What Is Direct Costs?
Direct costs are expenses that exist because a specific job exists. If a contractor did not take a particular job, they would not incur these costs. For field service and contracting businesses, direct costs consist primarily of field labor (including labor burden), materials and parts, and any subcontractor fees paid to complete the job. Direct costs are deducted from job revenue to calculate gross profit.
- Revenue: the amount invoiced to the client for the job
- Direct Costs: field labor + materials + subcontractor fees for that specific job
Why It Matters to Contractors
Tracking direct costs per job is what makes job costing possible. Without knowing what a job actually cost to deliver, a contractor cannot tell whether it was profitable. A job that billed $5,000 might have cost $4,500 in direct costs, leaving almost no margin. Another job billed at $3,000 might have cost $1,200, producing strong profit. Direct cost tracking reveals the difference.
How It Works
Direct costs are recorded as labor hours are logged and materials are consumed on a specific job. Field service software captures this data in real time as technicians update their work orders. At job close, the total of all direct costs on that work order represents the cost of delivery for that job. Subtracting that from the invoice amount gives the gross profit for the job.
A contractor invoices $4,500 for a job. The technician spent 8 hours at a fully burdened labor rate of $65 per hour ($520 in labor cost), materials cost $1,200, and a subcontractor was paid $600. Total direct costs = $520 + $1,200 + $600 = $2,320. Gross profit = $4,500 - $2,320 = $2,180, which is a 48.4% gross margin on this job.
Direct Costs vs. Overhead
Direct costs exist because a specific job exists. Overhead costs exist regardless of how many jobs run. Rent, insurance, vehicle depreciation, office salaries, and software subscriptions are overhead. They continue whether the crew is working or not. Gross margin accounts for direct costs only. Net profit accounts for both direct costs and overhead. A business can have strong gross margins on individual jobs but still lose money if overhead is too high relative to volume.
How Contractors Track This
Direct costs are tracked in job costing software that captures labor, materials, and subcontractor costs at the job level. The labor cost component should include the full burdened labor rate, not just the wage, to ensure overhead costs like payroll taxes, workers compensation, and benefits are reflected in job profitability calculations.
Frequently Asked Questions
Is equipment rental a direct cost?
Yes, when the equipment is rented specifically for a particular job. If a contractor rents a lift for a specific commercial job, that rental cost is a direct cost of that job. If the contractor owns equipment that is used across many jobs, the depreciation on that equipment is typically treated as overhead rather than a direct job cost, though accounting practices vary.
Is travel time a direct cost?
It depends on how the contractor handles billing and labor tracking. If travel time is billable (charged to the client), the associated labor cost is a direct cost. If travel time is not billable, some contractors treat it as a direct cost of the job anyway since it would not occur without the job. Others treat it as overhead. For consistency and accuracy, most job costing systems track travel time separately from on-site billable time.
Should labor burden be included in direct costs?
Yes. Direct labor costs should use the fully burdened labor rate, which includes base wages plus payroll taxes, workers compensation, unemployment insurance, and any benefits the employer pays. Using only the base wage understates the true cost of labor on each job and overstates gross margin. The labor burden guide on this site explains how to calculate a burdened labor rate.