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It is a general guide, not financial or tax advice. An accountant can help you set this up for your own business.
What is job costing?
Xero’s UK guide describes it as an accounting method that tracks all costs and revenue for a single project, so you can see how profitable each job is instead of looking only at the business as a whole. Shopify’s UK guide adds that it suits businesses that do one-off or custom work, and helps with choosing projects and setting prices.
Xero gives the basic formula as:
Labour + Materials + Overheads = Total job cost
It also lists equipment as a fourth category in its guide.
What goes into each part?
According to Xero:
- Labour: wages, payroll taxes and benefits for everyone working on the job. For employees, that includes National Insurance, pensions and holiday pay as well as the day rate. Subcontractors count too.
- Materials: direct and indirect materials, plus delivery and wastage allowances.
- Overheads: your share of costs that are not tied to one job, such as office rent, insurance and equipment depreciation.
Shopify suggests keeping receipts, invoices and purchase orders, because they give you a record of what was actually spent to compare with your estimate.
How do you share out overheads?
Overheads are the hardest part, because no single job causes them. Shopify describes one method: divide last year’s overheads by last year’s direct labour hours to get an hourly overhead rate. In its example, $200,000 of overheads over 5,000 labour hours gives $40 an hour, so a 100 hour job carries $4,000 of overhead.
Xero describes another common approach: adding a percentage to each job to cover overheads. In its worked example, overheads are 15% of labour and materials. Both guides suggest working with an accountant to choose the right method and figure for your business.
Is markup the same as margin?
No, and it is easy to mix them up. Markup is what you add on top of your cost. Margin is the profit as a share of the price you charge.
Xero’s worked example is a bathroom job:
| Item | Cost |
|---|---|
| Labour: two people at £150 a day for 10 days | £3,000 |
| Materials | £4,500 |
| Overheads at 15% of £7,500 | £1,125 |
| Total job cost | £8,625 |
Xero then multiplies the cost by 1.2 for a price of £10,350, which it calls a 20% profit margin. Strictly, adding 20% on top of cost is a 20% markup. The profit is £1,725, which is about 16.7% of the £10,350 price. If you are aiming for a particular margin, make sure your sums are working on the price, not the cost.
Why check the job afterwards?
Xero says that by capturing each cost at the job level, you can compare your original estimate against what you actually spent and learn from the difference. It lists more accurate future estimates and spotting where time or materials are being wasted among the benefits.
Is job profit the same as taxable profit?
Not necessarily. GOV.UK explains that if you are self-employed you can deduct allowable expenses from your turnover to work out your taxable profit. Its example: turnover of £40,000 with £10,000 of allowable expenses gives a taxable profit of £30,000. Which costs are allowable is set by HMRC’s rules, so the profit you track on a job is a management figure. Your accountant or HMRC’s guidance is the place to check tax.
Questions people ask
What is the formula for a job’s total cost?
Xero gives labour plus materials plus overheads as the total job cost.
How do I include overheads in a quote?
Either use an hourly overhead rate based on last year’s figures, as Shopify describes, or add a percentage to each job, as Xero describes. An accountant can help you choose.
Is a 20% markup a 20% margin?
No. A 20% markup on cost gives a margin of about 16.7% of the price.
Where Job Profit Tracker helps, and where it does not
Job Profit Tracker is our Android app for solo trades. Its Google Play listing says it helps you see the profit on a job before you say yes: enter the quote and your costs, and it shows the profit and loss for that job. The core is free, with a one-time unlock for the full version. It is built for UK trades.
What it is good for: a quick check of whether a quote covers your costs.
What it will not do: it works from the figures you enter, so it can only be as good as your costs and overhead estimate. It is not accounting software or tax advice. For tax and for setting your rates, speak to an accountant.
Questions or bugs: Email us.
Sources
- Job costing: track costs and boost profits in constructionXero UK xero.com
- Job costing explainedShopify UK shopify.com
- Expenses if you’re self-employedGOV.UK gov.uk