Who has Higher Overhead?
In this Hypothetical Case Study what’s higher?
1.- The Cost Of Overhead For Running A One Person Carpentry Contracting Compnay
2.- The Cost Of Overhead For Running A Two Person Carpentry Contracting Compnay
In looking at the list of Overhead (Operating Expenses) what goes up (or down) when you add your first employee? And why?
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In case I may have left something out feel free to add a category. Okay that said what about: The Cost Of Overhead For Running A 3 or 4 Person Carpentry Contracting Compnay? Any different?
Edited 9/26/2002 10:39:13 AM ET by Jerrald Hayes
Replies
Jerrald,
I have enjoyed reading some of your other posts on business and thought I might finally chime in on this one. Yours is a good question about "Marginal Costs," or how much more cost do you incur by adding that one additional employee or making that one additional Widget (as we say in the Econ. world). I'm probably not the best person to provide you with an actual answer, but I might help you refine your question just a little. You left some important info. out of your "hypothetical" that, if included, would probably yeild you a more accurate answer.
Things I thought of first were, are both employees doing the exact same job? i.e. are both selling and therefore earning comission? Are both going to be needing a computer of their own? Do both need a dedicated work space and hence a larger physical area necessitating a higher rent payment? etc... Secondly, what exactly do you mean when you ask which is "Higher" one or two employees? Do you mean what's the number at the bottom of the line? If so, then your answer is always going to be, it's higher for the business with more employees. BUT, when you start talking about costs at the margin, for that one extra employee, the marginal overhead cost for each employee will go down to the point where it doesn't much matter how many you employ at least as long as they all fit in the building you rent to put them in.
You probably know all this, based on reading lots of your other posts, but this might help stimulate some other people with practical business experience iin their answers. Good luck!
Erich
When you ask "up or down" u mean per person, correct?
bobl Volo Non Voleo Joe's cheat sheet
well, in your list the only things that will actually go up ( IMNSHO) should be :
In the management area:
Gen'l Ins -- OCRA -- Ed. & Trng -- & Entertainment
and in the field:
Job Supervision -- Tools -- & Field Commo
unless you also provide vehicles and other optional equipment......
but the bottom line is the overhead per production hour goes down with the first employee and should continue down until you reach another plateau when you have to add employees to the management side of the ledger instead of the field production side.. some of the office functions can be subbed out on a part-time basis
if I had a more perfect setup it would be one office person... three field production and myself, wearing several hats, and the volume of work to support that organization..
Mike Smith Rhode Island : Design / Build / Repair / Restore
Mike, sounds like a lot of thought and experience went into what you consider the ideal company size. At that size would you still do some of the work? I get the feeling if it was bigger than that, you'd end up just pushing paper. And at what point does it end up running you instead of you running it?
I can still get some building in at that level... when I was running 5 carps wtih no office help it was crazy... right now it's me and two carps and an office manager/CAD designer..... one more good carp and a nice backlog would be peachyMike Smith Rhode Island : Design / Build / Repair / Restore
if I had a more perfect setup it would be one office person... three field production and myself, wearing several hats, and the volume of work to support that organization.. I would love for you too make a long thread of this please.
Tim Mooney
What does the office person do for you? I currently have two full time guys and my brother and I both three days per week. I recently hired two more for a house for myself. I do all the paperwork but don't know what I would specifically have an office person doing.
bids? invoicing? keeping daily logs? How much do you pay your office person, how many hours per week do they help you?
It feels like the need is there but I can't figure out what to have a office person doing.
Mike Butler
Berkeley Craftsmen
Jim is really asking you.
Tim Mooney
i wanna see what jerrald has to say... back later Mike Smith Rhode Island : Design / Build / Repair / Restore
Hey Mike (everybody) I just finished for the week (9/27/02 3:24 PM) so now I can get back to this and tell you why I was asking. Well I'm almost finished. I need to go buy some pants and get a haircut so when I get back I'll start writting and get back to you all on this.
View Image
I don't paint things. I only paint the difference
between things.--Henri
Matisse
The other day talking to Mike Butler (jim slim) in the what
to charge, how to bill customers discussion of the subject of the JLC article
How
To Charge For Overhead -September 2002- by Les Deal? came up along
with a discussion that was going on about it on the JLC site. I commented to
Mike Butler as follows:
I then went on to explain and graph an example of how I use the PROOF Methodology
(click
to see the whole post) I then went over to the JLC site to read what was
being said and that one discussion had evolved into three and all three were
pretty categorically "dissing" the PROOF concept and method with the
attacking charge pretty much coming from three guys. Instead of a open minded
discussion looking at and comparing the alternative merits of both systems these
guys were all over Peter Bush (who uses and was defending the system).
What irked me was the one of those guys used to use and even advocate the PROOF
system to others online here. Once even recommending it to a guy here a sure
way to for a contractor to recover his overhead and profit on jobs where the
owner is supplying some of the material ( since it puts the bulk of the responsibility
to recover markup on the labor part of the equation). in fact he recommended
the system on several occasions here. Now all of a sudden he was attacking it?
And trying to point out it downside? And the downside arguments he was making
weren't even valid!!
Then MS made a comment directed at Pete saying to "do the math" and
showing how Les Deals methods would fail for a small company. I thought reading
that he wasn't doing the math because for a real small company of one to three
personnel when you add or subtract employees in that range your overhead in
terms of total dollar spent stays pretty much the same. That means if a small
contractor of one adds one employee if his total overhead dollars spent stays
the same and by adding one employee he has almost effectively doubled his volume
so his overhead percentage has gone down. I asked the question here (and on
JLC) to see if I was nuts about my assumptions or not. Reading Mike
(Smiths) post here in answer to my question was just what I wanted to hear.
Especially when he said:
As of a few minutes ago one has even bothered to answer the same question asked
over on JLC other than Peter Bush. (hey maybe we're more together on business
issues here?) When Mike then said:
I think that maybe the "perfect setup" is just past that "plateau"
he mentioned in the previous paragraph since he added an office person his staff
his total actual dollars spent on overhead went up since that person is not
paid for by "billable hours" or by generating "billable revenue".
My thinking too is that from there each time you add an employee from there
the total amount spent on OH starts to go up dramatically and at a much faster
rate that the increases in revenue that those added employees bring can't quite
keep up with.
erich where you wrote "You probably know all this,
based on reading lots of your other posts, but this might help stimulate some
other people with practical business experience iin their answers."
got me thinking I don't have all the answers at all yet but I do think that
I've finally gotten a real good handle on what the correct methodologies probably
are. I'm talking about this stuff to hash it out in my own head and hoping to
connect with people who can find the weaknesses or faults in my thinking and
logic so that I can patch them up. Building stuff has never been a problem for
me but the business end always has. I can't believe how much my my business
understanding and knowledge has grown and matured over the last five to seven
years but given that I'm 46 I often wonder why did it take so long for me to
learn this stuff? Geez.
The math we're talking about here say's ( if we are correct about it) say that
the three person company is probably the "optimum" model in terms
of the Overhead to Total Revenue ratio. If that is true why grow bigger than
that? If that is true why are there big companies out there at all? According
to The
Joint Center for Housing Studies at Harvard University something like 800,000
remodeling companies or 70% of all companies are 1 to 3 employees in size if
I'm recalling my number correctly.
I made no secrets here lately that I want to grow my company in size ( for
a lot of different reason). I do think there is a way it can be done effectively
and profitably and a lot of this talk helps me explore those issue and things
I'm thinking about. I think the key to larger company success is somewhere within
what those 800,000 remodelers are doing right. The ones who are succeeding that
is! Because it should also be mentioned that something like four out of five
contracting companies fail in the first year. Been there done that too. But
I think it took me two years to fail with my first attempt at going out there
on my own. Took two years haiutus and went to work in one bad company and one
good one and then went back out on my own again and I think it's been 14 years
sailing that way now.
View Image
I don't paint things. I only paint the difference
between things.--Henri
Matisse
sonny is a Proof grad & I am also... I think I went thru the Proof seminar in the early '80s... still got the 8 tapes in the office..
the Office person is a multiplier for me.. she can take the customers shopping for product selection....
talk to the subs...... do the shop drawings....answer the phone... order supplies...and she's better at CAD than I am... just needs help with the details and concepts.. but moving them from concept to CAD, she's much more efficient..also.. her design time is billable.. she can come out on the job and help..
a very good hire...
now I need one more lead carpenter...
but I do agree with you.. the business end is always harder than the production end... and formats like this are great...just as going to RI Builder meetings and learning from the old pros was great....but this is like lightning striking compared to those things...
I also get a lot of fresh insight at events like JLC-Live...
anyways.. I guess this discussion is about OVERHEAD as it relates to a Contracting Business.. and the most important concept I think is that the sole proprietor who thinks he / she has a low overhead is really fooling themselves... they have a much higher overhead than one guy with 3 employees...
a sole prop. has to do it all..... so assume a number... 25 hours a week related to overhead... applied to 25 hours of production... that's 1 to 1..
now assume another number... one guy using 30 hours related to overhead with 3 employees getting 35 production hours from each.. plus 20 hours from himself.. a total of 125 hours of production carrying 45 hours of overhead ( 30+5+5+5), that's 1 to 2.7.... so the small company can be more efficient than the sole prop....( note the "CAN BE")....
whatever floats your boat.....
Mike Smith Rhode Island : Design / Build / Repair / Restore
My Note: the "real" small company SHOULD be more efficient than the
sole prop. Maybe the real question should be is "when they aren't
efficient, why is that?"
View Image
I don't paint things. I only paint the difference
between things.--Henri
Matisse
Jerrald,
Thank you for starting this thread, it is rather timely for me. I have been a lurker here for several years and have always enjoyed your business insights. As both you and Mike S. have pointed out the production side is the straightforward part, it is the business side that is most challenging.
My greatest concern as I think about growing the company from a two to three man shop to four or five is the loss of quality. I think that is where the small company may suffer inefficiences over the sole prop. I may be somewhat of a controlling personality when it comes to our work product, but I know it has been done right (i.e. no cost associated with fixing screwups).
Mike ,
your observation that a sole prop would spend 25 hrs a week on non-billable work seems very extreme-It seems to me that a sole prop should not have to spend 50% of their time managing and developing work. However, has it been your experience that you spend more that 20% of your time managing and developing work with your current crew size?
Thanks again for all your insights.
Hiker
I guess it depends on wether you are a full service remodeler or builder... or you are a specialty contractor... if the first....then how do you get everything done on less than 25 hours a week....
selling... estimating .. supervising.. coordinating subs... ordering materials.. picking up materials.... shopping with customers/ product selection...bookeeping.. payroll.. taxes... permits... inspections.....whoa.. where did i leave my hammer ?
now... suppose you're a plaster sub....life just got a lot easier , didn't it ?Mike Smith Rhode Island : Design / Build / Repair / Restore
I have done this 10 years . I have had 1 employee and now have 10. It cost me big $$$$$$ every day about 1,800.00 to run my crew equipment and taxes libality insur gas ect..... The answer to your question lies simply in 2 words and you have the reins on both of them.
Management
production
And you do that how?
View Image
I don't paint things. I only paint the difference
between things.--Henri
Matisse
Every day is a battle and thats no kidding if the guys decide to take an extra day to do something it can really hurt.
If the "guys decide to take an extra day"....
isn't that alot like poor estimating?
Jeff.......Sometimes on the toll road of life.....a handful of change is good.......
A bit on the sharp side? No it usually isn't since we are on a project that we have built 8-10 times. so it would have to do with their speed. I know how long it takes per floor roof truss set since we've done it so many times. They know as well so when daed line time rolls around they even know when its coming.
maybe sharp....maybe not.
I worked for a boss that would make similar comments in the company meetings......akin to...you guys are ripping me off.......then ask for suggestions.....
We asked why installing double doors were estimated at the same time as single swingers.....he said Because it's one opening.....
The went on to bitch about how he was loosing money on each double door install.....I asked if he knew it took us longer to install the doubles...why not simply put mote time in on the next bid that had doubles......that way...he'd be basing it on our time...not his guess as to how long it should take....
he said to just start installing them faster!
Sometimes ya can't help the owner! Just makes me question when the worker is slow...but the estimator never makes a mistake.
Could be either.......Jeff.......Sometimes on the toll road of life.....a handful of change is good.......
Thats one advantage I think we have the way were set up I work with the guys 5 days a week if a time eater comes ups they ususally say I hope your really charging fot this. They know as well that if we dont make money there's no jobs in the future.
Keeping them working is very importain to me their familys depened on it.
What's the employee's motivation to move quickly? You could say something like "work ethic and the pride of performing a good job quickly" but that's only going to cut it for you if you have an excellent recruiting/screening process.
Ultimately keeping the employees productive falls on your shoulders. That's one of the many things that come along with being the boss. Do they have any incentive?
Have you asked the guys why things sometimes take longer. Like Jeff said, the estimator is rarely wrong (never wrong if the boss is the estimator). Maybe they have materials shortage. Maybe the generator crapped out. Talk to the guys, help them to take ownership in the job, and implement their suggestions.
Jon Blakemore
The carrot on the stick.. last month I took the whole crew to Big buck brewery golfing 18 holes and Game works plus two hotle rooms for the night at the marriott. What they gave me 8000 square feet with pine trim two stories in 21 days. They kicked butt. Over all cost me 100.00 a guy in twenty one days what did it really cost good moral good prouduction. I agree you must reward. If you think of it as bribing you will resent your workers.
dude...was that me that opened the can O worms for ya?
Sorry! Jeff.......Sometimes on the toll road of life.....a handful of change is good.......
Next time you can open a beer or a donut box instead of worms
We have a saying in our company, "Every mistake is a bossing mistake."
Maybe we didn't explain what we wanted adequately. Maybe we didn't get the right materials in place and on time. Maybe we didn't supply the proper motivation (carrot or stick). And every other conceivable reason including HTWB. Hired the wrong boy.
Maybe it is their speed, but there still is only one person to blame, you, the boss. So you had better figure it out and get it done because nobody else is going to.
I see your point very clearly... yet when you pay a guy 20 bucks an hour and he suddenly can't read the evelation or forgets how to figure a pine line I do have a problem with that. Does he bear any responsibility other than showing up? On my crew you are expected to do your job to the best of your ability a lack of info can be a problem. On the other hand it is expect that we are all humans and will screw up. yet each carpenter (not a labor ) should be responsible to a degree (smaller than the owner ) to get it done and right........ balls in your court I look foward to your response.
Yes, I do expect my guys to do more than just show up and not just the best paid ones. Everyone is expected to work hard and think as well. But just because I expect it, does not mean that it always happens. If you have high expectations (and it sounds like you do), you will often be disappointed. Understand that your workers, even the best, will have their off days or weeks. It is your job to keep them on their toes in a way that preserves respect and to reward them when they do well. This doesn't have to cost a dime. Most people are happy to get a thanks and a pat on the back.
One problem that we have is that our employees can sometimes get stale either from doing the same kind of work over and over or with work with the same group for a long period of time. We try to shuffle our crews and work assignments around as much as their abilities allow. This keeps everybody fresh including the bosses. This may be a little difficult if your work is in a specialized area but even then varying the level of responsibility for the employees can keep them fresh and on top of the situation. Good luck and don't get discouraged by the bumps in the road.
. Most people are happy to get a thanks and a pat on the back
Wrong! Most, no ALL of us are in this for money!
Sure there are alot of good reasons to do this kind of work.
It is rewarding and satifying work.
But in the end we all need to get paid for it.
A pat on the back and a thank you only go so far. If you really mean it do something to make your Employees life a little better.
if your workers don't feel they are sharing in your success (other than the work end of it) they will never be motivated to go the extra yard.
When you tell a worker that he needs to be more productive or efficient, is this just because you need to make an extra boat payment this month, or is it because he needs to be part of the team?
Don't take any of this personally.
I am just putting forward the employees view of things.
Some times the "boss" needs to remember what it is like to wrk for some one else.
Mr T
Do not try this at home!
I am a trained professional!
The boss is always working for someone else. And we appreciate a pat on the back as much as anyone.
Our company has more long term employees than any outfit in our area. They are paid a competitive wage and have some benefits but that is not the main reason that they stay. Far be it for me to speak for them as to each one's specific reason for staying with us but I know it is not the money.
Just had an employee ask for health insurance. We had checked into getting it for the crew, but at the time the insurance company said 75% would have to take it. Our own family policy would be $300.00 more a month. Decided since we knew that we couldn't get 75% to participate and that ours would be $300.00 more we wouldn't get it. NOW we have three full time employees and one of the guys wants it or he is going to look. The other two I think are covered under their wives policies. The guy wanting it is single and if he went to get it on his own I think it would be sky high for him. He has some stuff going on that they would red flag. So here is my BIG question? How many of you have health insurance and do you pay the whole amount or just a portion? To be honest at what we are looking at for workman's comp and health I honestly wonder how many "small companies" can stay in business. Around here most customers don't want to pick up the tab. Meaning our prices will HAVE to go UP! By the way I personally know many companies that don't carry workman's comp etc. Trust me these are BIG companies! Hope someone shows up to help me here. This is stressing me out!Tamara
tamara... if you can get over the hump.. it puts you in a more competive position.. every time you can fold a benefit into your company .. you move a personal expense into a business expense...
are you incorporated ?
if you or your husband decided to chuck it and go to work for someone else.. what would be your criteria.... hmmmmm.. lesseee...yup.. health care , paid vacations, retirement pkg....
the short answer is ... we had all of 'em.. the '80's recession killed everyone of those including WC .. so far we're scratching our way back to running a real business.. we incorporated .. we have WC... we pay good or better rates... next thing has gotta be Health Ins...... which would be tomorrow if my wife lost hers...
i personally think any company is only as good as it's employees.. so recruiting and retention have to be high on the list ...Marketing can get you the prices to support the higher cost of benefits.. but it's the employees who have to deliver on the marketing promises....
perhaps the two employees that are covered by their wive's are paying a surcharge ...find out from your accountant what the rules are for coverage..Mike Smith Rhode Island : Design / Build / Repair / Restore
Thanks for the words of wisdom. Yes we are going to speak with the CPA and with a business attorney. Also have insurance company getting me the information on group policies and workman's comp.Tamara
I'm in the same place, looking to add health insurance, to aid in employee recruitment and retention. Look into trade associations. In my case the Wisconsin Home Builders Assoc. They have group health, dental, vision, etc. available. Initially looks good, but best rates are through PPO's, which can limit care providers. Good luck, and keep us posted, you may find something that would work for others here.
Brudoggie
Don't stop looking at just the trade org's....I got the best price by joining my local chamber of commerce.......and in my area....I had 5 chambers to choose from!
Jeff..............Al-ways look on......the bright......side of life...........
.......whistle.....whistle.......whistle........
We have the same problem here . I hired a young man who had some experience , and was very good . I payed him 2 dollars per hour more than going rate in hopes of keeping him , but I lost him to a large company . He took my raised offer , and went to them for benifits . They matched my offer and gave him medical and dental, paid vacations after a year , and a retirement plan based on profits. Hes doing about the same thing only commercial. I would need to be in another class . I sub mostly.
Tim Mooney
ya right if your boss cut your wages to $4.75 an hour and had you work 20 hrs of over time that you had to bank until it slowed down at which time you only got $4.75 for the banked time. You would be gone as soon as you got some thing better.