Why Most Job Shops Don't Know Their Real Margin

The Margin Illusion

"We're making 20% gross margin."

That's what most job shop owners say when asked about profitability. They're quoting the number from their P&L—revenue minus cost of goods sold, divided by revenue.

Here's the problem: that 20% is an average across all jobs. It tells you nothing about which jobs contributed to that margin—and which jobs subtracted from it.

"A 20% average margin could mean every job makes 20%. Or it could mean half your jobs make 40% and half lose money. You can't tell from the P&L."

Accounting Margin vs. Operational Margin

Your accounting system tracks money in and money out. It knows total revenue, total material purchases, and total labor expense. What it doesn't know:

• How much labor went to each job
• Which jobs consumed which materials
• How much overhead should be allocated to Job A vs. Job B

Without this job-level data, your P&L can only tell you company margin. You need operational data to calculate job margin.

The Difference in Practice

Imagine two jobs with the same $10,000 invoice:

Job A: 50 labor hours, $2,000 in materials. At $40/hour loaded labor and the quoted material cost, actual job cost is $4,000. Job margin: 60%.

Job B: 150 labor hours (setup problems, rework, learning curve), $3,500 in materials (extra material ordered after initial scraps). Actual job cost is $9,500. Job margin: 5%.

Your accounting system sees $20,000 in revenue across both jobs. It shows healthy margin on the combined revenue. It cannot tell you that Job B nearly lost money.

Where Margins Hide (and Leak)

Setup Time

Setup time is the silent margin killer for job shops. A 4-hour setup on a 2-hour run means setup is 67% of your labor cost. On small runs, setup often exceeds production time—but it's rarely tracked separately or considered in quoting.

Quoting Errors

Most quotes are based on estimates—sometimes from months-old data, sometimes from gut feel. When actual production differs from estimates, margin surprises follow. Without tracking actual vs. quoted, you never calibrate your quoting accuracy.

Material Waste

You quote material at theoretical usage. Actual usage includes offcuts, scraps, recuts, and mistakes. A 10% material waste factor can eliminate all margin on tight-bid jobs.

Hidden Rework

"We just fixed it" is the most expensive phrase in manufacturing. Rework time rarely gets logged—it's embarrassing, nobody asks about it, and logging it creates uncomfortable questions. But it's real labor cost that should be captured.

Non-Productive Time

Material handling, waiting for instructions, searching for tools, attending meetings—workers spend significant time on activities that don't directly produce product. This time has to go somewhere in your cost structure.

The 30% Problem

When job shops start tracking costs at the job level, they almost always discover the same thing: roughly 30% of their jobs are unprofitable or marginally profitable.

This isn't because they're bad at quoting. It's because they're quoting without data. They assume average performance, quote to average costs, and get killed by the variance.

The 30% problem has cascading effects:

• Profitable jobs subsidize unprofitable ones
• Good customers pay for bad customers
• Efficient workers' gains are eaten by inefficient processes
• You stay busy without getting ahead

Which 30%?

Without job costing, you don't know which 30%. Is it certain customers? Certain product types? Certain job sizes? Small rush jobs? Large complex assemblies?

The answer is usually a mix—and it's often counterintuitive. That great customer who gives you lots of work might be unprofitable because their jobs require constant changes. The one-off prototype work you hate doing might actually be your highest margin.

How to See Your Real Margins

Step 1: Track Labor at the Job Level

Workers need to log time to specific jobs—not just "worked 8 hours today." This can be done with timesheets, time clocks, or digital systems. The method matters less than the consistency.

Step 2: Capture Material Usage Per Job

When material gets issued to a job, record it. When more material is needed, record that too. The gap between quoted and actual tells you about waste and estimation accuracy.

Step 3: Define Your Overhead Rate

Calculate your total overhead (rent, utilities, indirect labor, depreciation, etc.) and divide by total direct labor hours or machine hours. Apply this rate to each job to allocate overhead.

Step 4: Calculate Job-Level P&L

For each job: Revenue minus (Direct Labor Cost + Direct Material Cost + Allocated Overhead) = Job Profit.

Do this for every job and rank them by margin percentage. The distribution will surprise you.

Step 5: Act on the Data

Job costing is only valuable if it changes behavior. Use it to:

• Recalibrate quotes for underperforming job types
• Reprice or fire unprofitable customers
• Identify process improvements for high-cost operations
• Focus sales efforts on high-margin work

From Average to Insight

Your P&L shows average margin. Job costing shows the distribution behind that average. The distribution is where the insights live—and where the money is.

Knowing your real margin at the job level transforms how you quote, how you schedule, which customers you pursue, and ultimately how profitable you become.