I’ve got this chart I did that plots the monthly Jobs Costs, Total Volume, and Overhead and Profit for another contractor I work with based on his numbers for 2008.
What can we learn from looking at this chart? (click for the full sized version)
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Fuel cost influenced materials and and that reflected on COGS while we held labor at a steady.
Spheramid Enterprises Architectural Woodworks
Repairs, Remodeling, Restorations
They kill Prophets, for Profits.
What is COGS?
COGS is Costs Of Goods Sold. It is the sum of the Labor Materials and SubContracting lines.
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Looks like labor costs stayed the same while Sales (inferred from declining sub & material costs) went down
I'm a fan of percentages and not nominal numbers. Just easier for me to look at and see where something is out of line. (not a knock on your project Jerrald)
if I had some time I would change out the graphs. But I'm out the door right now
Scrapr — "I'm a fan of percentages and not nominal numbers. Just easier for me to look at and see where something is out of line. "
Scrapr, I'm not sure what you mean. Anyway I'll publish the Excel workbook with the numbers in it soon enough and anyone who wants to can scrutinize it more closely.
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Not much other than labor overhead and subcontracting were at predictable/controllable levels. That material was quite a uncontrollable variable and cost spiked or jobs peaked in Aug.
But thankfully we were able to keep our cogs, cost of goods sold, in line to our profit margin goals. Labor, overhead and subcontractors aren't the big contributers to hi cost.
All I got. You can't say anything about external effects, the chart doesn't offer that info. You can assume many things for the cog increasing but not from this chart.
At least the cosgs did not intersect and go below cog or you'd be in the red.
Just A Guy With A Hammer
Edited 1/30/2009 6:27 pm by jagwah
jagwah — "Not much other than labor overhead and subcontracting were at predictable/controllable levels. That material was quite a uncontrollable variable and cost spiked or jobs peaked in Aug."
While the subcontracting sales are particularly low and pretty much stay there I think from looking at the chart that they are something I would describe as quite variable or even possibly unpredictable.
Although ya know what? Now I thinking that "unpredictable" is probably the wrong word altogether. My friend Jim's chart here will probably play out the same way next year although he might expect to see the materials line be lower as people might choose less expensive materials to try and make ends meet but I think his Material and SubContracting lines can be described as predictably variable.
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I give it a try. Better than playing solitaire
I have never been good at interpreting others' data. What I am seeing is that your company (is it yours?) is employing people on salary , Correct? Only way i have seen labor costs stay that consistant with that much COGS variation. Same with overhead. Usually stays the same.
What I also see is that the materials cost seems to have an adverse reponse to subcontract labor. My guess is that the sub contractors are supping materials also?. Taking these two into consideration, I see a more than consistant relationsship to To the cost of goods sold.
(My preferred guess)The only other way I can guess at it would be that You did alot of very high end jobs at some particular times of the year, while the rest were just average. Meaning higher materials, and more time intensive subcontract labor. your labor and over still runs about the same as in salaried supervision.
Where is the profit part of this equation? Really, none of my business but it has been a thing that I have dealt with in the past that I could never get a handle on.
migraine — "I have never been good at interpreting others' data. What I am seeing is that your company (is it yours?) is employing people on salary , Correct? "
No, it's not my company although I've seen the same trends for us in the past. There worker are all paid hourly wages and the owner pays himself both a wage for when he's working in the field and a small salary for running the company and he has one part-timer working on salary in the office.
"Only way i have seen labor costs stay that consistant with that much COGS variation. Same with overhead. Usually stays the same."
Unless a company is hiring and firiing employees throughout the year I find most companies regardless of whether their Labor Costs are salaries or wages remain realativly and consistently level altough I think the labor line here is very stable compared to what I would expect to see. But we'll have to see as I look at some more companies in the coming weeks.
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The only thing that this chart tells me is that his variable costs were down at the end of the year.
Plot the slales and the chart might be somewhat meaningful. Chart the profit, then you have something>G<
frammer52 —"The only thing that this chart tells me is that his variable costs were down at the end of the year."
Well, yeah as the outdoor work which is their bread and butter scales down in the fall and they go inside the costs lines that are variable Materials (red) and Subcontracting (magenta) do trend down and in fact continue down through the tough winter months of January and February. The conclusion I would draw is that his material intensive work is very seasonal and his subcontracting is just plain varialbe all over the place.
"Plot the slales and the chart might be somewhat meaningful. Chart the profit, then you have something>G<"
Well when I publish the full Excel workbook anybody can play with the charts any way they like. I'll let you know when I have it up here.
But what I saw right away as soon as I did the chart was a visual explanation for why contractors should use a Capacity Based Markup.
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I would buy that.
Higher Material costs (high end projects) do not necessarily produce higher profit margins/
A La Carte Government funding... the real democracy.
Hackinatit —"Higher Material costs (high end projects) do not necessarily produce higher profit margins/"
Well that is true but I'm not sure where you get that from the chart. To tell you the truth his Net Proftit which I didn't break out into it own line is much lower than either Jim or I would like to see and was one of the reasons we were looking at all the numbers in the first place.
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If the same labor dollar can install double the materials during the summer, then half the labor force should be laid off until next spring.
klhoush — "If the same labor dollar can install double the materials during the summer, then half the labor force should be laid off until next spring."
No, the company employee productivity hasn't changed. The project mix has. In the summertime months the projects they get almost all have a higher level of materials costs whereas in the winter they get more service and maintenance type projects which have a higher ratio of Labor to Materials. While it isn't anything you could necessarily pick up from looking at the graph I also happen to know to first hand that two of the jobs they did late January and February of last year were labor only interior finish subcontracts to a Kitchen & Bath studio where the K&B studio supplied all the materials.
Because they use a Capacity Based Markup method in setting their labor rate they know all their Overhead Costs are still going to be covered on any labor only jobs they get.
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I'll never understand this stuff.
klhoush — "I'll never understand this stuff."
Hang in there kloush. I do realize this discussion might be a little bit on the esoteric side but the bottom line message that using a Total Volume Based Markup Method like is taught by some consultants like Michael Stone in his book Markup & Profit and Walt Stoeppelwerth of HomeTech and many others is potentially dangerous to your businsses' health. I know I got burned by it years ago. In my blog article One of the Potential Problems in Using a Traditional Volume Based Markup that I wrote years ago is a fictionalized account of an experiece that actually happened to me. Forntuantly for me at the time I stumbled upon a seminar being offered by New England Builder Magazine (now known as Journal of Light Construction) taught by Irv Chasen entitled "How to Survive and Prosper in The Contracting Market" and what I learned woke me up and saved my skin. The program Irv Chasen taught came to be known as PROOF since that was the name of his consulting company (Profit Research On Operating Factors). As my careeer and learning moved on I was soon to discover when I bought and read David Gerstels book Running a Successful Construction Company when it was first published in 1991 that what I had come to know as the PROOF method Gerstel described as Capacity Based Markup. They were the same thing. And then just a couple of years ago I ran across a book by Ellen Rohr entitled How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image and she was again talking about the PROOF Capacity Based Markup method again.
I really don't like sounding so harsh in condemming Michael Stone and Walt Stoeppelwerth becuase 98% of what they have to say on the building and remodeling business is great valuable advice but don't do what they say regarding Markup.
Do do what Chasen Gerstel Rohr and I write about.
Hang in there becuase once it does click you'll look back and think, "Now I get it, what was I ever thinking before."
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When in college we had case studies like what you are giving. My problem is not in seeing what you are driving at, but in accoplishing it in the real world.
It will be amazing once it clicks to some people!
For me accomplishing it is the 2nd hardest part.
The hardest is coming up with my price in the first place.
Its just me and one employee. I do most all of the labor,accounting, estimating, sales and bookeeping. I would like the company to pay for a truck, retirement, insurance,paid vacations, gas, phone, office space, marketing, trade shows etc..
In a perfect world I should be able to punch those numbers in and come up with my price. Lets say it's $65 per hour per man. Now heres my problem. To me thats insanity.
I just priced out a small bathroom remodel: 5ft x 7ft - gut and redo. HO says he did rough #'s and he figured it should be around 3k. I tell him more like 5-6k. He says his max is 5k.
Tile floor, tile tub surround, drywall, exhaust fan, towel bar, paint, vanity, countertop, sink, toilet and shower and lav fixtures.
7 days x 8 hrs x $65 per man x 2 guys = $7200 + material $500 + allowances $1100(bare bones minimum) = $8800 There is no way I would get this job.
I came in at $5900 and I was highest of three by $1500. I feel good about my chances though.
My question is how tight should I make my #'s. I cut everything I can to get down to $40 hr. Thats paying me $56,000 for doing everything(acctng,est,sales,books and labor) and 12% profit. How does this measure with the rest of you guys?
Right now I 1099 my one guy but would like to put him on payroll soon. Do I not charge for his costs until I start incurring them? I pay my truck, phone and insurance with my(me and wifey's) personal account. Should I or shouldnt I be charging for these things?
i'll get back to you.... but you really already know the answerMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Mike will get to you about your numbers. My comment would be to learn how to sell better. It would be worthwile to take a course in salesmenship.
Years ago I ran a sales operation, with roffing and siding being what was sold. I was always the high man in bidding situations. You have to learn how to not get intoo these situations, in my view. Qualify customers better when they call.
I am going to recomend a web site where these discussions go on, pay particular attention to a bathroom guy in denver named Mike. See your PM.
Thanks.
It seems there is so much that goes into being "successful". The easiest part of my day is just doing the labor.
After work is where the work really begins. Learning to be a salesman. Learning how to manage my books. Learning........
Good thing I love reading and learning and am driven to succeed. My job is who I am and I am quite happy with that.
Starting without any capital could you succeed doing this if you didnt "live" it?
well... in 1975 i was 31...
started this company.... ( knock on wood )
so far... so goodyou know what your rate has to be... now you have to convince yourself that what you are asking for is worth ithere's a tip.... avoid bid situationsyou want to develop a tradition and reputation for quality.... it's hard to deliver quality when you are losing money..
only three things can happen when you sign a contract for a fixed price:
you can lose money
you can break even
or
you can make moneyworking for T&M in these hard economic times is very difficult.. some one will always work cheaper
working for Fixed Price, based on the rates you know you need to build your company... is what you want and needif you build your reputation... it becomes easier to find more and more no-one-else bidding type workafter all... your reputation is what you need... and there is no such thing as "competitive" bidding... everything we do is prototype
no one else is "bidding" on the same thing you intend to do for your customersMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Ya, I know what needs done. Not having the experience behind me and therefore the rep gets discouraging. Im definately learning patience, which is tough for a hyperactive kid.
I guess I feel that if Im charging $130 hr for me and a laborer than I need to know everything about everything. I know it sounds like Im talking myself outa charging what I deserve but wouldnt the client justifiably expect more? I feel I provide a First Class job. Organized, clean, professional, well run. But Im not fast, meticulous to a fault. I know it takes me longer to do things than a electrician or plumber or tiler etc... so I guess I drop my hourly rate to justify the time taken.
Im workin on it. The farther down the road I go the higher the hurdles seem to get.
the things that you aren't "competitive " at.... you can develop those skills...... but it's best to keep them for the "while i'm at it " jobs
we can do most anything.... but we don't do plumbing or electrical
and unless it's "incidental" we don't do excavation, concrete, tile, carpet, plaster, or painting
we do have a stable of subs that are better / more efficient at those trades than we are
that still leaves lot's of work for usMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Good answers Mike!
FCOH
You are in a situation that almost every contractor finds themself in eventuallyand--- you are attempting the strategy almost everyone tries--for a while but the ones who survive and prosper--- sooner or later develope a better strategy It's like this-- you did your numbers and you know that your number needs to be$8800 but instead of selling it at $8800 you are killing yourself to sell it at $5900
As gently as I can--------- I want to point out that essentially you have decided to have YOUR family subsidize this prospects bathroom to the tune of $2900 ! think about that for a while----and then please carefully back -up, because you are at a metaphorical crossroads--and you are headed down the wrong road.YOU need $8800 for the job. fine- that's reasonable Meanwhile the customer says $5000 tops---- Ok that's reasonable also. As far as I have ever found-- there are only 3 possible solutions to this
1)your salesmanship needs to improve, yes, but that is of limmited value. If his top number really IS $5000-- it doesn't matter how good a salesman you are because he doesn't have the other $3800
> sure- if the spread was only $800 almost anysalesman could close that deal---- but $3800 is like 75% of his budget-- very tough to upsell anyone 75%.
2) $8800 is the number you NEED-- this guy isn't the customer for you.
Perhaps his neighborhood doesn't justify $8800, or his personal circumstances don't allow it or any number of reasons that $8800 won't ever work for him----- BUT- there are plenty of neighborhoods it will-- you have to concentrate on THOSE areas. In my business I feel there are 3 basic price levels-- lets call them A,B,C. I KNOW I need to be at the very top end of B or the low end of C-- which means the entire range of The A level( rental properties, flips etc.)--are not feasible for me-- so I don't give a moments thought towards selling int that market because it just won't work--- but I CAN sell effectively through most of the B and C market
3) Perhaps you shouldn't be in the bathroom remodeling business at all????
think about it. you have the number you need-- maybe bathroom remodeling just doesn't generate the money you need in your area. don't take offense at that----- that's why i am not in bathroom remodeling.--- I started out doing a range of work-- but eventually I got my numbers down pat------- and certain types of work had to be discarded as not viable for me. whole categories of work were slashed from my roster of offered services.
what I arrived at doesn't matter-- it's what worked for me---- other people might have developed into custom stair building, or copper roofing,or replacement windows or vinyl siding, or lead abatement--- whatever.BTW--- one possible problem is your 1099 helper. among other things-----8 hours x 7 daysx $65 =$3640.Note that $3640 is almost exactly the difference in spread between the customers $5000 target and $8800 that you NEED with the helper?
the first thing i would examine is"do I need the helper?)- my answer would be NO!
Even at $8800--- 2 men can produce 2-3 times that without undue difficulty in other types of work over 7 days.Very best wishes,
stephen
Thanks.
I will marinate on that for a while.
Note that $3640 is almost exactly the difference in spread between the customers $5000 target and $8800 that you NEED with the helper?the first thing i would examine is"do I need the helper?)- my answer would be NO
Very good suggestion there!
seriously frammer52,
if I have the time next week I would like to discuss something related to this . I will probably start a new thread---but I have had an idea for a conversation here for a month or more---- courtesy of a few Emails I exchanged with a guy named JeremY here on Breaktime. SLIGHTLY related to that,however,
My approach generally would be
If I knew I NEEDED $8800--- instead of trying to figure out how to cut things enough to give the prospect the bathroom at $5700------ I would be going in the other direction and looking for ways to sell the project at $12,600- because THAT takes you into a whole 'nother level of service, materials and customer base. there just isn't enough in $5700 between material and 2 workers over 7 days to allow me to do things at the level I want to do them.
Talk with you later OH- BTW- very interesting call today from a lady who was by far my biggest customer last year. She was very demanding--- knew exactly what she wanted( high end for us-- copper flashing, Tri-laminates, new cupola, huge roof)-- well,bless her heart she is bending over backwards to line up her neighbor as a customer for me this year.
I am not a particularly good salesman-- but luckily my customers are on my behalf!!!!
funny thing-- a month ago I had phoned her household to ask if they would be a reference on another potential project of mine--they said yes. I sent a handwritten thank-you note mentioning how much I appreciate them acting as a reference, how much I appreciate their confidence and that I had asked THEM specifically because I felt their project was challenging, fun,interesting AND because I had felt that she had the ability to be an articulate spokesman on my behalf----
you just gotta LOVE customers like that
but it's hard to develope themAND the service required if you let yourself get beat down to $5000 when you KNOW you need $8800Talk to you later
stephen
Stepnen, I think the hasdest thing to do in his case is to attempt to get to the new customer base.
I am not sure he wants to go there yet. It is hard to convince people that raising prices may mean you are busier as mell as making more money!!!
I think we tend to limit ourselves with the thought that the economy is bad, therefore I must reduce my prices. In this terrible economy, the store I bought my kitchen cabinets from, sold 5 others in the past week. HMMMMMMMMM, makes you think, doesn't it!
Except for the most extreem areas of recession, I bet there is still work going on! Many with the high end buyer and the retirement community. I know I am not worried about the general economy when my wife told me we had to have a new kitchen. The old kitchen cabinets are 28 yrs old. I never liked them, but they lasted!! That I like111
Your labor and overhead remained constant while the business tanked in the 4th quarter. Better cut staff quickly to stay afloat.
klhoush 7 — "Your labor and overhead remained constant while the business tanked in the 4th quarter. Better cut staff quickly to stay afloat."
Well if you didn't consider a broader historical persepective than is shown in the chart you might make that decision but I think it would be hasty and dangerously incorrect. Short sighted thinking might have someone say the business is tanking while the broader picture is that the material sales are seasonal.
And besides as long at their Overhead Recovery is tied to the Labor costs with a Capacity Based Markup they have no trouble meeting their monthly Overhead Cash Flow requirements.
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cash flow requirements are paralleling material costs
I see COGS roughly parallel material costs. COGS seem to be roughly double what materials cost.
Maybe the owner is using his material costs as a way of bidding the projects?
I also notice that as COGS and materials dropped off, subs did also to some degree, but in house labor heald steady.
Perhaps as worked dropeed off the owner decided to keep more labor in house and sub out less?
i think jerrald is toying with us.... i bet the parallel tracking of COGS & material is going to show up as increased profits
his labor is level.... but COGS is decreasing.... i'm thinking profits are increasingMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
EricPaulson — "I see COGS roughly parallel material costs."
Yes that is true and we might then say that Material Sales is a major component Cost Driver with respect to the Total Costs of Goods Sold.
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MikeSmith — "cash flow requirements are paralleling material costs"
Mike, I think you might have misread the legend on the chart. The cash flow requirements (Overhead- dark mauve) are paralleling the Labor Costs (blue) .
By the way the other week while I was researching Activity Based Costing in the construction industry I discovered that your hybrid version of the PROOF (aka Capacity Based Markup) method has a specific name. It's called MORS for Multiple Overhead Recovery System or DORS for Dual Overhead Recovery System. I'll be putting those term in my glossary over the weekend.
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Id say that this company would be a perfect candidate for using the labor based markup method.
What happened here was I was playing around testing the new version of Numbers which is part of Apple's new iWork suite head to head vs. Microsoft Excel and I was was using them both on the financials I got from one of the contractors I do consulting for. He's a general all around carpentry contractor but spring summer and fall they have an excellent deck business that really picks up for them. I was comparing charting capabilities when all of a sudden the fact that the Labor Costs almost perfectly parallels the Overhead Cash flow requirements popped out at me.
While he did it in another online forum where I also posted this our friend Bob Kovacs nailed it right on the head when he said (the emphasis is mine):
By the way if you are thinking of dropping Excel to use Apple's Numbers,...don't. As much as it pains me to say it being such an Apple fan Excel still wins handily going away. You can make prettier looking document with Numbers but it doesn't have the tools that Excel has.
Anyway getting back to the topic at hand I thought this graph perfectly illustrated the reasoning that contractors should tie their markup to their labor costs (Capacity Based Markup) rather than tying it to the total volume of Cost Of Good Sold because that number varies to much to match the consistent line of Overhead Costs that contractors face month to month. My friend Jim here uses a Loaded Labor Rate built using Capacity Based Markup like Gerstel describes on pgs 167 through 168 of his book Running a Successful Construction Company so he doesn't have any problem hitting hitting his Overhead Cash Flow requirements but if 2009 were to follow the same trend lines of 2008 and he was to use a Volume Based Markup like what is written about in Michael Stone's book Markup and Profit and like so many of us are first taught he would have Cash Flow shortfalls the first four months of the new year and wouldn't get caught up until the fifth when the summer outdoor season really picks up (and his projects sell lots of materials).
I'll finish off the workbook hopefully sometime this weekend or possibly early next week and publish a link to it here so everyone can look at it and see just how bad that Cash Flow shortfall really is. I think a lot of people will be shocked to see just how bad it is.
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FCOH — "Id say that this company would be a perfect candidate for using the labor based markup method."
Correct but I think any contracting company will see the same parallel trends in the Labor (blue line) and Monthly Overhead (dark mauve line).
I've got some other companies I be looking at over the next few weeks and if they also give me permission to use their figures I publish their charts which I predict will be different in the Materials SubContracting and Total COGS lines (and those lines will move up and down all over the place) while Labor and Monthly Overhead lines will still run parallel to each other.
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I haven't read any of the other responses, but my quick guess is that if you're trying to pay for labor and overhead costs by relying on markups of materials & subs, you're going to be hurting some of the time, according to this chart.
Jon Blakemore
RappahannockINC.com Fredericksburg, VA
Yup, you got it too.
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hmmmm....
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now...... unless i'm misunderstanding this.....the red is total costs ( COGS )
so.... if i've corrrectly estimated all my costs and i mark them up then i'm going to make more profit .... also.... my needs for cash to cover my costs, are going to directly track cogs
and.... in this graph model... cogs is parallel to materials
the cash flow NEED is NOT going to track labor, its going to track cogs
where did i go wrong ?
Nah you're missing something in there. Let me get back to you tomorrow sometime.
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Okay Mike let me try and clarify this a little.
"now...... unless i'm misunderstanding this.....the red is total costs ( COGS )"
Yes red (the top line) is the Total Cost Of Goods Sold. It is the composite sum of the Blue Labor Line, the magenta SubContracting Line, and the yellow Material Costs line. Since it is a composite and not a standalone representation I probably should have done something graphically to set the line off as being a different representation from the others.
"so.... if i've corrrectly estimated all my costs and i mark them up then i'm going to make more profit .... also.... my needs for cash to cover my costs, are going to directly track cogs"
What you are describing there is NOT the PROOF Capacity Based Markup method. What you are describing is the Total Volume Based Markup Method which is where your markup is based on and tied to the the sum of all the Labor, Materials, SubContractor, and Equipment costs (in other words the COGS).
"and.... in this graph model... cogs is parallel to materials"
Yes it is roughly parallel but you do understand and recognize that dollars represented in the Materials line are also a component part of the Total Cost Of Goods Sold (COGS). The only significance I can draw from them being roughly parallel is because the sum of the Labor and SubContracting lines while variable has a level Trend Line means that Materials sales are a Driver of COGS. If you are contractor using the Total Volume Based Markup Method that a big huge important deal to consider. You then absolutely have to sell Materials to cover your Overhead Cash Flow expenses.
On the other hand if you are a contractor using the PROOF Capacity Based Markup method where your Overhead Recovery is tied only to you Labor Costs you say "big deal", "so what". Material sales are just gravy or icing on the cake (in that you can earn a Net Profit on them) but they aren't at all important as far as recovering your Overhead.
"the cash flow NEED is NOT going to track labor, its going to track cogs"
No, the Cash Flow need, the mauve line representing Monthly Overhead Costs, tracks/parallels almost exactly the blue Labor Cost line.
"where did i go wrong?"
Did that help clearing things up?
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monthly overhead costs are not the basis for cash flow... cash flow is , by definition, tied to COGSthe higher the expenditures, the more the need for cashif COGS spikes ( for whatever reason ), then the cash flow has to spike with it or you go into deficitMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Mike Smith — "monthly overhead costs are not the basis for cash flow... cash flow is , by definition, tied to COGS
the higher the expenditures, the more the need for cash"
Well yeah but I am not the overarching concept of Cash Flow I am talking only about the Cash Flow requirements of Monthly Overhead which is only a small component of Cash Flow (the whole kit and kaboodle). I am pretty sure that each time I've used the phrase cash flow in this discussion I tied the phrase to Monthy Overhead by saying something like "Monthy Overhead Cash Flow" but if that is what is confusing the issue then I wont use the phrase again. Forget about it. Think "Monthly Overhead Charges" or "Monthly Overhead Cash Requirements" or "Monthly Overhead Expenses".
My mistake for using a phrase that confuses the issue.
Now forgetting and ignoring the word Cash Flow look at what I have been saying again.
"Monthly Overhead Charges" parallel the blue Labor line almost exactly. That is why you tie the recovery of your "Overhead Expenses" to Labor and not to any of the other lines in particular COGS.
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absolutely...<<<<
"Monthly Overhead Charges" parallel the blue Labor line almost exactly. That is why you tie the recovery of your "Overhead Expenses" to Labor and not to any of the other lines in particular COGS.>>>>and i do... but that is not where i get in trouble... i get in trouble by not having the cash flow to cover cogs in a timely mannerie: i like to get my matl discountsand i like to pay my subs fastif i can't tie a payment schedule to those items then i fall behind...
so COGS is my main interest... i want the money to be there when the sub needs it .... or when i get a big bill from the supplier for a huge window orderthat COGS line if the primary one i need to get control ofi don't have much trouble at all with labor and fixed overhead... my work force is pretty stable... subs & materials are the big variablesMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
From: MikeSmith —"and i do... but that is not where i get in trouble... i get in trouble by not having the cash flow to cover cogs in a timely manner
ie: i like to get my matl discounts
and i like to pay my subs fast
if i can't tie a payment schedule to those items then i fall behind...
so COGS is my main interest... i want the money to be there when the sub needs it .... or when i get a big bill from the supplier for a huge window order
that COGS line if the primary one i need to get control of"
That may very well all be true (with regard to cash flow) but that wasn't my primary point in publishing the graph. Although when you take a look at the whole workbook you notice that if the contractor whose number these are was using a Volume Based markup he would be in cash flow hell during the winter months whereas the Capacity Based markup scenario makes profitibily and as a consequence Cash Flow more stable and consistent.
I've produce the spreadsheet workbork in both Excel and in the new iWork Numbers 09 format so anyone who wants to play around with them can see what I'm talking about. I hear you now have a Macintosh. Do you have the new version of iWork 09? While it not as powerful as Excel you can certainly make better looking documents with it. While in an earlier post here I said: "By the way if you are thinking of dropping Excel to use Apple's Numbers,...don't. " I think I now having some more experience with the program I now have to take that back. No it still doesn't have all the big powerful tools that Excel does it certainly has all the power that 95% of the contractors I deal with who use Excel will need and since when you are dealing with clients presentation certaily helps Numbers 09 can make a contractor look good. Don't have iWork? You can download a 30 day demo here: iWork - Download iWork Trial.
Well anyway here are the links to the document I titled "A Graphic Look Comparing a Use and Resulting Effects of Using a Capacity Based Markup vs. a Volume Based Markup In a Downturn".
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Capacity_vs_Volume_Case_3_01.numbers
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Capacity_vs_Volume_Case_3_01.xls
As for:
"...i don't have much trouble at all with labor and fixed overhead... my work force is pretty stable... subs & materials are the big variables"
As they almost always are which has been part of my point making all along.
Now hijacking my own topic and talking about Cash Flow have you ever read the Oct 99 JLC article Getting the Final Payment by Brian Sutton. It about breaking up the project in to smaller components parts (which I like to call work packages) in it he writes:
I think the contratractors that use the old one-third on deposit, one-third at some point during the work, and the balance upon completion are creating cash flow problems for themselves.
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I updated the Excel and Numbers files I posted last night so that the cells representing Net Profit Dollars and Net Profit % turn red when they go negative and made a few other minor cosmetic and spelling corrections
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Capacity_vs_Volume_Case_3_01.numbers
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Capacity_vs_Volume_Case_3_01.xls
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"Monthly Overhead Charges" parallel the blue Labor line almost exactly. That is why you tie the recovery of your "Overhead Expenses" to Labor and not to any of the other lines in particular COGS.
So, is what you are saying that production revenues alone should cover overhead?
Or are we just using overhead expenses as a guide to keep production revenues and OH costs parallel?
I'm no genious and I have always been challenged following your methods as they are so far away from kiss. Maybe once I can get my head wrapped around one of your concepts...............
Nothing really. Total costs are the sum of the component costs. Duh!!!
Add the profit and revenue lines, and then we might know something.
Another interesting thing would be to see about the ability to replace sub-contractors with in-house work. For that we need to see substitution costs.
BryanSayer — "Nothing really. Total costs are the sum of the component costs. Duh!!!
Add the profit and revenue lines, and then we might know something.
Another interesting thing would be to see about the ability to replace sub-contractors with in-house work. For that we need to see substitution costs."
Hello Bryan with all due respect your seeing nothing is a case of not seeing the forest through the trees or perhaps more specifically not seeing a tree in the forest. The core issue that I saw graphically illustrated when I was doing my clients analysis and that I wanted to illustrate was in regard to markup methodolgy and while in the actual Numbers/Excel workbook those lines are represented in the case of determining Markup they aren't that relevant. They, the 'profit and revenue lines' are instead an end by-product of whatever methodolgy you use. If I am recalling correctly you're not a contractor yourself so maybe markup isn't something you think about day to day so maybe that why you thought there was nothing there to see.
I very selectivly didn't choose to include them in the initial chart I posted here because that data would obfuscate and distract from what I wanted the chart to show.
Years ago I took a course and read the book The Visual Display of Quantitative Information by Edward Tufte and based on some of what I learned then I would describe inclusion of the 'profit and revenue lines' to be what Tufte describes as "ChartJunk" which is "all visual elements in charts and graphs that are not necessary to comprehend the information represented on the graph, or that distract the viewer from this information."
Reiterating the point I wanted to make if you take the SubContracting and Material costs out of the markup computation equations you are left with the Labor Cost component which is relativly stable and almost perfectly parallels the Overhead requirements. So,.... for those that are interested the lesson is you should tie your markup multiplier to Labor Costs alone (not COGs) to properly allocate Overhead Costs. (see Irv Chasen's free JLC January 2004 article Allocating Overhead to Labor Makes Financial Sense.
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I am a contractor, just not a building contractor. And yes, we deal with markup all the time.But that graph had nothing to do with markup. I just shows costs. Markup is irrelevant. Sell at the going rate and keep costs down. Everything left is profit.Though I agree that it is the labor rate that should be loaded, for totally different reasons.
BryanSayer — "I am a contractor, just not a building contractor. And yes, we deal with markup all the time.
But that graph had nothing to do with markup. I just shows costs. Markup is irrelevant. Sell at the going rate and keep costs down. Everything left is profit."
Bryan I'm really sorry but what you just said there doesn't make any sense at all. Since when is Markup irrelevant to Costs? If you aren't applying a Markup to a Cost just what then are you supposed to be applying a Markup to? Markup is defined as "the amount added to the cost to determine the asking price."
And "Sell at the going rate and keep costs down"??? What the heck does that mean? Who says what the going rate for anything is? Just how does anyone go about finding out what the going rate is?
The phrase "going rate" is probably the biggest hunk of malarkey and disinformation thrown around in any practical discussion on markup and pricing.
How does a "contractor" find out what the going rate is for 'stair building'? What about finding out the going rate for 'electron beam welding', or how about what is the going rate for 'screen writing'. Yeah sure there are industry averages but they are just that, they're AVERAGES of rates that have been all designed and set up based on the unique and specific financial requirements of each business within a particular discipline. There are highs and lows to the range. Only once you have a group of financially intelligent parties that set the billing rates scientifically on their own financial information will you have enough of a statistical sample to even compile a "going rate."
If the chart (graph) had nothing to do with markup don't you think it's amazing that people like Jon Blakemore and Bob Kovacs were able to look at it and figure out exactly what my point was?
I guess they must just have ESP.
"Though I agree that it is the labor rate that should be loaded, for totally different reasons."
I'd be very interested in hearing just what those reasons are.
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"I guess they must just have ESP."
Actually, I do!.
And I knew that you were going to say that...
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Jon, I don't really think it's really ESP on your part at all. Given the general understanding of the topics I write about I am sure your intuition helped you along but one thing I clearly see in all the forum talking, coaching, and consulting I do is that some people just "get it" and some people don't. There are clearly mental obstacles that people either consciously or unconsciously put up that block their understanding of the concept at time.I know because I used to be one of them. I can recall way back in 1987 or 88 when I was tooling along driving my company into hopeless debt I had been given a couple of hints and warnings that I was doing things wrong with regard to my labor price from a few older contractors I was in the volunteer Fire Department with but whatever they said flew over my head. Then I went to a seminar taught by Irv Chase up in Danbury CT called 'How To Survive & Prosper In The Contracting Market' and it was like a lightening bolt hit me. Suddenly,... all of a sudden finally,...I got it. I still have the lumps on my head from beating myself with a baseball bat on the drive home that evening thinking "how could I be so stupid, stupid, stupid". It was a month or two later I finally closed up shop and called it quits and for the next two years worked for another contractor and did small side jobs and worked to pay off my debts before setting out on my own in business again.
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Well, it's Thursday night and I've made some corrections and changes to the Numbers 09 and Excel workbooks I posted links to here the other day and even added a PDF of the Numbers 09 document so any interested parties can at least see what the document looks like in comparison to the MS Excel version.
They can be downloaded from: The "What Can We Learn From This Chart" Workbooks page.
By the way one fellow who downloaded the Excel version of the workbook to a Windows computer problems had some problems with the document where all the Formulas and Formatting were stripped away. Anyone else have any kind of problems like that? Let me know either here or you can email me from my forum profile and Ill try to run down and fix the problem for you.
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