So the other day after taking some time off to avoid the internet for a few says I checked back in and was checking out the articles in the current issue of JLC via the homepage there and I noticed under the “New This Month” section that said “Business-Allocating overhead to labor” and clicked on it and was happy to find an article by Irv Chasen’s the founder of PROOF Management consultants entitled Allocating Overhead to Labor Makes Financial Sense

Personally I took a seminar course back in 1987 called “How to Survive & Prosper in the Contracting Market” where Mr Chasen taught his method of markup which allocates overhead recovery to labor and it completely changed and rescued me from the way I was doing business beforehand.

So I started a discussion on the topic of the article in the Markup & Profit forum there. It soon appeared the the topic was going off course as people started talking about all sorts of other stuff and I was amazed that some very smart people over there even after (supposedly) reading Mr Chassens article still didn’t see the the potential problem in using a Traditional Volume Based Markup ( that Hometechs Walt Stoppelwerth and Michael Stone teach vs the PROOF/Indexed/Labor Allocated Overhead methodology that Mr. Chassen teaches.

I’ve started calling it the PROOF/Indexed/Labor Allocated Overhead because while those in the building and remodeling industry who learned the method from Mr Chassen call it PROOF (such as Mike Smith for one I can think of off the top of my head) after the name of his consulting company that teaches the course (Proof Management Consultants). I’ve recently learned the same method is taught an used in the truck and automobile repair industry too where it seems it referred to as Indexed. Indexed because Labor Costs are considered the “index” that the markup works off of to achieve selling price.

I also learned that the same method or system is also used by what I think is 99.9% of all Defense Department Aerospace contractors. They don’t call it anything special it just IS the way they do things there but since I asked this one guy about it he said “of course, generally speaking overhead is always allocated according to the labor expended in producing a part” so I started referring to it as Labor Allocated Overhead method too.

Well anyway like I said some of the folks there still didn’t “get it” or understand the potential (possible) problem in the strict use of the Traditional Volume Based Markup so I wrote my own explanation of the problem and how the PROOF/Indexed/Labor Allocated Overhead methodology solves the problem.

Since I really consider myself a BreakTimer first I thought I post bring the discussion of the topic back here too and provide the link to Mr Chassens article (you need to be a JLC Online member to read it or read it in the January 2004 hardcopy issue) and the link to the paper I written on it too: The Potential Problem Using a Traditional Volume Based Markup (and a solution to the problem)

I’d be very interested in hearing and exploring the pros and cons regarding both methods and to anyone who want to see what was being said over on JLC here’s the link to the topic over there. The Allocating Overhead to Labor topic on JLC.