Job Costing for Service & Repair Divisions: Accounting for Time & Materials vs. Fixed Bid
- Cost Construction Accounting
- 3 hours ago
- 6 min read
Nearly 60% of contractors don't accurately track job costs, leading to profit margins 15-25% lower than they should be. Unlike new construction, service work involves emergency calls, unpredictable repairs, and constantly changing conditions that make accurate job costing both critical and difficult.
Your billing model, Time & Materials (T&M) or Fixed Bid fundamentally changes how you track costs, recognize revenue, and protect your margins. Get this wrong, and profits leak away through untracked labor hours, missed material costs, and underestimated jobs.
Why Service Work Demands Better Job Costing
Service work presents unique challenges:
Unpredictable scope: You often don't know what you'll find until you open the equipment or wall
Emergency response: Rush jobs require premium labor rates and immediate material procurement at higher costs
Variable conditions: What takes two hours at one location might take four hours at another
Smaller job sizes: Higher administrative burden per dollar of revenue
The Three Cost Components You Must Track
Labor Costs: Direct technician time plus burden (payroll taxes, benefits, workers comp). Your actual labor cost is typically 25-40% above base wages. A technician earning $25/hour costs you $31-35/hour all-in.
Material Costs: Parts, supplies, and consumables used on the job, including waste and small tools.
Overhead Allocation: Indirect costs like shop rent, vehicles, equipment, and administrative staff. Most service contractors should allocate 40-80% of direct labor costs as overhead.
Time & Materials (T&M): Billing for Actual Costs
When T&M Makes Sense
T&M charges clients based on actual labor hours worked (at predetermined rates) plus materials (with markup). This shifts cost risk to the client.
Use T&M for:
Emergency repairs where scope is unknown
Diagnostic work requiring troubleshooting
Renovation projects with hidden conditions
Client-requested changes during the job
How T&M Accounting Works
Step 1 - Track labor in real-time: Technicians record time by job in 15-minute increments using mobile apps.
Step 2 - Document every material: Every part used is logged with quantities and costs.
Step 3 - Apply markups: Use predetermined rates (example: labor at $125/hour when technician costs $78/hour; materials at cost plus 20%).
Step 4 - Recognize revenue: Revenue is recognized as costs are incurred.
Step 5 - Generate detailed invoices: Show hours worked, rates, materials, and markups.
Real-World T&M Example
Emergency HVAC Compressor Replacement:
Technician labor: 6.5 hours × $125/hour = $812.50
Compressor cost: $450 × 1.20 markup = $540
Refrigerant and supplies: $85 × 1.20 markup = $102
Total billed: $1,454.50
Actual costs: $1,042.50
Gross profit: $412 (28% margin)
T&M Best Practices
Use mobile time tracking: Real-time entry prevents forgotten hours
Set clear rate schedules upfront: Communicate rates and markups before work begins
Provide regular cost updates: Give clients daily or weekly updates on multi-day jobs
Document everything with photos: Protect yourself in billing disputes
Fixed Bid: Pricing Before You Start
When Fixed Bid Makes Sense
Fixed Bid charges clients a predetermined price regardless of actual costs. This shifts cost risk to the contractor but provides clients with cost certainty.
Use Fixed Bid for:
Routine maintenance or preventive service contracts
Well-defined repair scopes where you've inspected the site
Competitive bidding situations
Repeat jobs where you have historical cost data
How Fixed Bid Accounting Works
Step 1 - Create detailed estimates: Calculate expected labor hours, material costs, and overhead using historical data.
Step 2 - Establish job budget: Break down by cost category to track variances.
Step 3 - Track actual costs: Compare to budget throughout the job to catch overruns early.
Step 4 - Analyze variances: Identify where actual costs differ from estimates.
Step 5 - Recognize revenue: Use percentage-of-completion or completed-contract method.
Step 6 - Bill per contract terms: Invoice according to payment schedule.
Real-World Fixed Bid Example
Annual HVAC Maintenance Contract (4 quarterly visits):
Fixed bid price: $2,400
Expected total annual cost: $2,000
Expected gross profit: $400 (20% margin)
After first quarter:
Actual cost: $525 (tech took 3.5 hours instead of 3)
Variance: $25 over budget
Year-end projection: Only $100 profit if efficiency doesn't improve
Fixed Bid Best Practices
Invest in accurate estimating: Use historical data and industry benchmarks
Build in contingency buffers: Add 10-15% for unexpected conditions
Track costs daily: Compare actual to budget immediately, not after two weeks
Manage scope tightly: Use clear contracts and written change order procedures
Use progress billing: Invoice at milestones (30% deposit, 40% at midpoint, 30% at completion)
T&M vs. Fixed Bid Comparison
Factor | Time & Materials | Fixed Bid |
Cost Risk | Client bears risk | Contractor bears risk |
Best For | Unpredictable repairs, emergency work | Routine services, defined scopes |
Documentation | Detailed time/material logs | Budget vs. actual tracking |
Profit Potential | Limited by rates and markups | Higher if you estimate well |
Cash Flow | Steady, predictable | Depends on payment schedule |
The fundamental difference is risk allocation. T&M protects you as long as you document everything. Fixed Bid means you absorb losses if costs exceed your bid but profit more if you finish under budget.
The 5 Most Costly Job Costing Mistakes
1. Inaccurate Labor Time Tracking
The mistake: Technicians estimate hours at week's end rather than logging daily.
The impact: Just 30 minutes per day of unbilled time costs over $25,000 annually per technician.
The fix: Implement mobile time tracking with real-time entry.
2. Improper Overhead Allocation
The mistake: Not allocating overhead or using arbitrary percentages.
The impact: You think jobs are profitable when they're losing money.
The fix: Calculate actual overhead rate annually (total indirect costs ÷ total direct labor dollars).
3. Missing Small Material Costs
The mistake: Small parts and consumables aren't tracked.
The impact: 5-10% of revenue disappears. On $1M revenue, that's $50,000-$100,000 lost.
The fix: Document every item used, no matter how small.
4. Poor Change Order Management
The mistake: Performing extra work without documented approvals.
The impact: You do $5,000 in additional work but can't bill for it.
The fix: No additional work begins without a signed change order.
5. Inadequate Documentation
The mistake: Relying on memory instead of photos and written records.
The impact: No evidence to support charges when clients dispute invoices.
The fix: Document everything before photos, progress, completed work, and all communications.
Choosing the Right Model for Each Job
Choose Time & Materials when:
Scope is uncertain and requires investigation
Emergency or urgent work requiring immediate response
You lack historical data for accurate estimates
Choose Fixed Bid when:
Scope is clearly defined and you've inspected the site
You have reliable cost data from similar jobs
Client demands price certainty for budgeting
Consider hybrid approaches: Fixed Bid for base scope with T&M provisions for additional work discovered during the job.
Track These Key Performance Indicators
Gross profit margin by job type: Target 30-40% for service work
Labor utilization rate: Target 65-75% for service technicians
Material markup realization: Are you achieving your target markup?
Estimate accuracy (Fixed Bid): Target within ±10% variance
Days to collect payment: Target under 45 days
Conclusion: Job Costing Drives Service Profitability
The difference between struggling and profitable service divisions comes down to accounting discipline. Every unbilled hour, untracked part, and poorly estimated job erodes your bottom line.
Your Action Plan:
Implement real-time tracking for all labor and materials
Calculate accurate overhead rates and apply consistently
Choose T&M for uncertain scopes, Fixed Bid for defined work
Monitor KPIs weekly to catch problems early
Document everything to support billing and protect against disputes
Proper job costing practices can increase your service division profitability by 15-25% or more.
Ready to transform your service division's profitability through better job costing?Â
Construction Cost Accounting specializes in helping service and repair contractors implement proper job costing systems, whether you use Time & Materials, Fixed Bid, or both. Our accounting solutions provide the detailed tracking, variance analysis, and reporting you need to maximize margins and make data-driven pricing decisions.
Visit Construction Cost Accounting to learn how proper job costing practices can increase your service division profitability by 15-25% or more.
