Advanced job-costing strategies for professional services businesses

Published January 6 2025

Table of contents

• Job-costing fundamentals for service businesses
• Setting up job costing systems for consultancies
• Time tracking and resource allocation methods
• Cost allocation strategies for different service types
• Technology solutions for automated job costing
• FAQs on job costing fundamentals for service businesses

Key takeaways

• Job costing helps service businesses protect margins. By tracking labour, expenses, and overheads accurately, you can see which projects and clients are truly profitable.
• Advanced job costing methods give better insight. Techniques like activity-based costing, contribution margin analysis, and earned value tracking help you spot risks early and price work more accurately.
• Real-time tracking improves decision-making. Monitoring costs, time, and budgets as projects run allows you to adjust pricing, resourcing, or scope before margins slip.

Job-costing fundamentals for service businesses

For professional services businesses, like consultancies, agencies, law firms, or freelance collectives, understanding your true costs is essential to profitability.

With the right job approach to job costing for your professional services, you can see exactly where every dollar and hour goes.

That means you’ll be better able to meet your budgets, price smarter, and improve project margins – without cutting corners on quality.

Let’s take a look at some advanced job costing strategies.

Activity-based costing (ABC)

Instead of spreading overhead evenly across all jobs, ABC assigns costs to activities based on the resources they consume. So, rather than allocating costs evenly, you calculate exactly how much time and other resources each project consumes and assign your costs accordingly.

This gives you more precise job profitability data, especially for complex multi-service projects like a complex merger or rebrand project.

Real time job-costing dashboards

Cloud-based software lets you track costs, time spent, and overall project profitability in real time – not just at month end. It gives you accurate, to-the-minute information on whether your project is within budget and scope.

Xero Projects, for example, helps make your project accounting and tracking hassle-free. It also lets you run project reports that are based on your real project data – not guesswork.

Dual rate overhead allocation

With this method you separate your fixed and variable costs. For example, your agency might log rent as a fixed cost, but might charge software subscriptions to the specific projects they’re used for. This way, it’s clear which costs grow with each project and which are fixed.

Rolling forecast and continuous repricing

In this job costing strategy, you check your actual costs against your budget regularly, instead of waiting for the yearly review. Say your team utilisation dipped in Q2 – you’d adjust the rates or project quotes for Q3 in line with this to keep your pricing accurate and avoid any surprises.

Contribution margin analysis by client

Instead of looking only at project profitability, it’s a good idea to check which clients actually deliver the best margins once you include all the time and resources you’ve spent on them.

For example, Client A might bill more but needs extra meetings and after-hours work, making them less profitable than Client B.

When you can, it’s best to focus on your high-margin clients and consider renegotiating or letting go of those who take more than they give.

Shadow pricing for alternative scenarios

To help choose the most profitable pricing strategy for future bids, try running past projects through different pricing scenarios, like hourly, fixed, or value-based pricing, to see which would've been most profitable.

For example, a $50,000 fixed-price project might have earned $65,000 under value-based pricing.

Earned value management (EVT)

This method measures actual progress against planned value to forecast final costs and timelines. For example, if a law firm sees a litigation case is 50% complete but is already at 70% of budgeted hours, the firm would trigger a billing or resource review that would help keep their other projects on track.

Using job costing for consultancy in this way can help you prevent budget blowouts and under-billing.

Job costing for professional services means tracking all the costs your business incurs to deliver a project or client engagement. These costs usually fall into three categories:

• Direct labour: billable hours for consultants, lawyers, creatives, or contractors
• Direct expenses: travel, materials, software licences, and subcontractor fees
• Allocated overheads: rent, utilities, and admin salaries distributed proportionally

By capturing these costs accurately, you can:

• Identify where projects are underperforming
• Spot opportunities to increase efficiency
• Use service pricing signals to guide future quotes and proposals

Even in service industries, unexpected costs – like unplanned client revisions or last-minute expert consultations – can creep in. By tracking these you’ll be able to track and bill for them as much as possible.

Setting up job costing systems for consultancies

A good job costing system doesn’t just track numbers – it also makes them actionable and prevents erosion of your margins. Here’s how to set up yours.

• Define your job structure: Break work into clearly defined projects or phases to help track costs and time in a clear, simple way.
• Standardise cost codes: Create consistent categories for labour, expenses, and overheads to make your cost-based reporting cleaner.
• Link with your accounting software: Integrating with tools like Xero Projects means your financials update automatically, saving manual entry time and the risk of errors.
• Establish approval workflows: Set up systems to review time entries and expenses before they hit your reports.

Service pricing signals are the clues your costs and margins give you about whether your rates reflect the true value of your work. If you notice that certain types of projects consistently take more hours than you quoted, your rates might be too low for the effort involved.

Time tracking and resource allocation methods

Time and resource allocation have a huge influence on costs for most professional service firms.

Three best practice time-tracking habits

• Log your time every day – encourage your team members to log hours daily for more accurate billing.
• Categorise your tasks – make sure you link hours to defined activities or deliverables, so you know what tasks create the most value.
• Use mobile-friendly tools – these make logging time easier when you’re working remotely or managing a remote team.

Tips for allocating resources efficiently

To make resource allocation run more smoothly:

• Assign high-value work to your best staff
• Analyse utilisation reports to see who’s overbooked or underused
• Monitor non-billable time to identify what you can shift to client work to improve project margins

For example, John runs a corporate law firm. With some fine-tuning of his resource allocation, he realises his junior associates spend too much time on admin he can’t bill for. He reallocates tasks to free up 10 billable hours per week – lifting profitability without needing to hire more staff.

Use cloud-based accounting software

Accounting and financial management software that’s based in the cloud can help minimise your financial admin, so you can spend more time running your projects. For instance:

• Accounting software simplifies record-keeping, reporting, loan applications, and tax filing.
• Invoicing software speeds up billing and chases late payments for you.
• Accounts payable software keeps track of bills, cash flow and payments.
• Time-keeping systems let you share rosters and record hours.
• Payroll software calculates wages, deductions, and pay slips automatically.

Cost allocation strategies for different service types

Your choice of cost allocation strategies generally comes down to two options: a direct allocation, or a proportional allocation.

• A direct allocation is when you assign costs directly to the project or client that incurred them, so the results of each project reflect their true cost.
• A proportional allocation is when you spread costs across multiple projects based on a logical metric – like hours worked, revenue, or services delivered. This is a fairer way to distribute shared costs when directly assigning them isn’t possible.

Different types of service businesses also need to allocate costs in ways that make sense for their work.

• Agencies may break costs down by campaign or client, including creative work, account management, and media spend.
• Consultancies usually track expenses by project phase, like discovery, implementation, and review, to catch scope creep early.
• Law firms would assign costs to each case, covering research, filings, and court appearances.
• Freelance teams generally split costs by deliverable, especially when subcontractors are involved.

By matching your service cost allocation strategy to how your business actually works, your job costing process will be more accurate – and the insights you gain will help you make smarter pricing decisions.

Technology solutions for automated job costing

By using a technology solution, you’ll improve your costing so you can refine your service pricing signals, helping you keep projects on budget and improving your project margins.

Look for software that:

• Syncs with your accounting software.
• Integrates time tracking and expense management in a single platform
• Features customisable reporting dashboards to give you insights into your costs when you need them
• Alerts you to budget thresholds or overruns

Xero Projects for example, makes it much easier to track time, costs, and profitability – all within your Xero accounting system.

Xero Projects helps you track project profitability in real time, spot risks early, and adapt faster – all without drowning in spreadsheets.

FAQs on job costing fundamentals for service businesses

When it comes to job costing, many professional services businesses share the same questions about setup, accuracy, and compliance. Here are clear answers to some of the most common ones.

Why is job costing important for service businesses?

It gives visibility into whether projects are generating the profit margins you expect.

Do I need special software for job costing?

Not always. Small businesses may start with spreadsheets, but software makes tracking and reporting much easier as you grow.

How detailed should job costing be?

It depends on your business. Some track only major expense categories, while others break costs down to very specific tasks or resources.

Is job costing only for large projects?

No. Even small, short-term jobs benefit from job costing because it highlights true profitability.

What’s the biggest mistake businesses make with job costing?

Failing to allocate overhead costs, which can make projects look more profitable than they actually are.