I am trying to figure my overhead again. I am using Michael Stone’s Markup and Profit book.
I have hired an employee and am paying him legitimately. So obviously with WC and taxes my overhead have increased.
Question 1 is do you figure the WC and Taxes into overhead or do you figure it into the hourly pay?
If I have figured it correctly my profit and overhead with the taxes and comp included is 1.75 which seems excessive to me. If I figure the taxes and comp into the hourly rate my profit and overhead drop to 1.33.
I am thinking it should not matter which way I do it, it should still come out the same in the end. Is this correct? However when I figure a project both ways I come up with a different number.
John
Replies
j... keep your labor costs separate from your overhead and profit
you have to carry employment taxes and W/C as part of your labor burden
EVERYTHING that can be charged directly to your employee is part of the labor burden
anything that goes up if he shows up is part of your labor burden
things that continue wether he is there or not are part of your overhead
my labor burden is 62% so if i pay a guy $20 ...
20 x 1.62 = $32.40... that's what it costs me for every hour he / she works
Mike what's the biggest cost of your 62%?
I thought ours was high at around 55%
Mike
I was thinking that is what I need to do. I can figure my overhead with no problem is there a similar formula for labor burden?
I was trying to break down my WC, taxes and such down hourly to figure my actual labor cost.
Also I normally figure hours for the job and then materials. Do you add you O&P to the total of both, or do you figure a smaller percentage for materials markup?
I have done it both ways. Sometimes when I figure the O&P to both, the final number just seems way out there.
For example I have figured one job I just lost by adding hours and material then O&P my number was almost twice the one bid and more than that on the third.
John
i'll look up the burden worksheet tomorrow....
offhand , i'd say it's the paid holidays and 400 hours of non-billable time that drives it up
good excuse to update my figuresMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
http://link.brightcove.com/services/player/bcpid14603281001
This might help or confuse the #### out of you. Actually I think she is trying to staighten out those she may have confused in the past.
She is like that; but sharp as a tack.
Listen to what Mike says. When he's not grumpy and actually answers your question in plain english you're doing great.
Eric,
Thanks for the link I will check it out. I was actually hoping Mike would give his input, I have been lurking here for years and I really get alot out of most of his business posts.
John
He'll be back. He's really a good guy and smart too. His wife told me he's handsome as well, but that's another story.
I just went back and listened to Leslie's video. I took and all day course with her last year I think at JLC in Providence.
My head was spinning. I believe she has an atypical or even unorthodox theory of accounting so far as usual industry standards go.
She probably has a lot of stuff floating around out there on the internet.
Maybe some good reading till Mike gets back from Chiplote.
So obviously with WC and taxes my overhead have increased.
No, your JOB costs have increased. You will allocate labor and burden to each job.
As for the rest of your questions............gotta think.
I just found this link http://www.remodeling.hw.net/articles/labor-burden-calculator/labor-burden-calculator.aspx
Is this an accurate calculator. If so how would I figure the percentages for comp and liability? My comp is 11.95 per 100 and liability is $872 annually.
Also is the FICA FUTA SUTA figured in this calculator.
John
I'm thinking general liability would be a fixed cost. OH
if some of the premium is based on payroll, then that portion goes to burdenMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
That either makes things very complicated or begs the question:is there a better (easier) way to allocate that cost?
Liability will go up as # of employees and payroll goes up.
Keep the base rate in OH and allocate the remainder to burden?
<<<<
EVERYTHING that can be charged directly to your employee is part of the labor burden
anything that goes up if he shows up is part of your labor burden
things that continue wether he is there or not are part of your overhead>>>>
if you're trying to do a rough calc....fine....but if you want to go thru the exercise, it makes the numbers more accurateMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
I looked over last years numbers and came up with a
current labor burden of 57 %..... so, I'll continue using
60% for burden ( a $20/hr person will cost $32
here's the compilation:
Labor Burden
( percentages determined by dividing item cost by carpenter
payroll expense )
Federal payroll taxes .093 from qtly reports
State payroll taxes .052
W/C ( 5645) .1018
General Liability .02 ( payroll portion )
non-billable hours .065 ( see notes below )
warranty work .02
Health Ins. .07 benefit
Payroll service .02 cost / carpenter payroll
Deliver supplies to job .063 (me)
Field Supervision .063 (me )
_______________________________________
sub-total .5678
notes:
in 2008 we had 2 carpenters for 52 weeks and
3 carpenters for 10 weeks. = 114 man weeks
( 10 + 52+ 52 )
total potential hours @ 40 hrs/wk = 4560
We actually paid 4257 hours ( absence, short days, etc )
4257 / 114 weeks = 37 hours / week
during that time we had 10 paid holidays
(10+10+1 = 21 paid holidays x 8 hrs = 168 hrs
and we had 110 hours of training, safety meetings, shop maint,
Christmas party, seminars ) (168 + 110 = 278 hrs downtime )
278 hrs / 114 weeks = 2.4 hrs per manweek of downtime
37 paid hours - 2 hrs downtime = 35 hrs Production / man
also 278/4257 = .065 as non-billable hours (downtime) %
note 2: should also be adjusted for cost of one company truck
driven by carpenter ( cost of truck / total carpenter payroll ) Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Why is your time, supervision and delivery, not a job cost instead of labor burden?You're a good guy if you pay for Christmas party time.John
i think it has to do with how i estimate production labor..
i know that they can do the work in the time alloted if i support themsometimes i'm on the production side of the ledger.. like i'd think... hmmmm .. setting trusses, that's 3 men one dayNOT 2 men a day & a halfbut i know that the delivery and supervision ( to me ) is a function of the production crew working.... so in my reasoning...it's part of the labor burden, so it gets rolled into the job cost that wayMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Mike,
I like the way you account for the details in your direct employee costs.
If you have a work force with wide range of skill levels, hence wide range of pay rates, you will get better answers from one job to the next if you estimate hrs for each level then apply burden as a percentage to the resulting cost estimate.
I have found many hourly related businesses like to also use payroll (labor cost plus burden) to allocate overhead for estimating and/or billing. This is particularly effective with stable labor force. It is done based upon the previous years direct labor ( labor plus burden) relative to that year’s overhead (utilities, professional services, property taxes business insurance, etc).
In your example: 4800 hrs @ $20 = $96,000 X 1.60 (160%)= $153,600. If overhead was $40,000 then: $40,000 /$96,000= .42 (42%) Added to the 1.6 (160%) =2.02 (202%)
Others operating with a lot of equipment and buildings take this another step and allocate their depreciation the same way. This could easily add another 10-20% to the multiplier.
All these steps are intended to assure that businesses reach the end of the year with more income than expenses. That is hard to do if it is not included in billings as the year progresses.
good thinking the hardest thing for me was once i knew my numbers i had to convince myself that i should charge those numbersit was probably harder to sell myself than it is to sell my customers
but if you want to deliver long term quality work... you can;t do it unless you are making a profitMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
It has long been my thinking that privately operated businesses should for business purposes (as opposed to tax purposes) price their own management time and benefits at what they would earn working for others. It should be at a compensation level commensurate with their skills and responsibilities.
This compensation calculation should then be included as part of the businesses overhead for cost estimates and billing based on the formula suggested in my previous post.
We too often confuse how expenses must be treated for tax purposes with how they should be viewed for making business decisions.
This is additional justification for including depreciation in the overhead allocation. Equipment and building ownership can clearly not be allocated to the job underway at the time of their acquisition. Therefore they must be charged off over time; this is done using depreciation, so the depreciation should be included in the overhead allocation. If this is not done the cost of the purchase will not be recovered from the customers who benefit from it’s use.
We all need to clarify our concept of profit. Profit should not be viewed as compensation for our own work effort; that should be compensated by overhead allocation. Profit should be viewed as compensation for risks undertaken. It should be viewed as what is left over after all operating expenses and depreciation have been recovered (including compensation for the owners time). This is more easily understood where the business is incorporated and the owners are paid a salary that is included in overhead; but the same logic should be applied to proprietorships.
i agree... the average guy would be well served if he/she uses their tax returns as a starting point for business allocation
wether it's schedule "C" for sole proprietors or the 1120 for corps... it's all spelled out right thereMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
I had dinner once with a wise... and handsome.... guy at an Outback in RI. He told me essentially the same thing and it really made a difference to me. Too often I felt guilty charging "too much"... or feared it would be rejected by the customer so I would be sick trying to work up the best bid.Nowadays, I charge what I charge... no more am I economically minded when I work up a price. I do a good job and offer good service... that is worth a fair price. SO far so good and it pains me to see how many tradesmen are still working for a pittance just to get the job or for whatever other reason.
<!----><!----><!---->
I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Take life as a test and shoot for a better score each day. Matt Garcia
so.... when ya gonna take me to the OUTBACK ?Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Whenever you decide to stop by. Lisa and I have become rather fond of Outback lately.
<!----><!----><!---->
I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Take life as a test and shoot for a better score each day. Matt Garcia
Mike, I appreciate the chart breakdown, however I am still a little confused.
You say "( percentages determined by dividing item cost by carpenter
payroll expense )" Do you mean item divided by carpenter hourly pay? Or what do you mean by payroll expense?
I don't think I am doing the math correctly.
John
suppose you have a payroll of $40,000
and you federal payroll taxes are $3600
3600 / 40000 = 9%
however you do the math, your goal is to figure all your costs associated with your direct labor
so.. if you start with $40,000
you know off the bat that you have to add 9% to it
now you have to find out what else you have to add to it
AND you have to find out what you SHOULD be adding to it if you want your company to grow
ie: if you goal is to have paid holidays, and co-pay for health insurance, and a company/match contributed 401k .. you have to figure out what they would cost and add them to your labor rate
if you don't , then you will never have themMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Ok That clears it up for me. Thank you
I have been doing this for about 6 yrs now and have been making money. I was doing the 1099 deal and when I got my NC GC license A couple months ago I decided it was time to make everything legit. I just want to make sure I continue to make money.
John
I consider that part of labour burden and markup.
Overhead os over everything, not just one variable. And don't forget that WC will vary in rate according to whether it is a roof job or a carp job eetc.
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Ok Thanks, that is what I normally do, but sometimes the final # just seems astronomical.
John
This has proven to be an excellent thread.
Thanks Mike and Piffin for your generosity.
J, one of my favorite quotes by one of the most important mentors and advocates in our industry:
" The #1 problem in the remodeling industry is that relatively few feel confident enough to charge customers what their work is worth."
Walt Stoeppelworth
Edited 4/4/2009 8:44 pm ET by EricPaulson