Pass-Through Expenses in QuickBooks Desktop

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One of my niches for a while was mom-and-pop construction shops in Portland, Oregon’s community of Russian immigrants. Their trades varied from custom carpentry to glass doors to specialty railings. What they all had in common was that the husband did the work while the wife kept the books. They all worked together, recommending each other to their clients. It was a thriving business model, and I delighted on setting up the bookkeeping for each one.

Fast forward a few years, and the new normal meant that their businesses were skyrocketing. Now that people were staying home, they started investing in house remodels to transform their living spaces. This community of construction entrepreneurs was busier than ever.

Along with that growth came a new concern about profitability. Several of the women came to me, concerned that while they knew they were making money, their volume meant that their husbands couldn’t keep track of it all in their heads anymore. They wondered if their QuickBooks had tools that would allow them to track the cycle of time and materials, to make sure that their customers were being invoiced correctly.

I was delighted that they were ready to rise up to the next level! Instead of treating their QuickBooks like a checkbook, they were ready to use it for job costing, and billing for time and materials. 

QuickBooks Desktop has features that allow clients to get reimbursed for their expenses including purchases, mileage, billable time, and subcontracted labor. We sat down as a group, turned on the features, and transformed their workflows to give them new insight into their income and expenses.

Let’s take a look at how to set up QuickBooks Desktop’s job costing system, and how to mark expenses billable to customers and then pass them through to an invoice. Then we’ll look at a few reports that can make all the difference between just getting by, and thriving.

Learn more by joining our CPE webinar presented by Alicia Katz Pollock, "Pass Through Expenses in QBDT" on Sept. 23. You can register here.

Setting up billable expenses

The first thing you need to do to work with pass-through expenses is to turn on the features. In the Preferences, go to Time & Expenses and look at the Company Preferences. Turn on all the options. If you have a default Markup, enter it (you can always update it on individual transactions). Assign an Income account to track the markup separately.

Creating customer jobs

Next, start thinking about your projects as discrete jobs. Instead of grouping everything at the customer level, start adding Jobs to customers. That way, when you do more than one project for a customer, you can analyze each one separately.

Creating two-sided items

Think of items and services as something you both buy and sell, even if they’re not inventory, or even tangible items. Billing for materials is easiest when you use the Items tab on bills, checks, and credit card expenses. When you buy a product, that makes it easy to include the item on the customer’s next invoice.

In the same way, if you hire subcontractors to perform your labor, turn the service item into a two-sided item. Instead of coding their payments directly to Cost of Labor, buy the same service you add to customer invoices.

Pass-through Labor Costs

The timesheets in QuickBooks not only flow through to payroll, but you can also use them to track labor to pass through to customer invoices.

Tracking vehicle mileage

The same holds true for vehicle mileage. When you invoice clients to get reimbursed for trips, the Mileage tracker makes it easy. You can make individual trips billable to customers using the same techniques.

Invoicing the customer for reimbursement

When you create new invoices for a customer use Invoice for Time and Expenses on the Customers menu. It will gather all unbilled expenses, time, and mileage into one invoice, and apply markup automatically.

Job Costing Reports

The best part about taking the time to assign customers to all expenses is being able to run reports comparing the income and costs associated with each job and item. 

A Profit and Loss Statement by Job is a P&L filtered for one specific customer. That way you can see the total income for a project, minus the cost of labor and materials. Some companies will even use journal entries to fully job cost overhead and payroll.

The reports my construction companies found most helpful were:

  • Profit and Loss by Job
  • Profit and Loss by Item
  • Job Profitability Summary
  • Item Profitability Summary
  • Mileage by Job Summary
  • Time by Job Summary

There are also Unbilled Expenses reports to make sure you haven’t forgotten to get reimbursed for your costs!

Conclusion

Using pass-through expenses led to several unexpected insights for my mom-and-pop contractors. One woman discovered that her husband hadn’t always invoiced for all their costs, and they were leaving money on the table!

Another family was delighted to start running job costing and profitability reports. They discovered that a customer they thought was their cash cow made them almost no profit.

Without this level of management and analysis, your reality may surprise you! If you work with project-based companies who bill for time and materials, make the most of pass-through expenses in QuickBooks Desktop.

Learn more by joining our CPE webinar presented by Alicia Katz Pollock, "Pass Through Expenses in QBDT" on Sept. 23. You can register here.