Job costing: why the profit is rarely where you think it is

There is a sentence you hear in every project business: «That one went well.» Ask what it rests on and you usually get a mix of gut feeling and memory. The client was happy, nothing blew up, the invoice was paid.

Whether any money was made is a different question. And that answer is rarely written down anywhere.

Why the annual accounts answer the wrong question

Most firms find out how they are doing once a year. The accountant presents the figures, there is a number at the bottom, and it is either good news or it isn't.

What that number does not tell you is which projects produced it. A year with a respectable profit can be twenty solid jobs and five disasters. As long as you cannot name the five, you will repeat them.

That is what job costing does. It measures the individual project, not the year.

This applies to a painting firm as much as to a consultancy, a design studio or a freelancer working on projects. Anyone who quotes up front and delivers afterwards has the same structural problem: the price is fixed early, the costs arrive later.

How to calculate the margin on a project

Revenue minus external costs minus labour costs equals margin. At heart there is nothing more to it.

The work is not in the formula. It is in getting those three numbers right, and that is where things go wrong.

Revenue: what was actually invoiced

Not what the quote said. Between the quote and the final invoice sit variations, discounts, goodwill, and the one item nobody billed because it felt awkward to raise.

On fixed-price work it is starker still. The revenue is set from day one. Every hour of extra effort comes straight out of the margin - invisibly, because the invoice never changes.

External costs: everything bought in

What this covers depends entirely on the business. In the trades it is materials, subcontractors, disposal, plant hire. In consulting it is travel, associates, licences, commissioned research or translation.

The common failure is not forgetting these costs but misallocating them. A supplier invoice for €4,200 covers three projects but gets booked against one - or against none, because splitting it is tedious. Now one project looks expensive, two look cheap, and all three numbers are wrong.

Labour: the line that is underestimated most

This is where calculating parts company with guessing. Labour cost is recorded hours multiplied by an internal cost rate - and the internal cost rate is not the salary.

Someone on €55,000 a year costs the business considerably more: employer contributions, insurance, holiday, public holidays, sick leave, training, a desk, equipment. Depending on how you count, you land somewhere between 1.3 and 1.8 times gross salary.

Then comes the second half. Those costs are not spread across every paid hour, only across the billable ones. Strip out holiday, sickness, business development, admin and training and you often end up with 1,200 to 1,500 productive hours a year rather than the nominal 1,800 or more.

Anyone working alone has the same problem in sharper form. Writing proposals, chasing invoices, keeping the books, staying current - all of it is working time nobody pays for, and all of it has to be carried by the billable hours.

Use the hourly wage instead of the true cost rate and every project looks more profitable than it is. On a twelve per cent margin, that single mistake is enough to turn profit into loss without anyone noticing.

What patterns job costing makes visible

Cost projects one by one and the same three patterns surface almost every time - and none of them shows up in the annual accounts.

Small jobs do not carry themselves. Winning the work, agreeing the scope, getting up to speed and raising the invoice cost roughly the same whatever the job is worth. On an €800 project that eats the margin. On a €40,000 one it disappears.

One client costs more than the rest. Not on price, on effort. Three review meetings instead of one, four rounds of changes, pays after the second reminder. None of that appears on an invoice. All of it appears in the hours.

One service line is chronically underpriced. Usually the one you have offered longest, whose price has not moved in years while the costs behind it have.

You will not see any of these in the annual accounts. You will see all three after ten costed projects.

A margin is not yet a profit

One distinction that is easy to miss: the internal cost rate covers a person, not the business. Rent, bookkeeping, management and vehicles are not in it - and they cannot sensibly be assigned to an individual project either, because any allocation key would be arbitrary.

So the margin from job costing sits before overhead. It tells you what a project contributes to the business, not what it earns.

As a rule of thumb: with an overhead surcharge of 25 per cent you need roughly 20 per cent project margin to break even. A project showing twelve per cent looks positive in the report and still eats into the substance.

The objection: «We haven't got time for that»

Fair - if you treat it as a separate task. An afternoon per project in a spreadsheet does not pay for itself.

The point is that the data already exists. The hours are recorded because people have to be paid or work has to be billed. The supplier invoices are entered because they have to be settled. The sales invoice has been raised.

What is missing is only the link: that every hour and every document is tied to a project. Once that holds, job costing stops being work and becomes a query.

So the effort sits in the discipline of recording, not in the arithmetic. And that discipline pays off anyway - not least for the question «how much time is in this project so far?», which is worth answering while the work is running, not after it.

How to start with job costing

If you do not want to change everything at once:

Take last year's three biggest projects and cost them retrospectively. By hand, once. It takes a few hours and tells you more about the business than half the annual accounts.

Work out an honest internal cost rate. Once, for each pay grade - and for yourself. This is the number most calculations get wrong.

Automate after that, not before. If you know what you want to see, you set up recording sensibly. If you install a system first and think afterwards, you end up measuring the wrong thing precisely.

---

In Pulse, job costing is a tab on the project page: revenue from the invoices raised, external costs from the supplier invoices allocated to the project, labour from recorded hours times the stored cost rate. Anything missing is shown as missing - a person without a cost rate produces a warning, not a silent zero.