How do the rest of you contractors bill customers for overhead costs. With all my expenses I figure it to be about $9.00 per hour. Do you hide it in othr costs or just list it on the bill as “overhead”? Thanks
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It's not hidden, it's included.
In other words, you have to figure out what your costs are and how to spread them. What is overhead to you?
For instance worker's comp is a labor burden cost, not overhead.
Do you work alone? Some overhead costs would be spread out thinner over four guys, other costs would be at least four times as much...
In 1979, my accountant told me to figure my labor cost this way; General rule of thumb, if your carpenters get paid ten bucks on payroll, you need to charge twenty bucks to make a couple and make it worthwhile. I said, "No way man!"
Found out the hard way that he was right.
Excellence is its own reward!
"The first rule is to keep an untroubled spirit.
The second is to look things in the face and know them for what they are."
--Marcus Aurelius
I am sometimes amazed at
how often this comes up and I have to wonder where we as contractors get the
idea that they have to break and show their overhead and profit figures to
our
clients. I
absolutely NEVER show what my figures for overhead and profit are. Like
piffen says they aren’t hidden they are just part and parcel of the number
you should be quoting the client for the project.
Think about it this way in your life as a consumer with what products or
services that you buy does the seller breakout the overhead costs for you to
look at and
see? When you buy books at the bookstore do you know how much the bookstore
is charging you for overhead or do you make you decision to buy the book on
whether
or not you think it worth the $24.95 price tag? What about a meal at a restaurant,
computer software, football tickets, a deli sandwich, electrical power, or laundry
detergent? The sellers of all those things don’t show you what their overhead
expenses are do they?
Nah don’t show O&P. It’s not a good idea and only will encourage
price nit-picking on the part of the client. Also different companies that end
up with exactly the same end price for a project may have different ways of calculation
overhead an markup so those number are really comparably anyway. Try and stick to giving
your customers the bottom line price for a project.
If you have the estimating experience and confidence try and present lump
sum quotes to you clients but if you’re not ready for that yet and still want
to do projects on Time & Materials or Cost Plus basis distribute your overhead
and profit figures across the categories proportionally.
I have a follow up question too. When you figured out that you wanted to add
$9.00 per hour for overhead expenses did you come up with that figure by figuring
your overhead for the year to be approximatly $18,000. ($18,000 divided by
2000 hours = $9.00 per hour for overhead).
By working faithfully eight hours a day, you may eventually get
to be a boss and work 12 hours a day. - Robert Frost
A couple years ago I made the mistake of going back through three years busines records to try and figure out what my true cost of being in business, or "overhead" was. What it cost me to operate my business before any job specific costs are figured in. Came up to over $30,000/year.
Using Jerald's rule of thumb of 2,000 hours worked per year that's over $15.00/hour overhead. Of course, I can't actually bill 40 hours for 50 weeks because of time spent managing the business, so I divided by a more realistic 1500 hrs/year and came up with closer to $20.00/hr overhead.
I told you it was a mistake. Ignorance was bliss.
Jerrald,
I'm in the construction biz 40 yrs.
Never O&P to my Customer...
You'r Dead Right...Ray Marzorati
http://www.probiltinc.com
Glad to see we're in agreement on that Ray but don't you find it interesting or amazing just how many contractors (even ones with decades of experience) think or feel they have to breakout their overhead for their clients?
Where did that idea ever come from?
View Image
By working faithfully eight hours a day, you may eventually get
to be a boss and work 12 hours a day. - Robert Frost
Jer,
Apparently there are some "CONTRACTORS" who misunderstand the meaning of:
"INFORMATION TECHNOLOGY"
You Know what I Mean?Ray Marzorati
http://www.probiltinc.com
Jerrald,
Since the prolifiration of Home Depot I can't even count how many people have asked for break downs of my costs. I often end up sending them a bid, one price, And if they don't call back they weren't that serious. The only time i did break things down it bit me in the #### but hard. Lesson learned.
Robert
Robert, I think there is a difference between showing a client a breakdown
of their project costs and showing them what your figures are for
overhead and profit.
As I've mentioned in a few other posts I think (msg#23421.16 in
what to charge, how to bill customers being one of them) I use a markup methodology
that recovers my overhead by placing virtually all of the markup on the
labor component of the equation. While I still markup materials I only am marking
them up for the costs directly associated with them. In other words the cost
of getting them and my profit on the materials. I define "the cost of getting
them" as any
one of, or or combination of the following: placing the order, shopping,
pickup, delivery ,and storage. And profit being what I arbitrarily want to
make in
company profit.
How I manage this is purely subjective choice on my part and not something
I necessarily recommend for everyone to do but depending upon the job that
materials
markup
could vary from anywhere in the range of a minimum of 10% to around a max
of 35%. If I have budgeted actual labor for material acquisition then I use
the minimum 10% figure since that would cover those costs but in the cases
where I can't accurately predict just how much time will be spent on getting
the materials the 35% figure come into play since that will on average cover
that expense. I think any and every contractor needs to work this out on an
individual basis for how thier specific company operates.
While I'm not at all in the same market segment as Home Depot so getting asked
to provide detailed breakdowns doesn't really happen much but if a client did
ask me for a cost breakdown I would budget labor for the material pickup costs,
use that
lower 10% materials markup figure
and therefore be able to show the client material costs at a level that didn't
seem exorbitantly marked up. However I would not break down the labor figure
that I am showing them into it's various components as I did in the examples
I've shown here on-line at times. I still absolutely
NEVER show what my figures for overhead and profit are.
In other words for a hypothetical project, finishing off the underside of
one of our stair installations by framing and fitting it out as a closet I
might show them something like:
Qty
Unit
Material
Plates, DF 2x4
28
LF
13.10
Studs, 8' DF 2x4
80
LF
37.44
1/2" thick
sheetrock
64
SF
19.97
Tape and Finish
64
SF
19.20
Cornerbead Galvanized
8
LF
0.86
Hollow-core door 1-3/8 x 2-6 pre-hung
1
Ea.
122.40
Casing 2-1/2" Colonial
2 heads 4 sides
34
LF
31.20
Base, colonial
35
LF
42.00
Passage set no key
1
Set
46.80
Paint wall, primer
48
SF
2.30
Paint wall, 2 coat finish
48
SF
4.61
Paint trim, primer
69
LF
3.60
Paint trim, 1 coat finish
69
LF
4.10
Material
Sub Total
347.58
10% Material Markup
34.76
Materials Total
$382.34
Labor
$770.00
Total
Project Price
$1152.34
The client can then lets say substitute a more or less expensive door to change
the the total project price and we would still be making our money. A door
is pretty much a door no matter where you get it but if they saw another Hollow-core
door 1-3/8 x 2-6 pre-hung for $109.99 I don't think they will dicker
over the difference and even if they do heck I would probably give them that
cheaper door and again I'd still be making my money. And I think
with those two possibilities the client would possibly feel more comfortable
and secure with the feeling that they have a little bit of choice and control
over the end project price
but
I would NOT show
them anything like:
same
stuff as in the above example
Material
Sub Total
347.58
10%
Material Markup
34.76
Materials Total
$382.34
Labor
466.67
Overhead
233.33
Profit
70.00
Labor
Total
$770.00
Total
Project Price
$1152.34
All of a sudden they would see the $233.33 for overhead and ask what was that
for? It opens up a cost variable for discussion that not easily explained or
rationalized. Yeah we know what it's for but why go through that lengthy explanation
because when you are all done they still may not like your explanation and that
number will still seem arbitrary and subjective to them whereas the door price
above is an objective cost. Why open that up for discussion at all?
Does
that make sense?View Image
In preparing for battle I have always found that plans are useless, but planning is indispensable.- Dwight D. Eisenhower
Hi Jerrald, I figured all expenses to run the business from office supplies to truck gas and everything in between and divided by 2000. Most of my work is T & M. Not the best business way I know. I've just been recouping these costs by adding them into the materials and labor. Thanks for the reply
I agree that there is no better price than a fixed one BUT so many of our jobs are not specific enough at the early stage to be able to give a meaningful fixed price. We try to give a high figure at this point for two reasons: to avoid the problem of cost overruns and to scare away the cheapskates. We are still left with a t&m billing system. While it would be more businesslike to build in a price with all sorts of additions and deductions spelled out in advance, we just can never find the time or motivation to do this. We have only had a couple of problems with this in over 20 years and I'm not sure that there was any preventing those problems.
Given that we do 30% of our work on a t&m basis, we put our o&p into our labor rates and mark up our subs and materials 10%. The customers can understand this and think that it is fair. Of course they don't know what our overhead and profit is, just the rate they pay for each man-hour.
Tim, Jim caught me. It was a trick question. That
$9.00 per hour figure for overhead expenses sounded low to me so I was worried
you might be using 2000 mhrs per year rather than 1500 billable hours per year
which is a much more realistic number (and safer for you too). Still that $9.00
per hour sounds low even with that revised math however depending on what section
of the country you are working in and if you're young and just starting out
that might be perfectly okay.
You might find these Business Owner Calculators interesting and possibly valuable
too.
Cost Calculator
There was a Calculator that I once saw for flooring contractors too but it
seems I've lost track of that bookmark, We're going to make a version of these
on-line calculators for the small carpentry and GC type operation for one of
our websites but we haven't gotten to it just yet. If you checkout this
post I made in the what to charge, how to bill customers discussion
from this past fall you can begin to see how we compute, figure, and distribute
our overhead. It
only an example and your number will most likely be different but it's a start.
At least your asking the right questions and you getting some real smart people
like piffen and jim blodgett giving you their perspectives.
By working faithfully eight hours a day, you may eventually get
to be a boss and work 12 hours a day. - Robert Frost
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