Compare cost spent to percent complete
If a job is half done and 70 percent of the budgeted cost is already spent, you are heading for a loss. The comparison is the simplest early warning there is. It works for a kitchen remodel, a landscaping contract or a design project.
Update it weekly. A job that looks fine on day ten can turn on day twenty.
Tag every cost to a job
Materials, subcontractors, labor, equipment rental, permits and fuel should all carry a job tag when you record them. Costs without a tag fall into overhead, and the job looks better than it is.
Do the tagging when the receipt arrives. Doing it at month end means guessing.
Watch labor hours, not just dollars
Labor is often where jobs slip. Compare hours worked to hours estimated at each stage. If the first phase took 40 percent more hours than planned, the later phases may follow the same pattern.
Record the hours on the day, even for yourself. Owner time that is not counted makes the margin look better than it is.
Track change orders in writing
Work outside the original scope is a cost the contract does not cover unless you bill it. Record each change, get approval in writing and add it to the contract total. Unbilled changes are a common reason for a loss.
If a client resists paying for a change, find out before the work, not after.
A worked example
A $20,000 job budgets $12,000 of cost for $8,000 of gross profit. At the halfway point you have spent $8,400 on materials, labor and a subcontractor. That is 70 percent of budget at 50 percent complete. If the pattern holds, the job will cost about $16,800 and the profit shrinks to $3,200.
The $3,200 is an estimate, but it is enough to call the client about a change order, or to rework the second half. Waiting for the final invoice would have left only the loss.
Keep the paperwork
Keep the contract, change orders, invoices from suppliers and subcontractors, and time records for each job. If there is a dispute, a clean file for the job protects you. Ask an attorney about anything that could become one.
These records also make the next quote better. After ten jobs, you know your real costs per hour and per material, not the ones you hoped for.
What to do when the numbers turn
Options include a change order, a conversation with the client, renegotiating a supplier price, rescheduling labor or stopping a phase until scope is agreed. Which is best depends on the contract, so read it and ask an attorney about anything serious.
A sheet that holds each job's costs and invoices and flags when costs catch up with the contract makes the warning visible. The Contractor Job Costing Sheet on this site does this. Your CPA can advise how to treat unfinished jobs for tax.
Common questions
What margin should a job earn?
It depends on the trade and your overhead. Work out your own break-even, then add the profit you need.
Should I track small jobs?
Yes, at least at a summary level. Small jobs add up.
How do I include overhead?
Many contractors add an overhead rate to labor or to total cost. Your CPA can help you choose a method.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.