Should I track material costs separately from labor costs?
Yes, separating materials from labor in your books is worth the extra effort. Combined tracking might seem simpler, but it hides the information you need to understand your margins and price jobs correctly.
When materials and labor are lumped together, you can’t diagnose problems. A job that ran $2,000 over budget could mean you underbid materials, underestimated labor hours, or both. Without separation, you’re guessing at the cause. With separation, you know exactly which component missed and by how much.
This matters most for pricing future work. If materials consistently come in at 30% of job costs and labor at 45%, you can build estimates with those percentages in mind. If everything is combined, you’re working with a single blended number that tells you nothing about where money actually goes. Your bids become educated guesses instead of calculations based on real data.
For contractors and skilled trades, separation is essential. A plumber bidding a bathroom remodel needs to know whether fixtures cost more than expected or whether the install took twice as long. An electrician can’t improve estimates without understanding which component keeps running over. Job costing without this breakdown is like checking your bank balance without looking at transactions.
Restaurants track this as a matter of survival. Food cost percentage and labor cost percentage are the two numbers that determine whether the business makes money. Combined, you’d see total kitchen costs but have no idea whether to negotiate with suppliers or adjust staffing levels. These are completely different problems requiring different solutions.
Service businesses with minimal materials still benefit from separation. Even if materials are only 10% of total job costs, that’s money you should be recovering in your pricing. Knowing the actual number beats assuming it’s small enough to ignore.
The setup is straightforward. Create separate expense accounts or sub-categories for materials and labor. For project-based work, assign each expense to the right category and the right job. Your reports will then show exactly how each cost type performs across projects and over time.
If you haven’t been tracking this way, start now rather than trying to recategorize years of old transactions. A Richmond bookkeeper who understands your industry can configure this correctly so the reports actually tell you something useful.
Going forward, you’ll see which jobs were profitable and why. That visibility changes how you bid, how you staff, and how you choose suppliers.
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More Questions
What's the best way to track costs for each project?
The best approach is capturing every cost as it happens and assigning it to the right project in your accounting system. This means tracking labor hours, materials, subcontractor bills, and direct expenses separately for each job so you know your actual profit margin on every project.
Read answerWhat financial reports do contractors need to review regularly?
Job cost reports, profit and loss statements, cash flow projections, and accounts receivable aging are the essential reports. Job costing should be reviewed weekly on active projects while others can follow monthly rhythms.
Read answerHow do I track fees from Shopify, Amazon, and PayPal?
Record gross sales and fees separately instead of just booking net deposits. Each platform provides settlement reports that break down exactly what they charged you, which you need for accurate margins and proper tax deductions.
Read answerWhat documents do I need to provide for catch-up bookkeeping?
Bank statements are the foundation. Credit card statements come next. Receipts, invoices, and payroll records help fill in the details, but you don't need perfect documentation to get started.
Read answerWhat's the Best Way to Track Inventory for a Restaurant?
Count weekly, track waste daily, and compare what you should have used against what you actually used. The gap between those two numbers tells you where your food cost is leaking.
Read answerWhen should I switch from doing my own books to hiring a bookkeeper?
There's no universal trigger point. The signs are usually falling behind on reconciliation, making recurring errors, or spending hours each month on something that pulls you away from actually running your business.
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