RHACOVA

Job costing and profitability

Estimate vs Actual: How Contractors Find Profit Leaks

The estimate was a prediction. The actual is what happened. The distance between them is the only honest feedback an estimating system ever gets.

The short answer

Compare what you estimated with what actually happened, one figure at a time: estimated cost against actual cost, expected profit against final profit. The comparison tells you where the money went, not why. The "why" is a judgement you attach afterwards — and getting into the habit of recording it is what turns a variance report into better estimates.

Definitions

Cost variance
Actual cost minus estimated cost. Positive means the job cost more than planned.
Expected profit
Estimated revenue minus estimated cost — what you sold the job expecting to keep.
Final profit
Final invoiced revenue minus actual cost. Unknown until the job is invoiced in full.
Profit leak
A cost that was real but never estimated, or was estimated at the wrong rate. Leaks repeat quietly across jobs because nothing in a single job draws attention to them.

The formulas

Cost variance = actual cost − estimated cost

Cost variance % = cost variance ÷ estimated cost

Expected profit = estimated revenue − estimated cost

Final profit = final revenue − actual cost

Profit variance = final profit − expected profit

Worked example

Estimated $17500 of cost at $24000 of revenue; the job ran $19100 and invoiced $24800:

  • Cost variance: $1,600.00 (9.14%)
  • Expected profit: $6,500.00
  • Final profit: $5,700.00
  • Profit variance: -$800.00

Revenue rose and profit still fell. That combination is common and badly understood: extra work was invoiced, but it cost more than it earned. Judging the job by its invoice total would have recorded it as a success.

Unknown is an answer

Remove the final invoiced amount and the same job reports final profit as unknown — No final revenue was entered, so the job's actual profit is not known yet.. Cost variance is still a fact and is still reported; profit is not, so it is not guessed.

Substituting the estimated revenue for an unknown final revenue would produce a confident-looking profit figure built on an assumption. RHACOVA refuses that trade everywhere: a stated unknown is more useful than a number you cannot defend.

Where the leaks usually are

Variance analysis is only useful if the cost classes are the same on both sides. When they are, repeat patterns surface quickly: labor hours estimated at the wage rather than the loaded rate; disposal and delivery trips omitted from the estimate; overhead never recovered because the recovery basis assumed more billable hours than the year delivered; change orders performed on a handshake and priced afterwards.

One job cannot distinguish a leak from bad luck. Several jobs showing the same signed variance in the same class can, and that is the point of doing this consistently rather than only after a job that hurt.

Common mistakes

  • Comparing only the totals, so offsetting errors inside the classes cancel out.
  • Assuming final revenue equals estimated revenue on an open job.
  • Rewriting the estimate after the fact, which destroys the comparison.
  • Recording a cause from memory weeks later instead of at the time.
  • Reviewing only the jobs that went badly, so the quiet leaks are never found.

Quick answers

What is a cost variance?
Actual cost minus estimated cost. A positive variance means the job cost more than estimated; a negative variance means it cost less.
Can I know final profit before the job is invoiced?
Not honestly. Until final revenue is known, final profit is unknown — projecting it from the estimated revenue hides exactly the problem you are looking for.

Run the numbers

Cost variance in dollars and percent, expected profit and margin, and final profit, profit variance and margin difference once a final revenue is known.

Open the Estimate vs Actual Calculator

Free, no account, and the answer stays on the page.

Track the variance while the job runs

RHACOVA Jobs compare actual and committed costs to a frozen baseline continuously, and record a reason for a variance only when someone states one.

Open Jobs

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

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