Construction job costing: Track costs and boost profits for your small business

Published Wednesday 5 November 2025

Table of contents

• What is construction job costing?
• Benefits of construction job costing
• Job costing vs process costing
• Breaking down job costing
• Construction job costing examples
• Job costing software
• Streamline your construction job-costing with Xero
• Frequently asked questions about construction job costing

Key takeaways

• Implement detailed job costing by tracking the exact costs of labor, materials, and overhead for each specific project rather than using broad averages, which provides precise project budgets and protects profit margins.

• Break down every construction project into three essential cost categories: direct labor (employees and subcontractors), materials (both direct materials like lumber and indirect supplies like fasteners), and overhead expenses (equipment depreciation, office costs, and insurance).

• Utilize job costing software to eliminate manual spreadsheet work and generate accurate estimates while tracking real-time costs as projects progress, helping you avoid cost overruns and maintain healthy profit margins.

• Apply job costing principles to any construction project size by calculating specific costs rather than using process costing averages, since every construction job has unique requirements that demand individualized cost analysis.

What is construction job costing?

Construction job costing is a way to track the exact costs of a specific project. Instead of using broad averages, you calculate the actual expenses for labor, materials, and overhead for each job. This gives you a clear picture of how much a project really costs. It helps you understand your profitability.

Benefits of construction job costing

Adopting job costing helps you run a more profitable and predictable construction business. It helps you make better decisions and stay in control of your finances.

With accurate job costing, you can:

• Create more accurate estimates: Use detailed data, not guesswork, to bid on jobs with confidence
• Improve profitability: Focus on the jobs that make the most money
• Manage cash flow better: Track expenses in real time to prevent cost overruns and keep projects on budget
• Strengthen client trust: Provide transparent and accurate pricing to reduce disputes

Job costing vs process costing

Job costing and process costing are the two main approaches for pricing construction projects. The main differences are:

• Job costing: You analyze each project individually and calculate specific labor, materials, and overhead costs for that job
• Process costing: You use average costs from similar past projects and apply them to new work.

Job costing works better for construction because every project has unique requirements. Process costing suits manufacturing where products are identical.

Job costing is especially useful in construction, where every job is different. Some agreements with de minimis construction activities are not classified as construction contracts for tax purposes. While job costing takes more effort, it gives you more accurate results.

Breaking down job costing

Breaking down job costing involves separating your project into three main cost categories. Accurate job costing requires detailed project analysis – reviewing drawings, visiting the worksite, and calculating specific costs for each component.

You can break job costing into 3 essential cost categories:

1. Labor

Labor costs include both direct employees and subcontractors. Calculate these costs by:

• Direct employees: Use daily or hourly rates and multiply by estimated project time
• Subcontractors: Use their rates to calculate estimated costs
• Contingency planning: Add buffer time for unexpected tasks
• Availability check: Confirm schedules to avoid project delays

2. Materials

Material costs include direct and indirect materials, plus equipment. These costs include:

• Direct materials: Primary project materials such as wood, steel, and electrical wiring
• Indirect materials: Consumable supplies such as fasteners, caulking, and adhesives
• Equipment rental: Tools and machinery for the project
• Additional costs: Margins for delivery, wastage, and material handling

3. Overheads

are business expenses not tied to specific jobs. These typically include:

• : Wear and tear on tools and machinery
• Office expenses: Rent, utilities, and administrative costs
• Insurance and licensing: Business insurance and professional licenses
• General business costs: Accounting, marketing, and other operational expenses

You can add overhead as a percentage of total job costs. Ask your accountant to help you find the right percentage for your business.

Construction job costing examples

You can use job costing for any construction project, big or small. The principles are the same for general contractors and specialized tradespeople.

Let's look at 2 common job costing scenarios:

1. A general contractor building a custom home

A contractor tracks all direct costs for the home build. This includes wages for the carpentry crew and invoices from subcontractors like electricians and plumbers. They also track the cost of all materials, from lumber to light fixtures. The contractor allocates a portion of overhead costs, such as office rent and insurance, to the project. This gives a true sense of the total cost and final profit margin.

2. A residential painter quoting a job

A painter calculates the cost for a specific house-painting job. They measure the square footage to determine the amount of paint and primer needed. They estimate the hours of labor for their crew to prep and paint the surfaces. The painter adds costs for supplies like tape, drop cloths, and equipment rental. They also include a percentage for overhead to arrive at a profitable quote.

Job costing software

Job costing software helps you calculate and track project costs. It eliminates manual spreadsheet work and reduces errors. You can generate accurate estimates and track real-time costs as projects progress.

Job costing software helps you do the following:

• Price jobs accurately: Calculate specific costs for each project
• Avoid customer conflicts: Provide accurate upfront quotes
• Save time on estimates: Generate quotes quickly
• Track profit margins: Add markup and calculate margins
• Monitor project costs: Compare actual expenses to estimates in real time

Download your free construction estimate template.

Streamline your construction job-costing with Xero

Accurate job costing is essential for construction profitability – and software makes it achievable. Job costing software eliminates guesswork by providing precise upfront estimates and real-time cost tracking throughout your projects.

This helps you avoid cost overruns, maintain healthy profit margins, and build stronger customer relationships through accurate pricing.

With Xero, you can track project costs. You can also connect to helpful construction apps in the Xero App Store and find an accountant to help you get set up. Take the next step toward more profitable projects by getting one month free. Xero makes it easy to run your business, not your books.

FAQs on construction job costing

Here are common questions and answers you might have about construction job costing.

What is the formula for job costing?

The basic formula for job costing is: total job cost = direct materials + direct labor + applied overhead. You calculate the actual cost of materials and labor for the job, then add a predetermined portion of your business's overhead expenses. For tax purposes, project completion is often defined by incurring at least 95% of the total allocable contract costs.

How do you calculate labor cost for a construction job?

To calculate labor cost, multiply the number of hours each employee works on the job by their hourly rate. This rate should include wages, payroll taxes, insurance, and benefits. For subcontractors, use their total invoice amount as the labor cost.

What's the difference between job costing and project accounting?

Job costing focuses on tracking the costs of individual jobs to determine profitability. Project accounting is broader. It includes all financial aspects of a project, such as billing, revenue recognition, and overall financial health, in addition to cost tracking. This can include navigating tax rules like the small construction contract exception for businesses under a certain revenue threshold.