Job Costing: What Is It and Do I Need it?
Of the many questions I’ve received from small business owners over the years, one of the most frequent runs along these lines: “My work involves a lot of projects for various clients. Is there any way to look at profit and loss on all these individual projects? And how do I figure out which software will let me do that?”
The feature described is generally called job costing or project-based accounting, and once you know the name for it, it’s pretty easy to figure out which software has it. But not all job costing is created equal, and it’s a little harder to learn how well the feature works unless you actually try it.
Here’s the lowdown on job costing, who needs it, and what programs are best suited to handle it.
What is job costing, anyway?
On a very basic level, job costing means you track your profit (or loss) on each individual job you perform. You’ll hear the term a lot in construction, but it’s a useful system in many service-based fields. It’s also called project-based accounting, project accounting, and job order costing.
To handle job costing, an accounting system must allow you to associate costs and revenue with individual projects, and to view total profit/loss figures for each project. You may also want the following features:
- The ability to easily rebill time and expenses to a client
- Project budgets, so you can track your progress as the project proceeds
Do I need it?
If you’re specifically looking for software with this capability, then obviously you know you need it; skip this bit and move on to the next section. But if you’re on the fence, here are a few factors to consider.
Do you rebill expenses and/or labor costs to your clients?
Job costing would be helpful for you. Being able to associate expenses with specific projects makes it easier to remember what costs you have—and haven’t—passed along, and helps you to remember which costs are associated with which project.Also, a lot of software with job costing capabilities makes rebilling hours and expenses very easy.
You may not need this feature. But check out the next question before deciding.
Do you do multiple projects for the same clients?
Job costing is a good idea. It will let you view your profit and loss on individual projects—and that can be really important for spotting patterns: figuring out what’s working for your business and what isn’t. You can break your time down into an hourly rate, look at where unexpected expenses got out of hand, figure out where you’re underestimating (assuming you give binding estimates), and get a better idea of what kinds of projects are the most profitable. You may think you already have a general idea of this—but you will probably find new, useful data if you can look at the actual numbers for each project. It can change the way you do business, increasing your profits and decreasing your stress level over time.
You may not need this feature. Nearly all good accounting software lets you track profit and loss by client, so you can view your most (and least) profitable projects just by breaking your reports down by client.
Do you bill the same hourly rate for all work? Does any of your work involve overhead, unbillable hours, or expenses that won’t be reimbursed?
- Yes/Yes, No/No, or No/Yes
You can definitely benefit from job costing. Figuring out the net hourly profit for each of your projects will be an indispensible tool. If you’ve never tried it before, you’re likely to be surprised by the results.
You probably don’t need job costing; you’re making the same amount for your time on every project, so there’s no reason to break it down (except, perhaps, curiosity). Remember, unbillable hours include tasks like interviewing potential new clients, compiling estimates, and the like. They also include any hours you work but can’t bill for because they exceed the fixed price the client has agreed to pay for the project.
Which programs offer the best job costing?
If you’ve read my other posts, you may have noticed I frequently say that one program isn’t necessarily the best for all companies. When it comes to an accounting package that supports job costing, however, there’s a clear frontrunner: QuickBooks Desktop for Windows (see our review), either Pro, Premier: Contractor, or Enterprise. If you have a Mac, QuickBooks Desktop for Mac will work, but if you need to integrate job costing with payroll, you could run into problems. If you want or need cloud-based software, there are options, but none of them offer you the options that QuickBooks’s locally installed software does.
What makes it so good? First, the organization, customizability, and flexibility of the system is far and away better than anything you’ll find in cloud-based software. Not only can you track profits by job; you can use class tracking and job-type tracking for even more reporting options. Say you’re in construction and you want to track your profit on bathroom versus kitchen remodels. No problem. Now you want to run a comparison of your profit on remodels versus original construction? Sure thing. A breakdown of P/L on every individual job? QuickBooks has you covered.
As with most things in QuickBooks, there’s a bit of an initial learning curve, but it pays off in the long run.
If you need (or simply prefer) cloud-based software, here are your top options:
- FreeAgent ($24/month) – Geared toward independent contractors, FreeAgent (see our review) has a particularly nice job costing feature. In addition to viewing project profit/loss figures, you can create budgets, set start and end dates, and enter the component tasks for each project. You can easily view all documentation (invoices, expense receipts, etc.) associated with each project.
- Xero ($9-70/month) – Xero (see our review) is great all-around accounting software, but while it supports basic job costing, the key word is basic. Job costing in Xero is accomplished by using tracking categories. That will give you a breakdown of profit/loss per project, but little more. If that’s all you need, I highly recommend Xero; what it lacks in dedicated job costing functionality, it makes up for in other areas.
- QuickBooks Plus ($40/month) – Like Xero, QuickBooks Plus (see our review) is at the upper end of cloud-based accounting software. It too uses tracking categories for job costing, though you also have the option to use sub-customers for the purpose. Since QuickBooks is more expensive and lacks a few of Xero’s invoicing features, I generally recommend Xero, but QBO remains a very good choice, and some companies will prefer the interface. Also, the integrated payroll beats Xero’s hands down, though you’ll pay more than twice as much for it.
And if you’re still not seeing anything you like, here’s a complete list of the other programs we’ve reviewed that offer job costing.
- Saasu ($9-$40) – Excellent integrated inventory management.
- Kashoo ($30/month) – Very basic software with a great iPad app.
- Sage One ($0-10/month) – A basic, low-cost program with a free option.
- KashFlow (£5-£15/month) – Primarily geared toward UK users.
- Clear Books (£7.40-£16.50/month, 2-year commitment required) – Primarily geared toward UK users.
- Twinfield (£52/month) – Complex software best suited for European businesses.
- LessAccounting ($20-$54/month) – Not recommended.
Have more questions? Ask us in comments!