We Budgeted 90 Labor Hours. The Job Took 104. Here’s What Happened to the Profit.

One of the easiest mistakes to make in a contracting business is looking at the money left over after a job and deciding whether the job was simply “good” or “bad.”

A profitable job can still expose problems in your estimate.

And a job that goes over budget in one category can still outperform your overall profit goal.

I recently completed a project in my own contracting business that illustrates this perfectly.

The project sold for $7,468. Before it started, I budgeted approximately 90 man-hours of labor.

The actual result?

About 104 man-hours.

That’s roughly 16% more labor than I estimated.

But when I closed out the job and compared my estimated costs with the actual costs, something interesting happened:

We actually made slightly more profit than I originally projected.

Here’s exactly how the numbers worked.

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A Little Context About My Contracting Business

The Common Contractor is intended for contractors across the home-service industry—not one particular trade.

But the numbers in this article aren’t hypothetical.

They come from an actual project completed by my own company. My firsthand contracting experience is primarily in landscape construction and hardscape work, where we manage crews, materials, equipment, production rates, estimating and job costing much like contractors in many other trades do.

This particular project happened to involve a small paver patio and leveling wall.

But whether you install pavers, pour concrete, paint houses, remodel kitchens, install plumbing, perform electrical work or run another crew-based home-service business, the financial question is essentially the same:

What did I think the job would cost—and what did it actually cost?

That’s what we’re analyzing here.

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The Original Estimate

The customer price for the project was:

$7,468

Before the project started, I established budgets for the major direct costs.

Budget Item	Budgeted
Materials & Fuel	$2,703
Labor	$1,995
Total Direct Job Cost	$4,698
Expected Job Profit	$2,770
Expected Job Margin	37.1%

The labor budget represented approximately 90 man-hours.

The material/fuel budget included approximately a 15% markup on the expected material costs, along with a $100 fuel allowance.

That gave me two different ways to evaluate the job after completion:

Did we hit the production target?

And:

Did we hit the financial target?

As you’ll see, those two questions didn’t have the same answer.

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I Budget Labor From Clock-In to Clock-Out

There’s an important detail about the way I estimate labor.

I don’t count only the hours employees are physically producing work at the customer’s property.

I count their time from clock-in to clock-out on the days they’re assigned to that project.

Suppose a crew member clocks in at our shop at 7:00 AM, loads up, travels to the project and begins working at 8:00 AM.

That first hour wasn’t free.

The company paid for it.

For my purposes, I want the job’s labor budget to absorb that time.

This also helps protect against one of the most dangerous assumptions a small contractor can make:

An employee’s hourly wage is not the same thing as the employee’s hourly cost to the business.

Payroll taxes, workers’ compensation and other labor burden increase the true cost of an employee. Then nonproductive paid time can increase the effective cost of each hour of actual production even further.

That’s why I separate the concepts of true employee cost and effective labor rate when evaluating labor.

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I Don’t Give My Foreman a Dollar Labor Budget

I know the financial labor target.

My foreman doesn’t need it.

For this project, I knew there was approximately $1,995 of labor built into my job-cost budget.

But telling a crew leader, “You have $1,995 of labor,” isn’t necessarily the most useful way to manage production in the field.

Instead, I translated that financial budget into a production goal.

The original plan looked roughly like this:

Day	Planned Crew
Tuesday	3 employees
Wednesday	2 employees
Thursday	3 employees
Friday	2 employees
Production Goal	Complete by Friday

I also gave the foreman the maximum material budget for the project.

We’re currently experimenting with a performance-bonus system in which meeting job goals can contribute toward a foreman’s bonus.

So there are essentially two versions of the same job budget.

The company’s version

I care about:

• Labor dollars
• Material dollars
• Total job cost
• Gross profit
• Gross margin

The foreman’s version

He cares about:

• How many employees are available
• How many days he has
• When the project needs to be completed
• How much he can spend on materials
• Whether the finished work meets our standards

I think that’s an important distinction.

The estimator needs financial targets. The field needs production targets.

Ultimately, however, they need to describe the same job.

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Then We Completed the Job

Once the work was finished, I replaced my estimates with the actual numbers.

Here’s what happened:

	Budgeted	Actual	Variance
Revenue	$7,468	$7,468	—
Materials & Fuel	$2,703	$2,284	$419 favorable
Labor	$1,995	$2,299	$304 unfavorable
Total Direct Cost	$4,698	$4,583	$115 favorable
Job Profit	$2,770	$2,885	$115 favorable
Job Margin	37.1%	38.6%	+1.5 points

Want to do this with one of your own completed jobs? Enter your estimated and actual costs into our free Estimate vs Actual Job Cost Calculator to see exactly where you gained or lost money.

At first glance, this looks like a great result.

We expected $2,770 in job profit.

We produced approximately $2,885.

But that’s not the whole story.

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Labor Missed the Target

This is exactly why I don’t want to evaluate jobs based only on whether they made money.

My labor estimate was approximately:

90 man-hours

Actual labor was approximately:

104 man-hours

That’s roughly 14 additional man-hours, or about 15.6% more labor hours than budgeted.

The dollars tell essentially the same story:

Budgeted labor: $1,995
Actual labor: $2,299
Labor overrun: $304

Actual labor cost was about 15.2% over budget.

So if I were evaluating the accuracy of my labor estimate alone:

We missed.

That’s useful information.

The fact that the overall project made money shouldn’t cause me to ignore it.

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But Materials Beat the Budget

This is where the result gets more interesting.

We had allowed:

$2,703

for materials and fuel.

Actual spending was:

$2,284

That’s a $419 favorable variance.

Now put the two together:

+$419 favorable materials/fuel variance

− $304 unfavorable labor variance

= $115 favorable total job-cost variance

That’s why a project that used approximately 16% more labor hours than estimated still beat its overall profit target.

The labor performance missed.

The total job performance didn’t.

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This Is One Reason I Don’t Sell Materials at Cost

The material portion deserves some attention because it’s easy to look at material markup as nothing more than extra profit.

I don’t think that’s a very useful way to think about it.

An estimate is created before reality happens.

Once work begins, reality gets a vote.

Materials may cost more than expected. You may need additional quantities. Something may get damaged. There can be waste, additional trips, small supplies or delivery expenses.

Or another part of the job—such as labor—may simply take longer than expected.

On this project, the margin built into our material pricing helped absorb a labor overrun.

That’s not the same thing as saying:

“Our labor estimate was fine because the job still made money.”

It wasn’t.

The labor estimate missed.

But the job had enough margin elsewhere to absorb the miss and still achieve the company’s overall financial goal.

That’s exactly why I want to see the individual cost categories and the final job result.

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A Profitable Job Can Still Reveal a Bad Assumption

This may be the most important lesson from this project.

Ask two questions separately.

Did we meet the labor-production target?

No.

We budgeted approximately 90 man-hours and used approximately 104.

Did we meet the overall financial target?

Yes.

We expected approximately $2,770 in job profit and finished around $2,885.

If I looked only at the $2,885, I could conclude:

Everything went according to plan.

It didn’t.

If I looked only at the labor overrun, I could conclude:

This was a bad job.

It wasn’t.

The value comes from understanding why the final result was different from the estimate.

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Job Costing Isn’t Just About Finding Your Profit

A contractor can calculate profit after a project fairly easily.

Revenue minus the project’s costs tells you what remained.

Our free Contractor Profit & Margin Calculator can do exactly that.

But I think the more valuable question is:

Why did I make that amount?

That’s where job costing becomes useful.

Before starting a project, I want to know what I expect to spend on labor, materials, equipment, subcontractors and other direct costs.

Our Contractor Job Cost Calculator is built around that same idea.

Then after the project, I want the actual numbers.

The difference between those two sets of numbers is where the education is.

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One Job Doesn’t Mean I Should Immediately Change My Estimates

There’s another mistake I want to avoid.

We estimated approximately 90 labor hours.

The project took approximately 104.

Does that mean I’m immediately going to estimate the next similar project at 104 hours?

Not necessarily.

One project isn’t enough information.

Maybe something specific slowed this project down.

Maybe 90 hours was too aggressive.

Maybe the crew should have completed it faster.

Maybe the scope had a detail I underestimated.

That’s where repetition becomes valuable.

If I estimate several similar jobs at 90 hours and they repeatedly take 100–105, I have a pretty compelling answer:

My estimating assumption is wrong.

At that point, continuing to estimate 90 hours isn’t being aggressive.

It’s ignoring my own data.

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The Numbers From Completed Jobs Should Improve Future Estimates

This is the system I’m trying to use in my own contracting business:

Estimate → Perform → Measure → Learn → Estimate Better

Before the job, establish the expected:

• Labor
• Materials
• Equipment
• Subcontractors
• Other direct costs
• Selling price
• Gross profit
• Gross margin

Then do the work.

Afterward, replace the assumptions with reality.

Compare the two.

Our Estimate vs Actual Job Cost Calculator was built specifically for this step.

The purpose isn’t to prove that the estimator was right.

It’s to make the next estimate better.

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The Bottom Line

This was a $7,468 contracting project.

We expected approximately:

$4,698 in direct job costs

and:

$2,770 in job profit before company overhead.

Instead, the project produced approximately:

$4,583 in direct job costs

and:

$2,885 in job profit before company overhead.

That’s approximately a 38.6% job-level gross margin.

So we beat the overall financial target by $115.

But underneath that good result was something I absolutely want to know:

Labor took approximately 16% more hours than expected.

Materials happened to outperform the budget enough to absorb that overrun.

That’s why I don’t want to simply know whether a job was profitable.

I want to know where the profit came from, where the estimate missed and what that information should change about the next job I price.

That’s the real value of job costing.