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Should I include overhead in my job cost?

This question (in its many flavors) is one we encounter quite frequently at Knowify. We know from experience that accountants can have pretty strong opinions about this question, but we’re also not afraid to share ours. In short: No, you should not. Here’s why:

Including overhead in job costs only tells you about the past. Focusing on project-based profitability helps you plan for your future.

If you include overhead in your job cost…

By including overhead in your job P&Ls, you will be generating margin and P&L numbers that are very specific to that period in time for your business. If you have a low workload—perhaps the boss was on vacation for a while, or an estimator quit and was hard to replace—, then overhead will be spread over comparatively fewer jobs, and those jobs will appear to be less profitable. Did your estimator do a bad job? Did your crews work more slowly than usual, or were there construction delays? Probably not—the lower-than-expected margin would just be a product of fewer jobs. In our view, that picture is misleading. If your goal is to have your estimators get better over time, understand which workers or crews are your most valuable ones, and plan for the future, including overhead in your job cost isn’t likely to help.

Screenshot of a WIP report in spreadsheet format generated with Knowify | Reporting | Knowify

Note: You can generate this detailed work-in-progress report with Knowify in the Contract Jobs Reports section.

If you exclude overhead from your job cost…

We recognize that you give something up by excluding overhead: you may be misled into thinking that certain very low margin jobs are profitable when, if overhead were taken into account (let alone opportunity cost), they most likely aren’t. But that’s OK: any good accountant can help you set an appropriate margin target for your jobs, and you, as an experienced contractor in your industry, should have a good sense of the margin levels you can earn in your area right now and over the long-run. The more challenging question is: “If I had twice as many jobs, how much money would I be making?” The answer is NOT twice your current profit; that calculation would ignore fixed cost leverage as you grow. For example, you will probably not need a second bookkeeper as you grow, nor will you need (unless you grow a lot!) a much bigger office. You may however need additional superintendents or project managers, estimators, trucks, etc.—which is why we often work with contractors using Knowify to make sure that those costs are captured in their job costs. At the end of the day, it comes down to this: if you know what your project based P&L is, you’ll be able to calculate how much money you’ll be making a year or two years from now as you grow. Do your projections indicate significant profit? Maybe you can plan to open another office, or hire an estimator/PM who will focus on a new line of business. Your financial data can feed your strategy, if done right.

The Knowify team is well versed in job costing, and would be happy to help you work toward setting up your Knowify in a way to help you get meaningful insights out of your data. For those of you wanting something more in depth, we work with many top-shelf construction-oriented bookkeepers and business consultants who would be happy to talk to you about the right way to approach job costing, and hopefully set you on a long-term path toward success!