What job costing means
Job costing is a way of working out what one specific job cost you, then comparing that number to what you charged for it. You do it job by job, not across the whole business at once.
That last part is what makes it useful. A profit and loss statement tells you the company made money last quarter. Job costing tells you that the Whitfield rebrand made money and the Mullins website lost it, which is the thing you can actually act on.
The method comes from manufacturing and construction, where you can point at a pile of timber and say it belongs to one site. It works just as well for service work. It just leans on different numbers, which is where most guides on this subject stop being helpful.
The seven steps
Most explainers list seven steps. Here they are in plain terms.
- Pick the job. One project, one client build, one repair. It needs a clear start and end, or there is nothing to add up.
- Add up direct labor. The hours people spent on that job, priced at what those people cost you per hour.
- Add direct materials. Anything you bought specifically for this job.
- Add other direct costs. Travel, a freelancer, a stock photo licence, a permit.
- Apply overhead. Your rent, software, and admin salaries do not belong to one job, so you spread a share of them across all jobs.
- Total it. Labor plus materials plus other direct costs plus overhead.
- Compare it to revenue. What you charged, minus what it cost, is the margin on that job.
For a service business, steps 3 and 4 are often close to zero. Step 2 is nearly the whole answer, and step 5 is the one people get wrong.
A worked example
Say Karen Whitfield's agency quotes a fixed fee of 12,000 dollars for a brand refresh.
Three people work on it. Derek Mullins is a designer who costs the agency 45 dollars an hour. Tanya Brooks is a senior strategist at 70 dollars an hour. Wesley Pike is a junior at 28 dollars an hour. Note that these are cost rates, not billing rates. A cost rate is salary, tax, and benefits divided by working hours. It is what the person costs you, not what the client pays.
The job runs like this:
- Derek logs 60 hours. 60 by 45 is 2,700 dollars.
- Tanya logs 24 hours. 24 by 70 is 1,680 dollars.
- Wesley logs 90 hours. 90 by 28 is 2,520 dollars.
Direct labor comes to 6,900 dollars. Add 400 dollars of stock photography and font licences as direct costs, and you are at 7,300 dollars.
Now overhead. If the agency's yearly overhead is 300,000 dollars and the team bills 6,000 hours a year, that is 50 dollars of overhead per worked hour. The job used 174 hours, so it carries 8,700 dollars of overhead.
Total cost: 7,300 plus 8,700, which is 16,000 dollars. Against a 12,000 dollar fee, the job lost 4,000 dollars.
That is the point of doing this. On revenue alone the job looked like a solid five-figure win. The margin only shows up when you attribute the hours and the overhead, and it shows that Wesley did 90 hours of work on a job scoped for far less.
Why the overhead step trips people up
Skipping overhead is the most common mistake, and it always flatters the numbers. In the example above, ignoring it turns a 4,000 dollar loss into a 4,700 dollar profit. Same job, opposite decision.
There is no single correct way to spread overhead. Per worked hour is the simplest and works well when people are your main cost. Some businesses spread it as a percentage of direct labor instead, which lands in a similar place. Pick one method and use it for every job, because the comparison between jobs matters more than the precision of any single figure.
Job costing against process costing
These two get confused constantly, and the difference is simple.
Job costing prices one distinct job at a time. Every job is different, so every job gets its own tally. A law firm, an agency, a custom furniture maker, and a plumbing company all work this way.
Process costing spreads cost evenly across a large number of identical units. If you bottle 400,000 litres of juice, you do not cost each bottle separately. You take the total cost of the run and divide.
If your work varies from client to client, you want job costing.
What changes for service businesses
Nearly every article about job costing is written for construction or manufacturing. That is a real gap, because the two cases behave differently.
Labor is the cost. Materials are a rounding error for most service firms, so the accuracy of your job costing comes down entirely to whether people log their hours to the right job. Bad time data means bad job costing, and no amount of accounting rigour downstream can fix it.
Rates change mid-job. Someone gets a raise in April while a job runs from January to June. If your system prices the whole job at today's rate, January's work gets recosted at a rate nobody was earning at the time, and your margin history quietly shifts. Rates need to be dated, and each entry needs to keep the rate that applied when the work happened.
The unit is a task, not a site. Knowing a project lost money is useful. Knowing the revisions phase ate 60% of the hours is what stops it happening on the next job.
Doing it in a spreadsheet
A spreadsheet is a fine place to start. One tab per job, a row per person, cost rate in a column, hours in another.
It stops working for three reasons, usually in this order. First, someone logs hours a week late and nobody updates the sheet. Second, a rate changes and there is no record of which rate applied on which date, so old jobs get recosted by accident. Third, you get enough jobs running at once that keeping the tabs current becomes somebody's actual job.
At that point the sheet is not saving you money any more.
Where TimeTracker fits, and where it does not
TimeTracker does job costing from tracked hours. Each person carries a cost rate and a billing rate, both dated, and every time entry stores the rates that applied on the day it was logged. Costs and margin roll up per task and per project next to the budget, so the numbers are current rather than rebuilt at month end. Cost and margin are also permission gated, so you can let a contractor log hours without showing them what the rest of the team costs.
What it does not do: there is no materials costing, no purchase orders, and no subcontractor billing. If you are pricing a fit-out where timber and plant hire are most of the cost, you need a construction package, not this. It is built for teams whose main cost is people's time.
You can see the full picture on the job costing page, check a single job by hand with the labor cost calculator, or work out a rate that covers your overhead with the billable rate calculator.