useful in competitive bidding environments, where contractors must work within strict budget constraints. Job costing, by comparison, allows for continuous cost tracking and adjustments during the project.


Software for Job Costing in Construction

To track job costs effectively, contractors rely on construction accounting and project management software with integrated job costing features. These tools help contractors input and track expenses—like labor, materials, subcontractor costs, and overhead—and assign them to the appropriate projects, helping manage budgets and ensure profitability.

Most popular construction accounting tools will support job costing. Some, like Sage 100 Contractor have nuanced features to help with job costing and related reporting. Other, more general accounting solutions, like QuickBooks Online support job costing, but require some configuration to get started.

Many construction project management software—such as Procore and Buildertrend—also include features to help construction professionals manage job costing. These platforms also help contractors track RFIs, submittals, and change orders, ensuring that all cost-related changes are captured and reflected in the project’s financials. With this combination of features, contractors can avoid budget overruns and maintain a clear, up-to-date view of their project’s profitability.

Job costing is a vital tool for contractors of all sizes, enabling them to track expenses and maintain control over their project budgets. Whether managing a small home renovation or a large commercial development, job costing ensures that every dollar is accounted for and allocated accurately. By integrating job costing into their operations through the right software, contractors can streamline project management, track costs efficiently, and ensure long-term profitability.


The information provided in this guide was developed using resources from authoritative sources, including the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), the Internal Revenue Service (IRS), and the Construction Financial Management Association (CFMA). We recommend consulting with a professional accountant or seeking additional guidance from these sources to ensure compliance with the latest regulations and best practices.

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