11.3 Job Costing and Financial Management

Job Costing Basics

Job costing is the discipline of accumulating every actual cost against the specific job that incurred it, using the same cost codes the estimate used — demolition labor, framing lumber, roofing subcontract, and so on. The payoff is the estimate-versus-actual comparison: if framing labor was estimated at 80 hours and consumed 110, that variance is information. It tells you the next estimate needs more framing hours, and it tells you now — while there is still time to recover — that this job is bleeding. Companies that look only at the checkbook balance at month end cannot tell which job made the money and which one ate it.

Job costing must capture labor burden (payroll taxes, workers' compensation, and benefits on top of wages), material invoices, equipment charges, subcontractor payments, and a fair allocation of overhead. The general ledger tells you whether the company is profitable; the job cost ledger tells you why.

A worked burden example makes the point concrete: a carpenter paid $25 per hour in base wages may carry $7 per hour of payroll taxes, workers' compensation, and benefits, so the true labor cost is $32 per hour. Job-cost reports that charge only $25 against the job understate labor by more than 20 percent and make unprofitable work look healthy.

Retainage

Retainage (also called retention) is the practice of withholding a percentage of each progress payment — commonly 5 to 10 percent — until the work is complete. It gives the party paying leverage to ensure punch-list completion and defect correction. On a $50,000 contract with 10 percent retention, $5,000 of earned money sits in the owner's hands until the end; a subcontractor working on thin margins must plan for that hole in cash flow.

Maryland law limits the practice on covered private projects: under Real Property Article § 9-304, where 100 percent payment and performance security is furnished, retention may not exceed 5 percent of the contract price or of any payment, and a contractor may not withhold from a subcontractor a higher retention percentage than the owner withheld from the contractor. Owners on covered private projects must release retainage within 90 days after substantial completion, and public contracts carry parallel 5 percent caps in the State Finance and Procurement Article. Most MHIC-scale residential jobs fall outside those thresholds, so retainage there is purely contractual — but the concept and its cash-flow math are standard business-law exam material.

Cash Flow, Progress Billing, and the Front-Loading Trap

Construction businesses rarely die from lack of profit on paper; they die from lack of cash. Progress billing ties collections to work actually completed — typically a schedule of payments in the contract such as deposit, rough-in complete, drywall complete, and final. Maryland's Home Improvement Law protects homeowners here: a home improvement contract may not require a deposit exceeding one-third of the contract price, and payments should track the value of work actually performed.

Front-loading means deliberately pricing or billing early line items above their true cost to pull cash forward — collecting 60 percent of the contract by the time 40 percent of the value is installed. It is tempting and dangerous: it leaves no money to finish the job if anything goes wrong, it looks like fraud when a dispute reaches the Commission, and it violates the spirit of the deposit rule. Honest progress billing — collect as earned, no faster — is both the ethical and the exam-correct answer.

The Two Financial Statements Every Contractor Must Read

The income statement (profit and loss statement) covers a period — a month, quarter, or year. It starts with revenue, subtracts direct costs to get gross profit, and subtracts overhead to get net income. It answers: did we make money, and how?

Worked example — one quarter:

The balance sheet is a snapshot at a point in time, built on one equation: Assets = Liabilities + Owner's Equity. Assets are what the business owns (cash, receivables, equipment); liabilities are what it owes (payables, loans, accrued taxes); equity — also called net worth — is the residual belonging to the owners. The quarter-end counterpart to the example above: cash $20,000, receivables $30,000, equipment $40,000 (assets of $90,000); payables $25,000 and a loan balance of $35,000 (liabilities of $60,000); leaving net worth of $30,000 — a solvent, positive-equity company.

Why MHIC Reviews Solvency

As part of contractor licensing, MHIC reviews an applicant's financial condition — assets, liabilities, and the resulting net worth — because the Commission's mission is protecting homeowners, and an insolvent contractor is a homeowner hazard: deposits get spent on old debts, jobs get abandoned mid-project, and judgments go unpaid. A balance sheet showing liabilities exceeding assets (negative net worth) signals exactly that risk, and applicants who cannot demonstrate solvency may be required to post a surety bond before a license issues. The exam takeaway connects accounting to regulation: net worth from the balance sheet is the solvency measure, and solvency is a licensing requirement, not just good practice.