Job costing: track costs and boost profits in construction

Published Thursday 29 January 2026

Table of contents

• What is job costing?
• Why is job costing important for construction?
• Job costing versus process costing
• Breaking down job costing
• Job costing software
• Get the security of accurate job costing
• FAQs on job costing

Key takeaways

• Break down each construction project into three specific cost categories (labour, materials, and overheads) to track expenses accurately and identify which jobs are actually profitable for your business.
• Add contingency margins to your estimates for unexpected complications and material wastage, as government guidance recommends allocating median risk values to your project's anticipated final cost.
• Use job costing software to automate calculations and track actual costs against estimates in real time, which eliminates manual errors and helps prevent cost overruns that damage profit margins.
• Invest 3-5% of a project's total cost in detailed upfront analysis before construction begins, including verifying drawings and assessing the worksite to create more competitive and accurate quotes.

What is job costing?

Job costing is an accounting method that helps you track the costs and revenue for individual projects. Instead of looking at your business finances as a whole, you can see exactly how profitable each job is.

It works by assigning all related costs to a specific job. These costs are typically broken down into three main categories: labour, materials, and overheads.

Why is job costing important for construction?

In construction, every project is different. Job costing gives you the clarity to price jobs accurately and protect your profit margins. By tracking costs for each project, you can see which jobs are making you money and which are not.

This detailed view helps you make smarter decisions, create more competitive quotes, and keep projects on budget. It gives you the confidence that your pricing supports a healthy, sustainable business.

Job costing versus process costing

Construction projects use two main pricing methods:

• Process costing: Uses average costs from past projects to estimate new work
• Job costing: Calculates specific costs for labour, materials, and overheads for each individual project

Process costing works best for uniform manufacturing processes.

Job costing is more precise because it involves fewer assumptions and gives you greater certainty. It’s particularly valuable in construction, where every project has unique variables. You can read more in the Xero construction accounting guide.

The trade-off is that job costing takes more time and effort upfront. UK government guidance suggests an investment of 3–5% of a project’s total cost is typically needed before construction even begins.

Breaking down job costing

Accurate job costing requires detailed project analysis to deliver precise estimates.

You need to analyse the project thoroughly, verify drawings, and assess the worksite before breaking costs into three main categories:

1. Labour

Labour costs include both direct employees and subcontractors.

For direct employees:

• Calculate daily or hourly rates
• Multiply by estimated project duration

For subcontractors:

• Confirm availability before committing to timelines
• Get their estimates but verify with your own calculations
• Add contingency for unexpected complications; official guidance recommends that the median value of risk should be allocated to the project’s anticipated final cost.

2. Materials

Material costs fall into three categories:

• Direct materials: Wood, steel, electrical wiring
• Indirect materials: Fasteners, caulking, consumables
• Equipment hire: Tools and machinery rental

Add a margin to cover delivery costs and material wastage.

3. Overheads

Overheads cover business expenses that don’t directly relate to specific jobs.

This includes equipment depreciation, office rent, and administration costs. Since these costs are indirect, you’ll estimate rather than calculate exact amounts.

Most builders add a percentage to each job to cover overheads. Work with an accountant to determine the right percentage for your business.

If you’re curious about the difference between hard and soft costs in construction, you can read the Xero guide to hard vs soft costs in construction.

Job costing software

Job costing software automates calculations and eliminates manual spreadsheet work.

This reduces errors and saves significant time compared to traditional manual methods.

Job costing software helps you:

• Price jobs accurately: Calculate specific costs for greater confidence in estimates
• Avoid customer disputes: Provide accurate upfront quotes to prevent billing surprises, which helps build the ‘mutual trust and cooperation’ that standard industry contracts like NEC4 emphasise.
• Speed up estimates: Generate quotes quickly by inputting numbers and letting software handle calculations
• Maintain profit margins: Add markup and calculate margins to stay competitive yet profitable
• Monitor project budgets: Track actual costs against estimates in real time to prevent cost overruns

You can download a free construction quote template.

Get the security of accurate job costing

Job costing software helps you avoid cost overruns by providing accurate upfront estimates and real-time budget tracking.

This reduces risky assumptions and keeps you in control of project profitability.

If you’re a Xero customer, you can:

• track costs with job costing software
• check our Xero App Store to find helpful job costing and general construction apps
• find an accountant or bookkeeper to help you get set up

FAQs on job costing

Here are answers to some common questions about job costing.

How do you calculate job cost?

To get the total cost for a job, you add together all the direct and indirect costs associated with it. The basic formula is: Total Direct Labour Costs + Total Direct Material Costs + Overhead Costs = Total Job Cost.

What is a simple job costing example?

Imagine a small building project. You calculate £1,000 in labour and £2,500 in materials. You then apply a pre-set overhead rate, say 15% of the labour and material cost (£3,500 x 0.15 = £525). The total job cost would be £1,000 + £2,500 + £525 = £4,025.

Can software help with job costing?

Yes, software makes job costing much simpler. It can automate calculations, track time and materials against a budget in real time, and generate reports to show you how profitable each job is. This saves time and reduces the chance of manual errors.