Your construction company is busy. The crews are working. Invoices are going out. Customers are paying. There is money in the bank.
So, business must be good…right? Maybe. But here is a more important question: Do you know which individual jobs are making you money?
I’m not asking which jobs brought in the most revenue or which jobs had the biggest contracts, or which jobs kept your crews busiest. I’m asking which jobs were profitable after you accounted for what it cost to complete them?
If you can’t answer that question, your accounting system may not be giving you all the information you need to run your construction business.
Revenue Doesn’t Tell You Whether a Job Was Profitable
Imagine you complete two jobs.
Job A
Contract Revenue: $250,000Job Costs: $175,000Gross Profit: $75,000Gross Profit Margin: 30%
Job B
Contract Revenue: $500,000Job Costs: $450,000Gross Profit: $50,000Gross Profit Margin: 10%
Job B generated twice as much revenue.
But Job A generated more gross profit—and did it with a much better margin.
Now imagine that Job B also required more management time, created more change-order disputes, took longer than expected, and tied up your cash in retainage for months.
Which was the better job?
Bigger doesn’t necessarily mean more profitable.
That’s why construction companies need to look beyond total revenue.
Job Costing Is the Foundation
To know whether a job is profitable, you first need to know what the job cost you. That is the purpose of job costing.
Job costing means assigning revenue and costs to the specific projects that generated them.
Depending on your company, job costs may include:
- Materials
- Direct labor
- Payroll taxes
- Employee benefits
- Subcontractors
- Equipment
- Equipment rental
- Permits
- Freight and delivery
- Disposal costs
- Travel
- Job-specific insurance
- Other direct project costs
The exact categories will vary by contractor. What matters is consistency.
If some project expenses are assigned to jobs and others are simply recorded to general expense accounts, your job profitability reports may not tell the whole story.
“I Know What My Materials and Subcontractors Cost.”
That’s a good start. But what about labor?
Labor can be one of the largest costs on a construction project.
If your employees spend 600 hours on a job, those labor costs need to be associated with that project if you want to understand its profitability. And wages may not represent the entire cost.
Depending on how your company measures job costs, you may also need to consider the employer’s cost of:
- Payroll taxes
- Workers’ compensation
- Health insurance
- Retirement benefits
- Paid time off
- Other employee-related costs
If an employee earns $30 per hour, the actual cost of putting that employee on a job is more than $30 per hour.
If your estimates use one labor cost but your accounting reports use another, comparing estimated profitability with actual profitability becomes difficult.
Estimated Costs vs. Actual Costs
Before a project begins, you probably estimate what it should cost.
Maybe you expect:
- $80,000 of materials
- $100,000 of labor
- $40,000 of subcontractors
- $20,000 of other job costs
Total estimated cost: $240,000
On a $320,000 contract, you are expecting an $80,000 gross profit.
That is a 25% gross profit margin.
But what happens as the job progresses?
Maybe materials increase to $92,000.
Labor takes longer than expected and reaches $118,000.
A subcontractor charges an additional $8,000.
Now your projected cost is $266,000.
If the contract amount hasn’t changed, your expected gross profit has fallen from $80,000 to $54,000.
Your margin has fallen from 25% to approximately 17%.
The project is still profitable.
But it is not as profitable as you expected.
You want to know that while the job is still in progress, not six months after it is finished.
Why Did the Job Miss the Estimate?
Knowing that a job wasn’t as profitable as expected is useful. Knowing why is even more useful.
Was labor underestimated?
Did material prices increase?
Was there excessive waste?
Did the job require overtime?
Was the original bid too low?
Did the project take longer than expected?
Were there unapproved change orders?
Did the customer change the scope of the work?
Were additional costs incurred but never billed?
Was productivity lower than expected?
Were expenses charged to the wrong job?
Did you miss costs when preparing the original estimate?
This is where good construction accounting becomes a management tool.
You’re not simply asking: “Did we make money?”
You’re asking: “Why did we make, or lose, the amount we did, and what can we learn before bidding the next job?”
Change Orders Matter
Construction projects change. A customer adds something. The scope changes. Unexpected conditions are discovered. Materials change. Additional labor is required.
A $300,000 contract can quickly become a $340,000 project.
But if the additional $40,000 of work isn’t properly documented, approved, tracked, and billed, the costs may still end up in your accounting records without the corresponding revenue.
That can destroy the profitability of an otherwise successful job.
Your accounting system should allow you to see the financial effect of change orders, not simply the revised contract amount.
Retainage Can Make Cash Flow Confusing
Construction companies deal with retainage. You have earned the revenue. You have billed the customer. You have paid your employees, suppliers, and subcontractors. But you haven’t collected all of the cash.
For example, you might invoice $100,000 but have 10% retainage withheld.
You receive $90,000.
The remaining $10,000 may not be collected until much later. In most cases, you won’t be able to collect on that $10,000 until the entire project is complete. If you are a subcontractor, that doesn’t mean when your portion of the project is complete, it means when the entire project is complete. Now you are waiting on every other subcontractor working on the project to finish their work as well.
Multiply that across several large projects and you can have a profitable company with a significant amount of cash tied up in retainage.
That’s why looking at the checking account alone can be misleading.
Profitability and cash flow are related, but they are not the same thing.
You need to understand both.
Work in Progress Matters, Too
For many contractors, looking only at invoices and expenses doesn’t provide a complete picture of how jobs are performing.
You may also need a Work in Progress (WIP) schedule.
A WIP schedule can help compare information such as:
- Contract amount
- Approved change orders
- Revised contract amount
- Estimated total cost
- Costs incurred to date
- Estimated cost to complete
- Percentage complete
- Revenue recognized
- Amount billed
- Overbillings
- Underbillings
This can help identify jobs that deserve attention before they become bigger problems.
What Are Overbillings and Underbillings?
These terms can sound complicated, but the basic idea is fairly simple.
Overbilling
You have billed the customer more than the amount of revenue you have earned based on the job’s progress.
This can be good for cash flow because you have collected, or expect to collect, cash ahead of the work.
But that extra billing isn’t necessarily profit.
You still have work to perform.
Underbilling
You have earned more revenue based on the job’s progress than you have billed to the customer.
That can happen for several reasons. Maybe billing hasn’t caught up with the work. Maybe change orders haven’t been approved. Maybe costs are accumulating faster than expected. Maybe someone simply hasn’t invoiced everything that should have been invoiced.
A significant underbilling deserves attention because your company may essentially be financing part of the project.
A Job Can Look Profitable Until the Last 10%
This is another construction accounting problem.
A job may look fantastic when it is 75% or 90% complete.
Then the last part of the project happens. Punch-list work. Callbacks. Rework. Additional labor. Cleanup. Warranty issues. Small material purchases. Project management time.
Suddenly, the margin starts shrinking.
That’s why it is important to keep tracking costs until the job is truly complete.
Don’t declare victory too early.
Gross Profit Percentage Is Worth Watching
Suppose your company typically earns a gross profit margin of around 25%.
Then you review your jobs and find:
Job A: 28%Job B: 26%Job C: 24%Job D: 9%
Job D deserves a conversation.
It doesn’t automatically mean something is wrong.
There may be a perfectly reasonable explanation.
But you want to understand it.
Was the job intentionally bid at a lower margin? Did costs run over? Was revenue missed? Were costs posted to the wrong job? Did something unusual happen?
Looking at profitability job by job makes it much easier to spot the outliers.
Don’t Look Only at Completed Jobs
Knowing what happened on completed jobs is useful.
Knowing what is happening on active jobs is even better.
If you wait until a job is finished to discover that the margin disappeared, there isn’t much you can do about that project.
If you identify a problem halfway through the job, you may still have options.
You might be able to:
- Investigate labor overruns
- Address material waste
- Bill an approved change order
- Correct costs posted to the wrong project
- Adjust staffing
- Improve purchasing
- Discuss scope changes with the customer
- Update the estimated cost to complete
Financial information is most useful when you receive it in time to do something with it.
What About Overhead?
Not every business expense belongs to a particular job.
Your construction company probably also pays for things such as:
- Office salaries
- Office rent
- Accounting
- Software
- General business insurance
- Advertising
- Telephone and internet
- Office supplies
- Professional fees
- Other administrative costs
These are generally part of your company overhead.
Job gross profit needs to be sufficient not only to cover direct job costs but also to contribute toward paying the company’s overhead and ultimately generating a net profit.
This is why a job can show a positive gross profit and still not necessarily be a good job.
If your gross margins aren’t sufficient to cover the cost of operating the company, being busy won’t solve the problem.
“But My Company Made Money This Year.”
That’s good. But I would still want to know: where did the profit come from?
Maybe ten jobs made excellent margins and two lost money.
Maybe one unusually profitable project carried several weak ones.
Maybe one type of work consistently produces a 30% margin while another produces 12%.
Maybe one project manager’s jobs consistently perform better.
Maybe certain customers create far more change-order problems.
Maybe small jobs are more profitable than large ones.
You can’t see those patterns if all of the activity is combined on one company-wide Profit and Loss Statement.
Company profitability tells you whether the company made money.
Job profitability helps tell you how it made that money.
Good Job Costing Can Help You Bid Better
Your completed jobs contain valuable information for your next estimate.
Suppose you consistently estimate 500 labor hours for a particular type of project, but the last five similar jobs required:
620 hours590 hours640 hours605 hours625 hours
Your accounting records are telling you something. Maybe 500 hours isn’t a realistic estimate.
If you keep bidding based on 500 hours because that’s what you’ve always used, you may continue underpricing your work.
Historical job-cost information can help you make better decisions about:
- Labor estimates
- Material allowances
- Subcontractor costs
- Markups
- Gross margin targets
- Pricing
- Which types of projects to pursue
- Which types of projects to avoid
Good construction accounting doesn’t just tell you what happened.
It can help you bid the next job better.
What Should You Be Able to Answer?
If your construction accounting system is giving you useful information, you should be able to answer questions such as:
- What is the current contract amount for each job?
- What approved change orders have been added?
- How much have we billed?
- How much retainage is outstanding?
- What have we spent on the job so far?
- What do we expect the job to cost when completed?
- How much gross profit are we expecting?
- What is the expected gross profit percentage?
- Is that margin improving or deteriorating?
- Are actual labor costs consistent with the estimate?
- Are material costs running over budget?
- Are we overbilled or underbilled?
- Are there costs that have not yet been billed?
- Which completed jobs were the most profitable?
- Which jobs performed worse than expected?
- Why?
You may not need to know every answer every morning.
But your accounting system should be capable of helping you find them.
QuickBooks Can Track Jobs, If It Is Set Up and Used Correctly
QuickBooks Online can be a useful part of a construction accounting system. But simply creating customers or projects isn’t enough. Transactions have to be consistently assigned to the correct jobs. (Consistency is King here.)
This may include:
- Revenue
- Materials
- Subcontractors
- Labor
- Equipment
- Other direct costs
Your Chart of Accounts also needs to be structured in a way that provides useful information without becoming unnecessarily complicated.
And the people entering transactions need to understand why job costing matters.
If half of the project costs are assigned to jobs and the other half are not, the reports may look impressive while still being wrong.
The software cannot fix inconsistent accounting procedures.
Garbage In, Garbage Out Still Applies
You can have beautiful reports. You can have dashboards. You can have graphs. You can have sophisticated construction software.
But if the underlying accounting data is wrong, those reports aren’t reliable.
Before relying on job profitability reports, make sure:
- Bank accounts are reconciled.
- Credit cards are reconciled.
- Job costs are being assigned consistently.
- Payroll is being allocated appropriately.
- Loans are recorded correctly.
- Accounts Receivable is accurate.
- Accounts Payable is accurate.
- Retainage is tracked.
- Change orders are recorded.
- Balance Sheet accounts are reviewed.
- Work in Progress is being handled appropriately for the business.
Better reports don’t fix bad bookkeeping.
Accurate bookkeeping creates better reports.
Your Tax Return Isn’t a Job Profitability Report
Your tax return tells you important information about your business.
But it isn’t designed to tell you whether the Smith project made money and the Jones project didn’t.
That is management information.
And you need it before tax season.
A construction business owner shouldn’t have to wait until the tax return is prepared to find out whether the company had a good year.
And you certainly shouldn’t have to wait until then to discover that certain types of jobs consistently lose money.
Construction Accounting Should Help You Run the Business
The purpose of construction accounting isn’t simply to keep QuickBooks updated. And it isn’t simply to prepare information for the tax return. Good construction accounting should help you understand:
Where are we making money?
Where are we losing margin?
Which jobs are performing well?
Which jobs need attention?
Are we billing appropriately?
How much cash is tied up in retainage?
Are our estimates realistic?
Are our margins sufficient to cover overhead?
Which types of work should we pursue more often?
Those are business questions.
Your accounting records should help you answer them.
Do You Know Which Jobs Are Profitable?
If I asked you right now: “What are your three most profitable jobs this year?”
Could you answer?
What if I asked: “Which three jobs had the worst margins—and why?”
If the answer is no, that doesn’t necessarily mean your company isn’t profitable.
It may simply mean your accounting system isn’t giving you the information you need.
And that’s something you can fix. Remember consistency is king! Every cost has be to recorded to the job. Saying “that invoice was used toward several jobs so just record it as materials” won’t get the job done.
Need Better Construction Accounting?
At Melton Bookkeeping & Accounting Services, I work with construction businesses that need more than transactions entered into QuickBooks.
Construction accounting may involve job costing, retainage, Work in Progress, overbillings and underbillings, Accounts Receivable, payroll allocations, job profitability, cash flow, and financial reporting that actually helps you understand what is happening in the business.
As a CPA and QuickBooks Online ProAdvisor, I bring an accounting perspective to the bookkeeping process and can also work with your tax preparer and other professional advisors.
If your QuickBooks file isn’t currently set up to give you useful job profitability information, don’t worry.
We can start by looking at what you have, how your jobs are currently being tracked, and what information you would like to be able to get from your accounting system.
If you’re looking for professional bookkeeping and accounting services for your construction business, call Melton Bookkeeping & Accounting Services at 417-630-0057.
Knowing that your company made money is good.
Knowing which jobs made it, and why, is much better.
