I am trying to figure out what it costs to hire the first employee.
Let’s say this employee gets paid “X/hr”. Add the taxes, unemployment, industrial insurance, whatever else the employer is required to pay by law and come up with the dollar ammount per hour for this employee.
Then add the increased overhead of having an employee (let’s leave calculating that figure for another discussion) and the total is the true cost for having this employee.
There’s no point in having an employee unless it makes the company money. The question is what would you consider a “fair” ammount to make from this employee?
I am thinking 20% above this employee’s (true) cost is a good starting point.
I’d like to hear anyone’s opinion – homeowners, businesspeople, employees, ANYONE’S. Thanks.
Tipi, Tipi, Tipi!
Replies
Jim,
I'm not clear about what you're asking.
Do you mean what your gross sales per employee should be . . .
Or what markup for profit you should put on the employees salary for your charge rate?
In the first case, I'm thinking at least three times his salary. In the second, I used Jerralds fine PILAO worksheet.
are you talking 20% markup
or
20% margin
there is a difference.
say it is costing you $1.00 to carry an employee. if you mark up that cost 20% you will charge the customer $1.20. if you want to make 20% margin you will charge the customer $1.25.
margin is calculated based on the final price. 20% of $1.25 is $1.00. markup is calculated based on your cost.
Jim,
What's fair?
I'd say, as much as your market will allow, above paying this person a decent wage, covering their employment costs, and hopefully some benefits.
Personally, I'd shoot for atleast 50% above total cost. Their are alot of unseen costs associated with employees, at times. Ie, education, lost productivity due to personal issues, etc.
I know of contractors that make well over 100% above cost, but they pay very poor wages. Fortunately, for them, there aren't alot of opportunities around here that are much better.
Brudoggie
Edited 3/31/2006 10:38 am ET by Brudoggie
if you hire at 12 dollar hour, you need to charge $65 a hour
Kidding right?
Jim,
My last 2 employers were 15 years ago, but both of them are still in business, and both billed my time out at roughly 3 times what I was being paid, w/no benefits. Plus I assume they made a markup on the material I installed also.
One employer was a few credits short of a college degree in accounting, so I assume he knew what he was doing. The other was 3 days older than dirt and i assumed he learned in the school of hard knocks.
Bowz
That doesnt sound off the mark to me, but as the phrase goes, whaddikno?
I'll say with my guy paying 12 and billing at 25 would be cutting things awful close. Survivable if we stay busy and nobody ever makes a mistake. *ahem* The biggest part of the equation to me turned out to be the highway robbery that insurers like to refer to as workmans comp.
"Sometimes when I consider what tremendous consequences come from little things, I am tempted to think -- there are no little things" - Bruce Barton
Jim, having had employees, the only real advice I can give is this. They are like farm animals. Whatever you do, don't give 'em names.
I'm not really kidding there. You're a softie like me, and I get attached to my employees. When things turn sour, either the relationship or the economy, it breaks my heart to let 'em go. Just viewing it as a business relationship is really hard, and I end up looking for work for them, bleeding money from my own wallet, when I should be laying them off.
So, charge a lot. Make sure you're profiting enough to make the headaches worthwhile. I think that you should annualize the profit you want from him. When does the profit exceed the headaches? Is it another 30K a year? Then you've got to clear $15/hour on him, after all the overhead and all the times he costs you money through mistakes, training, and so forth. Maybe you need to clear twice that to cover such contingencies.
For me, they suck the fun out of being in business. I'm done having employees. I'm much happier without, and enjoy the occasional loose partnership on larger jobs. Otherwise, alone is good.
Andy
"Never try to teach a pig to sing. It wastes your time and annoys the pig." Robert A. Heinlein
"Get off your dead #### and on your dying feet." Mom
"... don't give 'em names"
Andy, you're killen' me, but it's so true.
Phat
Never underestimate your ability to overestimate your ability
I'm a framer, I need people to help with things I've historially paid slightly above market. I thought that would help keep the right guys working for me and maybee even lure some of their friends. I still kept losing guys and for the worst part of it I was training these guys to be good workers for 3-4 months and they'd quit. Now I pay the least I can get away with, I let them pick it up on their own, when they seem to be in a good 'zone' I might take the time to show them something. If I didn't absolutely need employees I would never have them. Sure I'd be slower and I'd need a forklift and walljacks. If what I do in an hour takes my two employees three, it would have been more cost effective for me to do it myself. It's frustrating but I'm not going to be young forever so I'm trying to develop my buisness so I'm not required to kill my body when I'm 40 or so.
Well, I think the owner is almost always more motivated than the employees.Andy
"Never try to teach a pig to sing. It wastes your time and annoys the pig." Robert A. Heinlein
"Get off your dead #### and on your dying feet." Mom
I don't know what it's like where you are but we pay 1o.43% of a workers wage for 'workmans compensation' should they ever get hurt they are covered for 90/ of their wage as long as it takes to get well. There is a tonne of fraud up here, more so with bigger companys guys will hurt something like a shoulder or wrist at work and then take 1 1/2 years to recover all though hockey doesn't aggitate the injury. I'm very fortunate my employees have never been hurt. The one my age is at a genetic disadvantage, and Is likely going to spend his whole life in pain or atleast more so than the rest of us. I've thought of telling him to quit, while he's still able bodied enough to do a lower impact job. Framing is hard on a body, especially a week one. He starts having to get surgerys for carpal tunnel, and bi weekly adjustments and massages and I'm afraid he'll go on workmans compensation. Which will put my premiums through the roof. Not to mention make it near impossible for him to get another job. I've given him every opportunity to atleas reduce the tolls on his body. I usually do most of the nailing, climbing, carrying, ect. I've got all the ladders and ramps you could ever want, nailguns available at all times. Still catch him lifting too much, still pounding nails into lvls. I guess some people are just doomed
"For me, they suck the fun out of being in business. I'm done having employees. I'm much happier without, and enjoy the occasional loose partnership on larger jobs. Otherwise, alone is good."
Andy,
Makes one wonder why employers don't hire more hourly subs/part-timers. That's the way I've worked for my employer for close to ten years and would never go back to a full time "package" with benefits. Makes it easy on him and me. When things get slow, I work on my house, take flight lessons, whatever. When busy, I make extra OT. win-win
Jon B.
Here in CT at least, it's insurance. Self employeed, I don't need a WC policy, and my health insurance is a policy that covers the self employed. Were I to hire even one employee part time, I'd need WC, and my liability classification would change.Andy
"Never try to teach a pig to sing. It wastes your time and annoys the pig." Robert A. Heinlein
"Get off your dead #### and on your dying feet." Mom
It is the same in Ohio. They also have an interesting program with WC. The first 2 years you pay the "rate". That meant that for 2 guys, no accidents, $960 a month. After 2 years you can join a "group" which manages the issues for WC. After getting into a group my rate for 3 guys is now $105 a month. If you can figure out the methology in that let me know. I can't find anyone that can including the WC people. And you can't join a group till you have been in the system for 2 years. DanT
we joined a group last year thru the urging of our agent
reduced premiums by more than 20%..
of course , if you count in me buying breakfast at the safety meetings, maybe it ain't that muchMike Smith Rhode Island : Design / Build / Repair / Restore
I would assume that the highest risk for the insurer is your first two years in business with employees, and that the risk is significantly higher during those first two years than once you have a history that they can examine.Or else that they want to set a barrier to entry for marginally financed operations that might be out of business with two years anyway???Dunno, just speculation.Rebeccah
The 2 year risk assesment is probably correct. In our state it is mandatory. So everyone works as a sub or a single owner company to avoid it. Just we suckers that pay I guess. I really like it an want to provide it but at that rate per month I can understand why no one can afford it! DanT
Jim,
I think you are asking what it costs over and above wages on the average for taxes, ss, etc. If that is correct then I usually figure 25% as we have mandatory workmens comp.
Plan on a 3-4 month period of time before they will make you any money. It seems to take that long to determine how and what they can do in terms of doing to the quality level you expect. Also just getting them comfortable with you and you them is a time consuming process. I always make a list of things to cover with them and plan on covering the foreign stuff twice.
And as Andy Engel said if you want it to work you have to be willing to let them go if things slow up. I tell all new employees to figure on 30 hours for the first month so I am not paying them entirely just to hang around and watch. DanT
jim.. remember the old unscientific rule of thumb ?
1/3 cost + 1/3 for the company + 1/3 for me
i assume a 60% burden for our employees, so following that
a $10/ hour guy would cost me $16
plus 1/3 for overhead ( $16 x 1.33 ) = $21
plus 1/3 for me ( also known as profit ) ($21 x 1.33 ) = $28
so i'd charge him out at $30
an $18 / hour guy would cost me $28.80
+ 1/3 for the company ( overhead ) ( 1.33 x $28.80 ) = $38.30
+ 1.3 for me ( profit ) ( 1.33 x $38.30 ) = $51
now... guess what i bill an $18/hour guy at ? would you believe $45 ?
and sometimes ..... $50
i always thought it was funny how close i would up being to that olde rule of thumb..
shoulda done that from the get-go instead of sweating the numbers
jim.. remember the old unscientific rule of thumb ?
1/3 cost + 1/3 for the company + 1/3 for me
i assume a 60% burden for our employees, so following that
a $10/ hour guy would cost me $16
plus 1/3 for overhead ( $16 x 1.33 ) = $21
plus 1/3 for me ( also known as profit ) ($21 x 1.33 ) = $28
so i'd charge him out at $30
if your price model is 1/3 for cost, company and yourself you aren't charging enough. if your cost is $16, your overhead is $16, and profit is $16...total $48/hr.
to illustrate my point what is 1/3 of 48..........16
if you apply your 1/3 model to $30 you are only getting $10 for your labor, overhead, and profit each.
to make this discussion practical we need to decide if we are discussing mark up or margins...just saying 25% doesn't mean anything unless you know how to apply it.
here is the margin formula
P=price
GPM=gross profit margin
C=cost
P=C/(1-GPM) - all you know is your costs and desired GPM. once you define these two variables you can calculate your cost
Here is how you arrive at that formula
P-(P x GPM)=C --> P(1-GPM) = C --> P=C/(1-GPM)
Mike's old rule sounds close to what I was paid and what I was billed out for last time I was an employee.
The carps and leads ... making $15 and $18/hr ... were charged out at $50/guy.
pretty much hits Mikes numbers.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
Jim-
hire me
I'll work for 5 board feet of CVG fir/hour.
Actually, I don't know much about this except that the last place I worked, I was billed out at about $70 while working for $20 or $23. We had high transportation costs and we would often work on the road though.
Are you going to bill for the same amount of hours as your employee actually works, or are you going to pay your employee for things like prep, cleaning, transportation, that you may not bill for?
zak
jimblodgett ---
See how long it takes him to do the same work you do. Price his labor so the cost is the same regardless of who does the work.
As he gets faster pay him more.
I don't know Jim but when you say "let's leave calculating that figure [increased overhead] for another discussion" & "what would you consider a "fair" ammount to make from this employee?" it sounds to me that after figuring out the new employees "cost" you then think figuring out the rate to bill that person at is something of an esoteric decision where I think it is primarily (but not entirely) a pragmatic one.
What I tell others making the move to hiring an employee is first set up the PILAO Worksheet for just a solo operation based on your historical costs. Then add that second employee and the associated costs (The Labor Cost Worksheet) for that employee. What usually happens for the solo operator hiring the first employee is that the billing rate for you that the PILAO worksheet generates actually goes down and that's because most of the overhead costs (The Overhead Cost Worksheet) stay the same. There are some slight adjustments that you make to some of the line item numbers but for the most part your fixed overhead costs on that worksheet stay close to the same as they were when you were going solo.
So now you have a new rate for this new employee and (probably) a lower billing rate for your time does this mean you should now switch to using that lower rate. No it doesn't. That's really sort of a quirk of the hard math calculations of the worksheet. If the PILAO worksheet says your personal rate is now $65 per hour and you've been quoting jobs for you clients based on $70 per hour and you have no real problems or genuine arguments with you pricing then why change it? You then go back into the spreadsheet and then bump up the figure for Net Profit on line 103 of the Overhead Cost Worksheet upwards until your billing rate hits your old billing rate again.
Then the difference between the dollar figure on that line with what it used to be is what this new employees is worth in $$$ to you.
"I am thinking 20% above this employee's (true) cost is a good starting point. "
I think that is just way to vague and dangerously subjective and is not really grounded in the real numbers for running a business. Were you thinking that 20% is what you would then make or were you thinking that 20% is that employees contribution towards your fixed overhead costs?
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it must be my eyes....
every time I look at the title to this thread I think it says hanging instead of hiring...
Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming
WOW!!! What a Ride!
Forget the primal scream, just ROAR!!!
Edited 3/31/2006 8:53 pm by IMERC
When I had my cabinet shop and I finally decided to hire some one I found that no matter what I did, that person never made me any money, I usually lost money on him which meant it came out of my pocket. But, he did help take the physical burden off of me when it came to doing the heavy stuff.
When I got backed up on a few jobs because of scheduling and construction delays, I was forced to hire another guy just to keep up with the new time schedules. I also bought another saw, this helped too.
When I completed the first of the three jobs, I was more money ahead than normal and I paid off the saw along with another piece of machinery. The extra guy helped free me up to bid more work and still be able to focus on the elaborate stuff while the two of them worked on the normal, mundane stuff. I was starting to spend more time away from the shop and in the office/sales, not my favorite.
The true profitable time was when I had three guys working in the shop and I basically did the management. The problem with this was that these guys didn't have it in them to want to learn the intricate stuff and I didn't't trust them to do custom setups, which is what my shop was know for, so I was back to running a business during the day to keep 3 guys busy and doing the custom stuff at night to keep the customers happy. Unfortunately, I wasn't happy, and neither was my family. Something had to change, and I chose the family.
So, back to myself in a one man shop. I does get lonely sometimes...
Some thing to keep in mind
Reading and nodding my head alot. Lots of good food for thought here everyone. Thanks, and keep it up.
I'm not sure I understand why there's more labor burden for a higher paid employee. I guess it's because of the increased responsibility they are expected to carry - meaning more equipment for them, but that's a good example of the thoughts many of your posts have generated. Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
jim , i don't know if there is a higher burden percentage for hire paid workers as opposed to lower paid workers
but , with more employees the is a higher " propensity to spend "...
one of the examples was buying additional tools.. new employee, new nail gun..
two new employees , new trailer
three new employees , more staging
so , the burden doesn't go up ( unless you have company vehicles and you go from say one truck to two... that should be a function of burden.... no worker/driver... no extra truck )
and my simple example was not margin, it was mark-upMike Smith Rhode Island : Design / Build / Repair / Restore
"i don't know if there is a higher burden percentage for hire paid workers as opposed to lower paid workers"
Not if you figure it in %, Mike. But 60% of 18/hr is definately more dollars/hr than 60% of 12/hr. That's all I'm saying. I hadn't considered using % as the method of recapuring overhead on employees. I was thinking more along the lines of dollars/hr/employee, regardless of their individual wage.
Not arguing, just trying to understand.
Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
Jim, what will be interesting to me will be how your own billable rate compares to that of a potential employee. Gerald touched on it with his example of you being billed currently at 70, but the employee would be billed at 65. Not too far fetched to think you might need to raise your own rate to be right with all this.
But as an aside, opening day tomorrow.A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
Well, I can see a scenario where (some) employees could be charged out at a higher rate than the boss. Why not?
We just got home from 5 days at Spring Training. What a great gettaway. 9pm and we're in t-shirts and shorts, sitting closer to home plate than first base, about 10 rows up...great time. Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
calvin - "
Jim, what will be interesting to me will be how your own billable rate compares to that of a potential employee. Gerald touched on it with his example of you being billed currently at 70, but the employee would be billed at 65. Not too far fetched to think you might need to raise your own rate to be right with all this."
Well that isn't quite what I was getting at with my post. What my point was that if the billing rates of both employees are contributing to the recovery of overhead that overhead (while remaining the same in terms of dollars is going to be lower in terms of percentage per employee it that particular case. But that doesn't mean you should use charge lower rate. You increase your Net Profit so that you are making more to account for the risk and responsibility of having that employee.
(PS Did you notice the big win and great start the Yankees got of to last night? It is that time of year again thank God!)
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jerald... i looked all over JLC-Live for you...
was that you in the spandex demonstrating the miracle mop ?
seriously.. i still owe you lunch , ya big yankee fanMike Smith Rhode Island : Design / Build / Repair / Restore
MikeSmith - "jerald... i looked all over JLC-Live for you...
was that you in the spandex demonstrating the miracle mop ?
seriously.. i still owe you lunch , ya big yankee fan"
Nah I couldn't get there. I had only one day available to go and an old girlfriend showed up so I spent the weekend with her.
But the funny thing was and you will probable hate me for telling you this I saw the photo of you and a bunch of guys taken there and I printed it out for her to look at and asked her what she thought it was. She thought it was an old photo of me with a bunch guys. She thought you was me. But to make it even funnier she thought the picture of the older you looked like a younger me! What the heck does that mean I look like now! What a bummer. Anyway here's the two photos to compare. She actually took the picture of me.
Mike Smith and some of the guys at JLC live.
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Me in 1992, 14 years ago.
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I think it's the glasses and the baseball cap because I can't believe in real life that we would look anything like each other. And I probably out weigh you by a hundred pounds too. But heck I'll still take that lunch the Yankees won me!
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I'm stoked to see Johnson throwing 94-95 already. This time last year he was only in the upper 80's.
I'm ok with Moose, but the rest of the starting pitching has me concerned. Of course, lighting up Zito for 7 in 1 1/3 is always a good sign. We'll see what happens against Harden tonight.
Sox are losing 4-0 against Texas.Speak the truth, or make your peace some other way.
The game is on in fifteen minutes so I'm probably signing off for the evening to get my fix. These west coast games are a killer the next morning though. It's tough being a Yankee junkie.
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I agree. I'm used to hitting the rack by 11pm, but west coast trips push that back past 1am. It's still better than when they opened the season in Japan.
It costs me a $150 a season just to get all the games. Speak the truth, or make your peace some other way.
No, didn't see the 400 mill victory.
was busy watching the lesser priced spread getting creamed and then the subsequent day off. But today, beating the 05 world champs was sweet revenge.
You should come to cleve, I going to one of the games v. the high priced boys.
I guess now that I've thunk about it. What I meant in that post was jim has figured all the costs of the employee and that employees worth (wage) and when adding them up-lo and behold, he's gotta bill him for more than he's billing his own time for. Now to me, that means he's underpricing his own contribution. But with what you just mentioned, I'm thinking that a percentage might not be the real method to use for the cost of an employee. I'm thinking it might be closer to the truth to set a dollar amount for the cost of that employee and all of them as it were and then add that to the wage cost. Figure profit as a percentage of all of it put together. But now that I read what I've just written, I'm thinking I'm all wrong.
And now to the important stuff. You gonna make it to the fest this year? It's in your stomping ground. Take all of a couple hours out of your day. What do you say?A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
what works for me -
say I hire a guy at $12
12 x 1.15% covers FICA = 13.80
13.80 x 1.15 covers liability & misc OH = 15.87
15.87 x 1.50 covers profit & down time = 23.80
bill out at $24
which is close to what my accountant told me thirty years ago. He figured in construcytion the round figure rule of thumb was to double what you pay the guy
Now that works when I keep him busy around the clock stedy, but if I start doing smaller jobs, there is more down time that he still gets paid for. and I provide no cavation or health benefits
Welcome to the
Taunton University of Knowledge FHB Campus at Breaktime.
where ...
Excellence is its own reward!
So how many here use the PROOF system?It seemed like it was all the rage a few years ago, but from what I can construe most are not figuring their costs this way. Or maybe I'm misunderstanding something.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
i went to a couple PROOF seminars in the '70's..
i based our pricing on it.. but my understanding is that not all of the O&P has to go on labor..Irv Chasen was quite clear about that
if you spread the O&P to materials and subs ,you can reduce your labor rate
on some jobs our matls. subs, & in-house labor will be about the same.. so i allocate the same percentage to all three... AFTER i fully account for burden
as a result , our T&M labor rate is $50.. if i didn't share the O&P to M&L also, our rate would have to be about $75
if i were more of a specialty contractor with a higher percentage of our COG as in-house labor.. i'd probably shift it to a labor heavy markupMike Smith Rhode Island : Design / Build / Repair / Restore
MikeSmith - "i went to a couple PROOF seminars in the '70's..
i based our pricing on it.. but my understanding is that not all of the O&P has to go on labor..Irv Chasen was quite clear about that"
Whaaa? I think Irv Chasen was quite clear about exactly the opposite!
I took the same seminar back in '87 and in the PROOF Manual (How to Survive & Prosper in the Contracting Market) it's not until page 80 that he first mentions Overhead Markup on Subcontracts and Materials and in the first paragraph of that section he writes and I quote:
Only after that introduction does he get around to saying:
For the next three pages explain how that method works but then in the very next section called Nine or Eighty-One Combinations he illustrates one of the big problems with using that method over a PROOF (Capacity Based) methodolgy.
Every thing that Irv Chasen writes says base you overhead recovery on Labor. The only circumstances that he writes about where he thinks it okay to markup for overhead recovery on materials (he does always say to markup materials for Net Profit) is when the processing and handling of those materials generate their own fixed overhead costs such as a retail environment.
I have a business consulting client who in addition to being a landscape contractor also runs and maintains a nursery. Since the cost of running and maintaining that nursery generate overhead costs in his case I set him up with a markup on materials that would cover the recovery of those overhead costs and generate a Net Profit on the material sales but if providing materials is not creating overhead costs (which is typical of 90% of most contractors) why tie overhead recovery to it?
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JonBlakemore- "So how many here use the PROOF system?
It seemed like it was all the rage a few years ago, but from what I can construe most are not figuring their costs this way. Or maybe I'm misunderstanding something."
Jon according to my own anecdotal observations the majority of all contractors don’t really have any kind of a codified pricing methodology that they can clearly and rationally explain to others. Of those that do have a real pricing methodology in place half of them (25% of all contractors) fall into the Total Volume Based Markup method and the other half (25%) use a Capacity Based Markup (also known sometimes as PROOF).
Almost a year and a half ago I took a poll over on JLC regarding What type of Markup/Pricing Strategy Do You Use? And the results came pretty close to verifying those anecdotal observations of mine.
As for “PROOF [a Capacity Based Markup] being the rage here a few years ago” I’m not really sure just what your getting at. Are you inferring that it might have been just a fad? The thinking behind it is really not new and comes from the later part of what is sometimes called the Second Industrial Revolution (1871-1914). During the military buildup to the Spanish American War shipbuilders at the time found that recovering their overhead and earning a profit was better and more accurately tied to the TIME a process took than it's total overall cost (labor and material cost) because some processes took lots of time and relatively little material compared to some of the other manufacturing processes.
What I have noticed in the discussions over the years that internet forums have been around that discussions on markup methodology are often heated and passionately debated. Back in the old Remodeling Magazine forums (97-98) there was a great discussion called How Much Markup is Enough which I recall being the first really great discussion on markup and it went on for over a year. I think the winner of the war back then was the Capacity Based or PROOF method but then when JLC set up a Markup & Profit Forum where the moderator was Michael Stone who advocates a Total Volume Based Markup that method took some ground for a while but with no response from Michael Stone or any other users of a Total Volume Based Markup to the all problems it's creates I think the Capacity Based Markup method eventually took back the ground it may have lost.
As for BreakTime I think there has always been a slight edge here leaning towards the Capacity Based/PROOF side of the fence.
But to tell you the truth I think it always been pretty close to 25% of all contractors use a Capacity Based Method, another 25% use a Total Volume Based Markup, while the other remaining 50% price based on what they think and feel they need to charge to cover their overhead (for lack of a better description). In other words there no real logical math behind it and they just base their pricing on what their so called "experience" tells them.
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Jon - After reading these threads until my eyes blurr, I still don't know what label to attch to my system, but I try to recover all my overhead on my labor. Then I mark up for profit on labor, materials, subcontractors, everything except permit costs and dump fees.
Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
Jim,I've not taken the PROOF seminar that some have referred to, but it sounds to me like you're using the system.Just out of curiousity, why do you not add for profit on "other costs" (dump fees, permits, etc.)?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Wellllll, let me see if I can say this...
Dump and permit fees are set by others. I don't have any affect on them. I just pay what I'm told to pay by the appropriate clerk.
Now building materials, subs, and labor are all examples of selections I make based on years in the trades. I believe I affect the value of them, or affect the value the customer gets for their money, thereby earning a mark up on them.
What do you think? Does this make any sense?Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
jim.... where does this concept of "earned" come into it ?
you are not a wealthy man in terms of material goods.. so obviously you are not ripping off your customers..
matter of fact, your customers are better off because they have you to deal with...
i know mine are..
anyways.. any cost that goes thru your books is a cost you are incurring for the benefit of your customers.. wether you "add value " to it or not
you are in business for the benefit of two parties:
you ( and your family ) .... and your customers... making a profit enables you to stay in business and prosper.. enabling your customers to enjoy the continuing benfit of having you to deal with
so... can we get rid of the guilt ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
hmmmmmm...never have thought of it as "guilt". Have to ponder that a while.
I don't have any qualms about profit, or explaining it to anyone, anytime. I charge for the time to get the permit, the time to take stuff to the dump. I collect the overhead associated with having the equipment to haul that trash and to compensate me for the wear and tear on the vehicle...
No, I have to say, Mike, I think that profit is a function of the value I add to the choices I make spending the customer's money. I don't see how I can charge them profit on administrative costs like dump and permit fees (can't think of any similar fees but there MUST be some).
I'll sure let it turn in my head, though.
The rest of you all mark up permit costs? Dump fees?
Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
everything that is on my spreadsheet as a job cost .. goes to the bottom line..
and it ALL gets marked up..
permits... dumpsters... engineering feesMike Smith Rhode Island : Design / Build / Repair / Restore
Jim-
It's all a matter of how you look at it. Say your overhead for a year is $150,000, and you also want to turn a profit of $50,000- that's $200,000 to recoup thru markup in a year. Now, let's also say you get a huge job that's going to take you working fulltime for exactly one year to complete it. Let's assume this job has $400,000 in costs that you consider "worthy of making a profit on" and $400,000 in dump fees, permit costs, etc. You can do one of two things:
- Spread your $200k in OH&P over the $400k of "profit-worthy" costs, using a 1.5 multiplier.
- Spread the $200k over the whole $800k of project costs, usinga multiplier of 1.25.
In either case, you recoup your overhead and make your required profit. If it makes you feel better to not markup permit fees, dump fees, or whatever else, use the first option- just make sure you don't leave yourself short in the end.
Bob
If I touch it, move it, handle it, arrange it or even know it will happen on my job I make money on it. Frankly I don't see how you can make a profit year after year and not. This business has too many down times and unexpected expenses to not maximize your profits when you can. Just my opinion. Your milage may vary. DanT
Jim,
First off, I completely understand where you're coming from. As many know, I've been studying the business of construction for several years but have only *really* been involved in it for less than two years. Our company is expanding (and needs to expand) so I've been wrestling alot with just how much to charge and what our profit goals should be.
The rest of you all mark up permit costs? Dump fees?
We mark up all non-labor related costs (just like Mike says, if it's on the spreadsheet...) for O & P.
I also think that your statment about profit correlating with value added is something to chew on, but then Mike's counter about your customers being better off since they have found you is a good point as well.
Ultimately I think I would have to agree with Bob that it's 6/1 and half a dozen... If you're making enough to cover your overhead and a reasonable profit, no matter what method you use will be right. Sometimes these discussions can get heated, but it all really comes down to the Schedule C at the end of the year- Are your gross sales more or less than your costs? The different methods have value for different people, but you must find one that works for you.
Jim, out of curiousity, I think I remember you saying that you don't do much T&M work any more, is my memory right?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
"Jim, out of curiousity, I think I remember you saying that you don't do much T&M work any more, is my memory right?"
It comes and goes, Jon. For a couple years I was bidding almost everything I did. The job I just finished (kitchen remodel), the job I'm currently on (drywall - turnkey, small waterfront home) and the next job on the schedule (whole house remodel, master suite addition, garage and romperroom addition) are all T&M.
I like T&M, it allows me to focus on what I do best, serve the customer. But I am trying to be careful about billing practices. I'm learning. Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
You will have to pay SS and medicare taxes based on your employee's wages. That adds 12.4% for SS and 2.9% for Medicare, so that is already 15.3% above what you pay them.
Then you have to pay Workers' Comp insurance, say about 1% or so.
Then you have State taxes to pay. Here in IL, we have to pay State Unemployment Insurance, which, depending on your situation, may be another few percentage points. For arguement's sake, let's say it's 3%.
For just those alone, that's about 20% of the employee wages that you have to pay.
Then add in your time or accountant costs to run payroll, file quarterly and annual payroll taxes.
Are you providing benefits? Medical, sick pay, retirement? Gotta figure those costs too.
Management of employees: That takes time to keep them working. Also consider when they get sick or quit. Or the mistakes they make on the job. More time for you to add up.
As you can see, charging a customer 50% more than what you're paying an employee is not out of line, and probably pretty cheap. 100% more would probably still be cheap for the customer. You have to see what the market will bear, but these are good starting points.
Pete Duffy, Handyman
Wow! Your WC is cheap! Here, it varies by class, but for general carpentry with no roofing, it was upwards of 20% last time I checked, somewhere around 50% for roofing. My labor burden including taxes and before figuring in anything for profit was something like 50%.
Andy
"Never try to teach a pig to sing. It wastes your time and annoys the pig." Robert A. Heinlein
"Get off your dead #### and on your dying feet." Mom
with price of fuel today, need to allow for that. A run to hardware is 5 dollar in fuel.
Getting away from the job for half an hour: Priceless.Andy
"Never try to teach a pig to sing. It wastes your time and annoys the pig." Robert A. Heinlein
"Get off your dead #### and on your dying feet." Mom
don't forget everyone you buy stuff from now adds a fuel charge. Do we?
if you're looking to get the most realistic view possible, you also have to factor in opportunity costs for the employee, and the inceased amount of work you can now handle, by having the employee (it might cost you to carry him, but that may be offset by being able to pick up another job a week etc...)
I've weighed this question a lot myself. I like to pay my help what I would want to get paid if in their shoes. Needless to say that would be a decent rate. Lats say I pay a guy $15 / hr. I use a service called a Professional Emplyer Organization . Technically my employees work for this company and I lease them hourly. The company debits my account every week after I fax them time sheets. I also pay for their comp through this service. In the end a $15 dollar an hour guy costs me $22 / hour out of my checking acount. I figure in a little mor for overhead, tools, low productivity, mistakes and I come up with about $28 / hr. If I am subbing then my profit wil be slim since I need to be competitive (see guest worker program for detaisl). I hope to make between $30 - $35 hr. On bid jobs of my own I price a job at $30 /hr per guy then add 10% to labor and materials combined. I'm still looking for the best way myself. I'm still not making what I want but my guys are happy, I have few headaches, I enjoy their company and happy employees build a good reputation. I can only hope that this will raise me to the level jobs that pay well. right now it's about 50 / 50 as to how many people think I'm off my rocker charging this much and people who accept. I really would like to get $40 / hr per guy. That would allow for some growth and some profit. Not sure how to get there and still stay busy.
hvtrim...
no way can you ever make money at those markups.... on one job you will make a little, then lose it big on other jobs
no matter what markup system you use.... 10% doesn't do it
you're making ABOUT $8/man....$16k /man/year..
but that is to cover O & P... au nd it won't normally cover O..
then you add your 10%.. and you maybe get to the "well , maybe i can pay all my bills for the company, but there is nothing left for my family level"
you need to review your cost of doing business and pull out some of your previous job costs
do you file a Schedule C for taxes ?.. are you covering everything on that schedule ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
Mike is right. Those margins are tight. I pay one guy 10.50 and the other 16.50. I bill $50 an hour for their time. Sometimes 45 but not often. I mark materials up on all small jobs 40% and large jobs 20-30. And I am not getting rich. So I imagine you are looking down the dark side of poverty.
The problem with those types of margins is that you can survive. But that is all that will happen. You will just survive. One bad job of any reasonable size. One accident, you get sick for a month, anything like that and you are broke and your business is closed. Not to mention it is really tough to move up in terms of equipment and financing any larger jobs etc. DanT
I appreciate your feedback. I do pretty much just get by. I do find however that asking for more than $35/ hr ends up in me not getting the job. Some people end up coming in at so much less some how. I do try to do quality work without taking short cuts but it sure is hard to make it pay. Second - about half my work is as a subcontractor. How much do you pay a sub to do work. $50 / hr? If so I'm willing to commute or move. No one I've found yet is willing to go that high around here.
I would stop working as a sub if possible. You need to work directly for the homeowner and charge them full price. When you work as a sub, your client (the GC) is the one making the profit.
As far as closing rates (how many jobs you sell), 50/50 is too many sales in my opinion. I get about 25% of the jobs that I am contacted about. I decline to look at about 25%, right off the bat. On another 25% I ballpark the job over the phone and usually get rid of them that way--I do this intentionally when I think someone has no idea what things cost and I doubt the job will ever happen. Of the remaining 50%, I go out and meet them, write up and estimate, and get maybe 1/2 of those.
The main thing you might want to do (and that I continue to try to do) is get more leads. I advertise my business, and people call me. My main focus is to skim off the jobs that are (a) right for us, in terms of the type of work wanted and the timeline, and (b) coming from the right type of client, which is to say wealthy, good taste, etc.
Hate to make it sound crass, but I only want customers who are ready to spend some real money and want a first-class contractor, which is what I am. The rest of the world is going to hire the cheap guys who work for cash, quit before the job is done, don't get permits, damage the landscaping and the floors, build stuff that looks rough and then falls apart, don't have a license, etc. etc.
Anyway, I suggest you try to get rid of the sub work. Find the well-off homeowners in your area who want a real contractor and market to them. Raise your prices to at least $45-50 per hour and don't even blink when you hand them the bid.
Edited 4/8/2006 10:53 am by davidmeiland
I pay subs the same as what you are getting, 30-35 an hour as that is the going rate in my area. I charge 50 an hour for there time. See a picture developing here?
What David says above is right on target with my view. I advertise and look for ways to generate more leads. There are some on the board that choose the referal only. If you have been at it 25 years that will work well. For those of us just out of the chute it is a tough row to hoe.
I worked for 102 clients last year. If everyone of those clients mentioned me to 3 friends I then have 400 people who know about me. If 10% need work done on their house (probably a generous number) and all call me (not likely) then I get 40 customers for this year. If you think my 10% number conservative then we can double it to 20%. So now I have 80 people who if they all call me will give me customers for this year........I am still 22 people short from breaking even. Of course job size will have some effect but you get the picture.
I try to sell 30-40% of the leads I get and I try to generate 10 leads a week. Referals, which we get more and more of, are a bonus. I want them and work for them and reward for them but never count on them. That way I can continue to grow. DanT
Your model is very solid, always good to read more about what you are doing. The math regarding the number of leads, number of sales, number of inquiries... that's stuff that I need to analyze myself. The average job size for us varies a lot, so it's harder to pin down. Sometimes a job lasts a week, sometimes 10 weeks.
Yeah, I agree with these past few posts. It sounds to me like you aren't recovering your overhead, much less making any profit. I have gone through my financial records for the past 5 years and it costs me 30k/year to be in business. Divide that by the number of hours I can realistically bill myself out/year and you'll see my overhead. That's not profit for the company or even wages for my labor.
Hiring an employee would allow me to spread that overhead onto two people's labor, but would also raise my overhead - not double it, but certainly raise it.
The thing that has helped me more than anything was to sit down and come up with a realistic understanding of my overhead, then seperate that in my mind from "profit".
Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
"The thing that has helped me more than anything was to sit down and come up with a realistic understanding of my overhead, then seperate that in my mind from "profit"."
Really good point. I think we all take a while to seperate the two. DanT
Yeah, that was like the perverbial "light" coming on for me, Dan. I'm sure it was as a result of studying here in the business folder. What a great resource this forum is, huh?
Looking for the local dirt track to open any time now. Went and had ribs today at our favorite joint that's right on the way to our local track. Raining. If it had been nicer I'm pretty sure either Kathy or I would have suggested driving out there to see it they're turning left yet! Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
I envy your availability of a rib joint. The best ribs I have ever had were with Mooney in Arkansas. What a drive for dinner lol! DanT
Dan, New Riegle north of you by Fostoria? Ever try 'em?A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
No, but I will now! Thanks! DanT
If you go, call us........we'll meet up.
If we can't make it, tell Hilda that goofball horseshoe throw'n guy from Bowling Green/Toledo sent you.
Then duck.A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
I don't have your email any more. Want to meet Friday evening or Saturday afternoon? [email protected]. DanT
I'll ask the wife. The email works through here. Otherwise, I'll email you.
I think you'll like it, how far from you?
There's a road off 23 you use to get there. See on a map if you can find Oh. 587. New Reigel is on that, north of 23.A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
Quittin' Time
Yeah, or you could take the scenic route, like we did! Well worth the trip.Tipi, Tipi, Tipi!
http://www.asmallwoodworkingcompany.com
Jim,I sat down and figured out my actual overhead based on the past three yaers and came up with 25 k (I could esily assume that to be 30k if I chose to upgrade / add some equipment). So while I manage to survive and cover my payroll and overhead (I typically have between 2 and 3 employees) I am left with less than I want to make for myself. With all this I intend to continue my transition away from subbing. Thanks all for the encouragement.
I appreciate your sound advice. I tend to disqualify customers right off the bat when they call because you just know it's not going to be worth your time. I did in fact start the advertising campaign and am hoping to have more leads to choose from. I will take your advice to heart and leave the sub contracting world behind. I figure there will be a transition period but I am well respected by my past customers and my piers. Hope it won't take long.Thanks again,Jason
hvtrim....
one problem you have is quoting an hourly rate.. you would be better off bidding the job lump sum
it's usually no one's business if your rate is $50 or $150..
if the rate is buried in the bid, it never becomes an issue
we do T&M only if circumstances force us.. otherwise we prefer to give a lump sum..
and
most of the time you will find you are bidding aginst no one elseMike Smith Rhode Island : Design / Build / Repair / Restore
Mike, I agree, in fact I generally don't qoute rates to customers or even some g.c.'s I just give a price but the rates I've been discussing are the base rates I use to find my quotes / bidsThanks Jason
My own feeling on this, not having any employees of my own, is:
What is the going rate for someone with this persons skills, addin all of the extra employer costs to get the true cost to you of havingthis employee. Then figure out how much increase in profit ( before his costs ) and the deduct the employees costs form the increased profit. Look at the balance - if negative - it is not worth it - you are losing money. If positive - how much and is it enough to warrant hiring someone. If yes, and if it is a significant amount, maybe look at offering a higher wage to attract and keep a better worker.
a lot of you are wary of hiring employees because of
the additional overhead,
the problems associated with having employees,
the problem of always having to find work to keep them gainfully employed.....
but let me tell you... some of you are going to be doing this for the next 30 years ( i have already ).. and one thing that has helped separate me from the pack is that i have legitimate employees
as a result.. my production keeps going wether or not i'm on the job..
wether or not i'm even in the office.. or even in the country.. it keeps going if i'm on vacation.. or sick..
and it has a cost associated with it.. there is a lot of work involved in having employees.. you need them .... and they need you.. it's a mutual assistance program..
over the years.. i've probably had 30 different guys and gals working for me.. some for two months.. some for 10 years
some i trained and they became good contractors on their own... they would still give me a hand if i asked
i've fired about 3 guys outright..
i've let work run down and laid others off and never recalled them..
i even went thru a depression here in RI when i had no employees for alomost two years..
but the bottom line is this .. if you want to build a company / business, you need employees.. real employees with a commitment to them and them committing to you....
take that for what it's worth.... but i can't really think of any organization , long term , that functions as a one-man bandMike Smith Rhode Island : Design / Build / Repair / Restore
Do you offer health benefits to your employees?
I've noticed lots of adds in the local paper offering benefits, and paid vacation. Until a couple years ago, it was almost impossible to get on as employee. Everything was 1099. Now, the demand is up, so they are offering benefits.If you have any poo, fling it now.
we have a cafeteria plan and i pay a portion of the single coverage..
we have two paid holidays .. and no vacation time.. but i'm working on extending the benefits
when i started in '73.. right up until a recession in '87... we had paid Blue Cross, and 7 paid holidays..
but the leaner, meaner '80's stopped a lot of thatMike Smith Rhode Island : Design / Build / Repair / Restore
I agree 100% with you. The other thing that happens when you have employees is a lot of loose ends get taken care of that are tough to do on your own. Shop stays cleaner, tools back in place more, tools repaired more, paper work gets done, sales calls as well as sale education gets done more promptly etc. The reason? Because you have time or have a guy free for a couple of hours so you have him clean up the nail area or whatever.
My point is your business becomes more organized and better managed because you have some time to put into it. Instead of coming home each night exhausted to the point all you can do is do some paper work and go to bed (still happens, just not as often) you will have days when you can get everyone going and head back to the office to get more quotes out.
I found it to be just like starting my business and working a job too. I wondered what I would do with the extra hours after I quit my job. Within 3 months I couldn't figure out how I had time for a job. Once you have employees you wonder how you had time to get it all done. DanT
I'm with you on having employees. I treat them withthe respect they deserve and most of the time they bend over backwards for me. Only had to fire a couple ove the years. Most went out on their own or retired or died. but I can leave them on a job and feel good about it and things get done well 95% of the time. I often need to be there as a third guy just to leep getting things done when we are busy but it's nice to look at jobs and run errands, price things out , etc while work is stil progressing.