In our latest episode of Builder, Budgets, and Beers, we had the pleasure of sitting down with construction accounting celebrity, the one and only Penny Lane, owner of Penny Lane’s JobCosting.com. She dropped some serious knowledge bombs about construction accounting that we knew we had to share with builders in our audience. Penny talked about laying a solid accounting foundation, starting with a well-organized Chart of Accounts and cost codes. These two little things are your secret weapon to knowing if you’re making the money you should be making on your jobs.

Why Your Financials Are Messy (and How to Fix Them)

The problem is that most builders often find themselves asking, “Are we making the margin we should be making?” And a lot of the time, the answer is, “I don’t know.” Why? Because your financials are a mess. When your books are cluttered, you lose confidence in reading your financial reports. Not because you don’t know how to, but because they’re inaccurate and confusing. That loss of confidence turns into intimidation, and boom!—you’ve got yourself a vicious cycle of gut-based decisions, not data-driven ones.

To break that cycle, you need two things: a well-organized Chart of Accounts and a solid understanding of how different account types impact your financial reports. Lucky for you, that’s what we’re going to talk about today.

What Is a Chart of Accounts?

Let’s start with the basics: what is a Chart of Accounts? Think of it as the framework that keeps all your financials in order. In construction accounting, this is where you categorize your costs into direct costs (aka job costs) and indirect costs (non job related costs).

• Direct costs go into your Cost of Goods Sold (COGS) account. These are the costs directly related to a job, like materials, labor, and subcontractors.
• Indirect costs go into your Expenses account. These are your overhead costs—things like office rent, equipment, or that truck fuel you’re constantly shelling out for.

Here’s a quick trick to figure out if a cost is direct or indirect: ask yourself, “Where did this cost land when I priced out the job?” If it was part of your bid, it’s a direct cost, if it falls below the line then it’s indirect. And here’s the kicker—all of your overhead needs to be covered by your markup. More on that later.

Cost Codes: The Common Misconception

Here’s a common mistake we see all the time in various builders’ Charts of Accounts —Builders try to create their cost codes as sub-accounts within their Chart of Accounts. Big mistake.

In QuickBooks, cost codes should be set up under Products & Services (in QuickBooks Online) or Items (in QuickBooks Desktop), which trace back to different accounts. For example, your Materials account might have 15 different cost codes under it. This allows you to track all your materials, but keeps your financial reports clean.

If you start using sub-accounts for cost codes, you’re only muddying the waters. Cost codes are for tracking estimates versus actuals; financial reports are for the big picture. You want to see the big categories in your COGS—materials, labor, and subcontractors—not hundreds of detailed cost codes that only make sense when you’re comparing budgets.

How Many Cost Codes Should I Have?

Now you might be thinking, “How many cost codes should I actually have?” According to Penny, the sweet spot for SMB builders is under 100. Ideally, you’ll have about 30 main cost codes, each broken down into three types: materials, labor, and subcontractors.

Why? Two big reasons:

1. Tracking estimates vs actuals for materials, labor and, subcontractors: This is especially important if you self-perform some or most of the work. Being able to tracking labor separately is crucial.
2. Chart of Accounts clarity: In QuickBooks, you can only assign one code to one income and one expense account. So having a Framing Materials cost code that maps back to the Materials account in your COGS makes your reports much more useful, especially when you’re doing things like insurance audits or taxes.

We get it—having tons of cost codes seems like a great way to get more detail, but trust us, it’s a pain for your office manager or PM to code everything that granularly. Stick with what’s practical.

The Power of Markup to Hit Your Margin

So, you’ve got your Chart of Accounts and cost codes in order—now let’s talk markup. This is where the magic happens.

The first question you should ask yourself is, “How much profit do I need to make?” This isn’t about what sounds good, it’s about what you need to cover your overhead and take home what you deserve.

Here’s the process Penny laid out:

1. Look at your fixed overhead costs, including indirect costs. Your organized Chart of Accounts makes this easy to see.
2. Now figure out what you need to cover that overhead and still make your target profit. This is your gross profit (aka overhead + profit).
3. Finally, project your volume at cost—not at sales. Sales are the variable here. Once you have your volume at cost, apply different markups until you find a number that works.

Let’s put this into perspective with an example:

• Overhead costs: $500,000
• Desired net profit: $300,000
• Expected total project volume at cost: $3,000,000

To calculate the necessary markup percentage based on the numbers above, you simply need to add your overhead and desired profit, then divide by your total volume at cost.

This means that you would need to apply a markup of around 27% to your costs to cover your overhead and hit your profit target.

Now, Penny hears this all the time from builders she works with: “I can’t mark it up that much!” But numbers don’t lie. If your markup seems too high, you either need to increase your volume, lower your overhead, or bite the bullet and charge what you need to charge.

However, if you happen to find that the markup percentage needed to hit your profit targets seems unusually high, it could be a red flag. A high markup may indicate that your overhead costs are too high for the size of your operation aka volume, or that your volume of work isn’t high enough to spread those costs effectively. Overhead should be proportional to the scale of your business. If you're struggling with large fixed expenses but not bringing in enough jobs, it might be time to either trim those costs or ramp up your project volume. Keep a close eye on your overhead to ensure you're setting the right markup—not just for profitability but for long-term sustainability.

Conclusion: Get Your Financials in Order, Get Paid Right

Too many builders are out here making critical business decisions based on instincts alone. Why? Because their financials are not well-organized, and they don’t have confidence in what they’re seeing in their reports. But if you take the time to organize your Chart of Accounts and set up your cost codes properly, you’ll be able to read your reports, understand your margins, and make data-driven decisions that sustain and grow your business.

So, let’s crack open a beer and get your books in order!

(Bonus 🎁) Markup vs. Margin - What’s the Difference

This is where builders often get confused. Markup and margin are not the same thing. Let’s look at the following definitions:

Markup refers to the amount added to the cost of a project (materials, labor, overhead, etc.) to establish the final price charged to the client. Markup ensures the builder covers their costs and generates a profit. It’s usually expressed as a percentage and is critical for the financial health of construction firms. For example, if a project costs $100,000 and the builder applies a 20% markup, the price quoted to the client would be $120,000.

Markup Percentage is the percentage added to the total direct costs of a project to determine the final price charged to the client. It’s calculated by dividing the amount of markup by the cost. The formula is:

For instance, if the direct costs of a project are $100,000 and the contractor adds a $20,000 markup, the markup percentage is 20%.

Gross Profit Margin is the actual profit made from a project after accounting for all the direct costs (materials, labor, subcontractors). It represents the profit before indirect expenses (like office overhead) are deducted. Gross profit margin is essential for understanding how efficiently a project was priced and executed. It is the difference between price (which is essentially the revenue made from the project) and direct costs, expressed in dollars.

Gross margin percentage measures the profitability of a project as a percentage of the total revenue (the total price of all projects). It tells you what percentage of revenue remains after covering direct costs. This is a critical metric for builders, as it shows the relationship between cost, price, and profit. The formula is:

In the same example, with $120,000 in Price and $100,000 in Direct Costs, the Gross Margin Percentage is about 16.67%.

While it’s important to track your margin (easy to do with financial reports), you need markup to actually price your jobs correctly. If you’ve got your Chart of Accounts and cost codes dialed in, you’ll know exactly what your markup needs to be in no time.

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