THE 7 WEEK CFO SERIES ON CONSTRUCTION

WEEK TWO: Is Your Job Costing Lying to You? How to Find the Profit Killers on Every Project

Most Canadian contractors know their bid margin. Few track their actual margin job by job. The difference will surprise, and probably frustrate, you.

Profit is made or lost at the project level, not the company level. Until you can see the margin on every job in progress, you are managing your business with the lights off.

KEY OBSERVATIONS FROM CANADIAN CONSTRUCTION PRACTICE 

THE ESTIMATED VS. ACTUAL GAP

You tendered at one margin. You delivered at a different one. Here’s why.

Many Canadian contractors know their bid margin going in. Far fewer know their actual margin coming out. The gap between those two figures, and the inability to see it until the project is closed, is one of the most costly issues in the industry.

Estimated vs. actual cost variance is an important metric to review on a regular basis, ideally every week, not at project close. By the time you are closing out a contract, the financial outcome is already determined. Reviewed consistently throughout the project, cost variance tells you which jobs are drifting from budget and gives you time to respond.

From the Field

We have worked with Canadian construction businesses where the gap between estimated and realised margin was significant enough to turn a seemingly profitable project into a net loss, not because the work was poorly executed, but because the cost data arrived too late to act on. Early visibility changes the outcome.

WHERE THE MARGIN GOES

The cost leaks that compress profitability before you see them

These are the categories that most consistently erode margin on Canadian construction projects, often without appearing clearly on any single report:

• Equipment idle time: equipment and machinery sitting on site between project phases incurs cost regardless of utilisation. Because few contractors allocate idle time to a specific job cost code, it is absorbed into general overhead rather than assigned to the project where it was incurred. 

• Rework: various construction industry studies have estimated that rework may account for several percentage points of total project cost. In Canadian ICI (Industrial, Commercial, Institutional) construction, rework is common, but rarely tracked back to the originating job or phase in a way that informs future estimating. 

• Change order lag: change orders approved verbally but not formalised and invoiced for days or weeks afterwards, or never invoiced at all, are one of the most consistent sources of margin loss on Canadian construction projects. The work is performed. The value is not recovered. 

• Unallocated labour: time spent on site supervision, deficiency walk-throughs, warranty callbacks, and project coordination that is not coded to a specific job becomes general overhead and inflates your overhead rate across the business. 

• Scope creep without a formal change directive: performing additional work without issuing a written change order or change directive under the contract is, in practical terms, a contribution to the project owner at your own expense. 

No single one of these items may appear significant in isolation. Across a multi-million dollar project running over several months, the cumulative effect on realised margin can be substantial.

SETTING UP JOB COSTING IN CANADA

The right accounting structure for a Canadian construction business

Ideally your accounting system needs to capture job costs at the phase or cost-code level, not merely by project. A total project cost figure tells you what you spent. A cost-code breakdown tells you where you spent it and whether it aligns with your estimate.

A few examples of software commonly used by mid-market contractors:

• Jonas Construction Software: Canadian-built and commonly used in ICI, mechanical, and electrical trade contracting. Handles job costing, payroll, and project billing natively. 

• Procore / Buildertrend: field and project management platforms that feed cost data into your accounting system, eliminating manual re-entry. 

• QuickBooks Online: often workable for smaller or less complex operations, but it requires disciplined job-code setup and may become limiting as project volume, phases, and reporting complexity increase. 

Whichever platform you use, the governing principle is the same: labour, materials, subcontractors, equipment, and allocated overhead are coded to a specific project and phase before it posts to your books. If your bookkeeper is coding project-related expenses to a general overhead account for convenience, your job cost reports are not as reliable.

THE PRE-MORTEM REVIEW

A CFO technique for catching cost overruns before they become losses

A post-mortem review examines what went wrong after a project is complete. By then, the financial outcome cannot be changed. A pre-mortem review is conducted when the work is in progress, and there is still time to influence the result.

If actual costs are running ahead of the budget curve while the work is in progress, you are on a trajectory to deliver a lower margin than tendered, but you still have the opportunity to course-correct. Options at this stage include: tightening subcontractor supervision, formalizing and billing any outstanding change orders, revising your material procurement approach, or having a direct conversation with the project owner about scope alignment.

The value of the pre-mortem review is that it moves the decision point from ‘understanding what happened’ to ‘preventing what was about to happen.’

FROM THE FIELD

The contractors who consistently protect their margin are not necessarily the ones who estimate more accurately. They are the ones who review their cost position frequently enough to act on it while there is still a project to act on.

This week’s action steps

• Pull the cost report on your most recently completed project. Compare actual vs. estimated by cost code, not just by project total. What was the variance, and at which phase did it occur?

• List your last five change orders or change directives. Note the date of verbal or written approval and the date the invoice was issued. Are any still unbilled?

• Ask your bookkeeper or accountant how direct labour hours are being coded. Is every billable hour assigned to a job cost code, or is some time landing in general overhead?

WORK WITH MASTERY FRACTIONAL CFO SERVICES

Not sure where your margin is going?

Mastery CFO can help you review whether your job costing setup is giving you the visibility you need, and identify the first few areas worth looking at more closely.

→  Book your complimentary consultation at masterycfo.com

Next week:

From Gut Feel to Growth Plan, Building a 12-Month Forecast Your Canadian Bank Will Believe

A full pipeline is not a financial plan. Next week we show you how CFOs turn backlog data and project history into a forecast that drives business decisions and satisfies Canadian lenders.

Mastery CFO  │  Fractional CFO Services  │  masterycfo.com