Construction Bidding, Job Costing & WIP Reports:

How to Track Project Profitability

Are you buying Work” or Making Money?

Contractors live and die by their projects. However, the only thing worse than losing a bid is winning the wrong project—or failing to implement the financial management and review processes needed to keep it profitable.

Throughout this article, we will discuss the importance of precise bidding, the continuous improvement of job costing, and the use of Work-in-Progress (WIP) reviews. These tools allow you to determine if a project is making money in real-time, rather than finding out three months after the final walkthrough.

To secure and manage a project successfully, there are three key reflection points: Bidding, Job Costing, and WIP Review.

1. Why Construction Bidding Accuracy Impacts Profitability

Before contractors can run, they must learn to walk. In the context of financial management, that first step is the bidding process.

• The Risk: If you bid too low, you add undue risk and may give away your profits—or worse, incur a loss.
• The Opportunity Cost: If you bid too high, you will struggle to secure enough work to keep your team busy and drive growth.

Bidding is more than a sales tool; it is the most critical financial projection you will make for your business. To succeed, contractors must move away from “guesstimating” and adopt a data-driven process. By using historical job costing data to refine future bids, you can avoid the “race to the bottom” and focus on winning projects that contribute to your long-term profitability and growth. You and your team work too hard to complete projects for zero profit.

2. What Is Job Costing in Construction and Why It Matters

Working in tandem with bidding is job costing: the process of tracking every dollar spent on a specific project. This includes labor, materials, and equipment, as well as “hidden” costs like permits, bonding, and overhead. Without accurate job costing, you are essentially “buying work”—paying for the privilege of working without knowing your margins. 

Real-Time Labor Tracking

Labor is often a project’s largest expense. It is imperative that crews log hours to specific projects and cost codes. Below are common scenarios that an be overlooked:

• Allocation: If a superintendent oversees multiple sites, is their time split based on actual hours? Similarly, are other other employees splitting time between projects throughout the day.
• The “Fully Burdened” Rate: Are payroll taxes, benefits and other employment costs included? If you only track raw wages, you are omitting a high cost that can quickly erode profits.

Material Allocation and Inventory Control

You must track where materials go, not just what you bought. Below are a few areas of material costing that need to be reviewed:

• Transfers: If materials remain after a job, their cost should be transferred to the next project. Otherwise, you overstate costs on the first job and understate them on the second, skewing the data for future bids.
• Inventory: If your company maintains an inventory, every item removed for a project must be accounted for as a cost. Without this, inventory becomes a “black hole” that eats company profit.

Equipment Cost Allocation

Equipment isn’t free just because you own it. Every hour a machine runs on-site incurs a cost.

• Ownership Costs: Depreciation, interest, taxes, and insurance.
• Operating Costs: Fuel, lube, tires, and wear parts.
• Internal Rental Rates: Establishing an internal hourly or daily rate for your fleet ensures that the project “pays” for the equipment it consumes, funding the eventual replacement of that machinery.

Overhead Allocation in Construction

This accounts for “soft costs” (indirect labor such as bidding and office support, insurance, yard space, etc.). This is often driven by a project input, such as labor hours. It is recommended to regularly recalculate this rate to ensure your bids aren’t significantly over- or under-allocating these costs.

Inaccurate job costing leads to an incorrect WIP report and turns into a surprise related to company profitability (or lack thereof). If your field data is wrong, your WIP report might show a strong profit when you are actually breaking even or losing money.

3. Understanding WIP Reports in Construction

While job costing provides the data, the Work-in-Progress (WIP) report provides the insight. Finding out a project went over budget after completion is too late for redirection. The WIP report tells you exactly where you stand relative to your estimates by tracking:

• Total Revised Contract Price: The original bid plus approved change orders.
• Total Estimated Costs: The original estimate plus costs from approved change orders. Verify that the cost to date, plus any remaining anticipated costs, tie back to this estimate.
• Actual Costs to Date: All costs incurred to date.
• Percent Complete: Calculated by dividing Actual Costs by Total Estimated Costs.

After the percentage is calculated, you can then cacluate the revenue earned job-to-date and compare that to the billings-to-date to determine if you are over-billed or under-billed. The WIP report reveals “hidden” numbers on your balance sheet through these under-billings and over-billings:

• Under-Billings (Contract Assets): You have performed the work but haven’t billed for it yet. This is essentially an interest-free loan you are giving your client, which can stifle your cash flow.
• Over-Billings (Contract Liabilities): You have billed for more work than has been performed. While this is the preferred position for a contractor due to the strong cash position, it is a liability; you owe that work to the client and will need that cash to finish the job later.