Margins don’t lie—until they do.
Many finance leaders know the feeling: jobs look profitable all month long, only to collapse when the books close. Margins that once looked solid suddenly vanish, replaced by unexplained swings in WIP (Work in Progress), under- or over-absorbed labour, and overheads that seem inflated beyond reason. It’s frustrating, and worse, it undermines trust in your numbers.
The culprit? In most cases, it is something called labour recovery. Put simply, it’s the way you make sure the cost of your team’s time ends up in the right place in your accounts.
If those hours stay buried in overhead (Opex), your projects or products look cheaper than they really are. If they’re misallocated, you get distortions in WIP or Cost of Sales (COS). Done right, labour recovery ensures that reported margins reflect the real cost of delivering work—materials, services, and people included.
If labour recovery isn’t set up correctly, the issues don’t just show up in your general ledger (GL), they show up everywhere. At first, your projects or production orders may appear profitable mid-month. But as soon as you close, the picture shifts:
This isn’t just an accounting headache. The ripple effects are felt across the business:
Left unchecked, mismanaged labour recovery erodes more than just financial accuracy—it undermines decision-making, planning, and ultimately, profitability.
SAP Business One gives you flexibility in how to treat labour, but that flexibility can also create confusion. The most important rule is this: pick one model and stick with it.
For businesses that deliver services, the Projects model makes sense. Labour is captured through timesheets and activities, allocated to projects or service calls, and then recovered either through billing or by a reclassification at month-end.
For those who manufacture goods, the Production model is usually a better fit. Labour is set up as a resource, attached to bills of materials and routings, and absorbed into WIP and finished goods. COS is then recognised when items are delivered.
Both models work. But trying to mix them on the same flow leads to messy accounting and unreliable margins.
At its core, this isn’t just about accounting accuracy. It’s about making sure your reported gross margins actually reflect reality. COS should always include the labour that creates or delivers your product or service. If those hours are missing, your margins are overstated; if they’re misclassified, your numbers become noisy and misleading.
Equally important is how you treat absorption and overhead. Tracking planned versus actual labour allows you to see whether efficiency is improving or slipping, while handling idle time consistently prevents unexpected spikes in your results. And when it comes to overhead, the rule is simple: decide upfront whether you’ll load it into recovery rates or reclassify it at month-end—but never do both
When labour recovery is set up correctly, your financials tell a clear story: WIP settles cleanly, variances make sense, and margins stay consistent from mid-month snapshots through to close.
We often see the same mistakes repeated across companies. None of these are complex problems, but they can create real headaches if they’re not addressed consistently:
These pitfalls may look small in isolation, but together they undermine the accuracy of your margins and the confidence people have in the numbers.
Labour recovery doesn’t need to be complicated. With the right setup in SAP Business One, cost centres defined, resources built, time captured consistently, and clear month-end processes, you can stop the margin whiplash and restore confidence in your numbers.
That’s why we’ve created a one-page quick guide. It condenses everything into a practical checklist you can use to set up your model, post the right true-ups, and monitor the KPIs that matter.
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