I’ve always just bid jobs as a total sum but I have recently acquired a contract to service a large chain of restaurants in my area (35 locations). With this, I will be billing T&M.
I’d like to know, form those of you that do T&M, what is normal for markup on materials. ie, I need to replace a closer on a door. This particular closer is $220.00. I need to add 7.5% tax and then I should mark the unit up… but what percentage?
When you do mark up materials… what is the reasoning. I mean what is that supposed to cover? the effort of acquisition? gas and labor for the gopher? profit? or is the pickup figured in with the hourly rate?
When you’re this good, EVERYONE wants a crack at you!
Replies
pete... i always looked to the insurance companies as setting the standards for what is legit and what is not
they readily accept a markup of 15% overhead and 10% profit
when we do T&M i always use that as my basis
so we charge
our labor rate PLUS
[(materials, subs, equipment rental ) x (1.25)]
our labor rate includes
( hourly rate of pay + burden + overhead + profit )
currently our rate comes out to about $45 so the rate we charge is $50
Mike and David,
My rate is established at 65 per hour. BUT, I can't justifiably charge them that rate for picking up the part so even if I supplied the closer at cost but charged for my time, I imagine that there may be up to 2 hours involved and that would amount to 130.00 more than the cost of the part. That seem exorbant.
if I mark up 20% I don't feel like I am taking advantage but I don't want a situaion where they feel I am marking up something unreasonably. that 20% would only amount to about 45 bucks. extra to me.... which after proabaly 10-15 in gas, doens't amount to much at all.
Maybe it is like you, Mike Smith, told me once... that it only seems like a lot of money because It is a lot of money to me or I wouldn't want to pay that amount for the service. To the client this may be perfectly reasonable.
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
" PLUS [(materials, subs, equipment rental ) x (1.25)]"shouldn't that be "x 1.265"? you don't charge profit on overhead?bobl Volo, non valeoBaloney detecter WFR"But when you're a kibbutzer and have no responsibility to decide the facts and apply the law, you can reach any conclusion you want because it doesn't matter." SHG
Edited 2/26/2007 12:08 pm ET by bobl
i always looked to the insurance companies as setting the standards for what is legit and what is not<<<
I always wondered about where the mark ups and profit #'s actually came from. I think where you get the numbers from (insurance companies) is pretty solid.
Although I wonder where they get them from but my guess is that they REALLY play the numbers/statistcs game with the deepest microscopes.
Your answer is a good one!
"As I was walkin' - I saw a sign thereAnd that sign said - no tress passin'But on the other side .... it didn't say nothin!Now that side was made for you and me!" Woody Guthrie 1956
http://WWW.CLIFFORDRENOVATIONS.COM
Mike, Do you realize you just used: Insurance companies, standard and legit in the same sentence???
without a negative betwixt???
I have not seen this before...
;)I don't feel safe in this world no more I don't want to die in a nuclear war I want to sail away to a distant shore and make like an ape man
If you are going to do T&M it might be worth establishing an hourly rate that covers all of the overhead and profit you need, and charge items thru to the customer at your cost. That way you can use your vendor invoices as backup without having anyone start to wonder if they should just provide the materials to avoid your markup. Or, can you simply establish a retail price for each item you sell this customer? i.e. the closer costs you $220, you charge $330 for it..?
20%.
Here's something else - you said, "... I need to add 7.5% tax and then I should mark the unit up..." I do the opposite. I mark up, then collect the sales tax of the entire transaction. The customer pays sales tax on the transaction, which includes profit, not profit on the sales tax. I simply collect the tax, then pay to the appropriate government agencies.
"When you do mark up materials... what is the reasoning." That's profit. Are you asking what the reasoning for profit is?
Remodeling contractor who once visited the Glass City.
Very good point. Tax is calculated AFTER all OH&P is applied.
Yes, but I am not charging the client tax on my service. I am only accounting for the sales tax cost to me for the part as an expense.
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
Are you saying you pay sales tax on materials you resell?Remodeling contractor who once visited the Glass City.
Yes, In Ohio we pay sales tax on materials that we resell when it comes to construction related matters.
However, we do not charge a sales tax on construction services.
There are exceptions to both rules above but those are the standards.
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
Well, that's different than here in WA. We are tax exempt on items we resell. The end user pays the tax. Not suppliers in the chain of custody.
Still. I don't see why a customer should pay mark up on sales tax. I would calculate the sales tax after calculating the mark up. That way they pay tax on the mark up, not mark up on the tax. Remodeling contractor who once visited the Glass City.
I think most states are like that.
SOMEONE has to pay.
If you pay it up front at the time of sale to you, it's over and done, you simply pass the cost along to the consumer rather than you collecting it from them and paying to the state.
Who needs anther thing to be accounting for?[email protected]
WHICH content will be free, of course; WHICH content will require registration; but WHICH content will be available only to members of FineHomebuilding.com.???
From what I understand, as the PM not the boss.
We charge $50.00 per hour. We charge for every min I have anybody on the job, and when I get a call at home or on the weekends. We charge 1.5 ($75.00) for OT.
Materials are charged thru us, as are the subs and whatever else will be billed to the job.
We add 10% to all bills to cover the management side of things and the girl in the office writing out the bills.
example 40 hours = $2000.00 material $2000.00 subs $2000.00
billed to customer $6600.00
I got a lesson in this today, from the big guy himself.The bad news is you've done exactly the right things to be exactly where you are today. "IdahoDon 1/31/07"
We charge $50.00 per hour. We charge for every min I have anybody on the job, and when I get a call at home or on the weekends. We charge 1.5 ($75.00) for OT.
That tidbit gives me a great idea.
As I've mentioned before, Frank is learning how much time can be wasted and consumed running in the residential remodeling field. In years past, he/we didn't get many nighttime calls because almost all of our dealings were with superintendents who typically were off the job by 4:30 pm. Now though, the calls are coming in at all hours because Frank hasn't set down the firm limits that he should.
I like the idea of billing at OT rates, or even straight rates after hours. This can easily be tracked by looking at the itemized phone bill and the invoices can include photo copies of the actual minutes. I don't think we have to resort to rounding to the 1/4 hour, but simply asking for payment for every after hour call will substantially limit, or eliminate them.
blue"...
keep looking for customers who want to hire YOU.. all the rest are looking for commodities.. are you a commodity ?... if you get sucked into "free estimates" and "soliciting bids"... then you are a commodity... if your operation is set up to compete as a commodity, then have at it..... but be prepared to keep your margins low and your overhead high...."
From the best of TauntonU.
Jerrald,
Thanks for the information, I am immensly interested. Where are the books referred to by Andy available? Or, is most of the information you are so kindly sharing only available on the links you've given?Ottcarpentry
Ott, the books that I think Andy is referring to are:
David Gerstel's, Running a Successful Construction Company (which i thought most everyone already owned, (and just needed to reread a little bit here and there.))
Ellen Rohr's book How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image
are available from Amazon. Running a Successful Construction Company is available in most any good bookstore. How Much Should I Charge? unfortunately, for all kinds of business owners, I don't see in stores nearly as often.
In addition to How Much Should I Charge? Ellen Rohr has another companion book entitled Where Did The Money Go?- Easy Accounting Basics for the Business Owner Who Hates Numbers View Imagewhich is also great one for understanding the accounting basics as contractors we often seem to skip over when we first go into business and don't really pick up on or get interested in until we're inspired by a crisis.
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Jerrald,Thank you very much. I was wondering if there is a resource that you could steer me towards that would help me adjust for pricing according to regional norms. Let me explain. I currently am in business in the Northwest and will soon be moving to the midwest. I know what people are comfortable with me charging where I am currently at, but would like to ease the transition of building a new clientel by being competitive in a new market area (preferrably without attending the school of hard knocks by losing bids). Reading various discussions on BT has only reinforced my understanding of regional differences in pricing. Any help you could provide would be most appreciated.Thanks Ottcarpentry
Ott I think the way you have to look at your move is what are the differences between your costs where ever you are in the Northwest vs. where ever it is you go in the midwest. Some will be different some will be the same.
Workers Comp and General Liability Insurance can vary greatly from state to state. The wages you have to pay your employees too. In this very discussion factotam said "i live in south texas where wages are low, i charge $30.00 per hour" . Roughly reverse engineering that billing rate I think that works out to an employee wage of around $16 per hour. Here in the NY suburban region carpenters typically earn a wages of $25-35 per hour. The wages you pay are probably going to be your biggest difference but you really have to look at all your costs on an individual basis.
Things like the payments on you vehicle are probably going to be the same no matter where you are in the country. Same thing for your computer and software expenses. If you need shop or storage space that is going to be different and sometimes just a few miles can make huge difference in terms of rent too. So you will just need to look at all your costs on a one by one basis.
"I know what people are comfortable with me charging where I am currently at, but would like to ease the transition of building a new clientel by being competitive in a new market area (preferrably without attending the school of hard knocks by losing bids)."
There is nothing inherently wrong with losing bids provided you have a good supply of leads to work from. Your prices are what your prices are (if you've done your figuring right). When you lower your price just to get the work that money has to come from somewhere and when you do do that what you are saying is you are willing to work for less.
I would worry more about getting good some PR and marketing out there so that you get a good steady stream of job leads (in fact you should work to get a lot more leads than you can ever handle so that you can cherry pick the good ones) and not try to sell yourself short by paying yourself less.
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With some clients you can limit the after-hours calls, but not all of them. Your policy of billing for those calls would piss off a lot of clients. They are busy at work during the day and need to be able to handle some of the job communication at night. Generally there is an up side to these situations--I am working for a guy right now who is gone before I get there and comes back after I leave. If I absolutely have to call him with a detail question during the day, I can, but it's not his preference. So, in return for not getting bothered EVER during the work day at the job, I take some evening calls. It's working a lot better than a typical situation where the owner is around all day and stops you ten times to ask questions.
David, now that you mention it, you are right. Often the evening calls are the best time to discuss some matters. I guess it all comes down to balance.
blue"...
keep looking for customers who want to hire YOU.. all the rest are looking for commodities.. are you a commodity ?... if you get sucked into "free estimates" and "soliciting bids"... then you are a commodity... if your operation is set up to compete as a commodity, then have at it..... but be prepared to keep your margins low and your overhead high...."
From the best of TauntonU.
The only downside is I have to Itemize my personal cell phone bill every month and pick ot all the calls that were business related. I black out everything else and turn it in to the office. Boss gives me $50.00 a month towards my phone bill. Also I keep a "log book" of all calls I make or receive, with notes as to what is discussed.
All works out in the end.The bad news is you've done exactly the right things to be exactly where you are today. "IdahoDon 1/31/07"
my cell # is my business # ...
when the cell rings at Nite ... if convient I look at the screen ...
and unless it's a buddy ... I simply don't answer.
if they don't know what voice mail is for then they're too dumb to work with.
I do make it point to return calls within 24 hrs ...
usually within 4. And overnite messages get returned first thing the next morning.
so it's never become a problem.
also helps that I usually screen the home phone calls too ...
again ... that's what the ans machine is for!
pretty sure we got most everyone trained to "start talking first" ...
the wife will usually run over ... but I get most of my calls on the cell ...
and she gets most of hers on the home line.
it's a good system ... keeps me in the recliner!
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
Actually that is a good system Jeff. It makes sense to me.
blue"...
keep looking for customers who want to hire YOU.. all the rest are looking for commodities.. are you a commodity ?... if you get sucked into "free estimates" and "soliciting bids"... then you are a commodity... if your operation is set up to compete as a commodity, then have at it..... but be prepared to keep your margins low and your overhead high...."
From the best of TauntonU.
took me a while to get used to it.
way back before I had a cell phone the home number was also work ...
so that made it harder.
always thot about a seperate business line ... then I got the first cell.
I like to pretent that my little company makes for a real job for me ...
so I try to have customers treat me like a real working person.
U know ... "office hrs" and such. Even if there's no "office" .. there are still traditional business hours. That's why I also shoot for an 8 hr day.
realized years ago ... as an employee ... while I was working 7:40 to 4 ...
my wife and the rest of the world working "real jobs" worked 9 to 5
why should I/We put in an extra half an hour every day just 'cause we don't have a cubicle?
so when I went self employeed ... officially ... it's 7 to 3, 8 to 4, or 9 to 5.
I'll work an extra hour if it puts an extra 2 under my belt.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
Jeff-- I don't think i have answered a ringing telephone in 5-6 years now.
My wife, on the other hand is NOT able to NOT answer a ringing phone( unless it's my sister calling)
stephen
"My wife, on the other hand is NOT able to NOT answer a ringing phone( unless it's my sister calling)"
word for freaking word ... my house.
even the "my sister" part!
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
how 'bout dis?
wife holding phone looking at caller ID, shouting at the top of her voice to everyone in the house
DON'T ANSWER THAT PHONE!!!
( your sister named mary as well? 50 years old-never moved out of mom and dads house-weighs about 400#s????)
Stephen
bstcrpntr - "We charge $50.00 per hour. We charge for every min I have anybody on the job, and when I get a call at home or on the weekends. We charge 1.5 ($75.00) for OT."
Bstcrpntr, are you charging more for overtime because you think it costs you more when your employees work overtime or are you charging more for overtime just to discourage the practice of clients asking for you to put in overtime (acceleration)?
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We do it for both reasons. If we have to pay them 1.5 and 2x on the bennies, we cant make a dime at 50.
JeremyThe bad news is you've done exactly the right things to be exactly where you are today. "IdahoDon 1/31/07"
bstcrpntr - "We do it for both reasons. If we have to pay them 1.5 and 2x on the bennies, we cant make a dime at 50."
Jeremey, I going to confess and apologize in that asking you "...are you charging more for overtime because you think it costs you more when your employees work overtime ...?" was sort of a set-up.
The idea that having working employees work overtime costs the employer a lot more money is actually a myth. The thing is I'll bet 95% of all contractors if you ask them that question will say that they think that it does.
Lets say an employer pays a carpenter a wage of $25 per hour. And then lets say he burdened rate (wage+Variable Overhead cost) brings the cost of that carpenter to $31.25. The contractor (using a Capacity Based Markup) then marks up that cost 2.12 (the median markup rate for contractors using a Capacity Based Markup) to cover his or her Fixed Overhead costs to come up with a billing rate of $66.25 per hour.
If that employee works 40 hrs in a week those 40 hours have contributed $1400 towards the company's overhead costs that week which is the allotment you would expect that employee's work to do during that week ($66.25 per hr Billing Rate - $31.25 per hr. Burdened Rate = $35.00 per hr. Fixed Overhead Costs, $35.00 per hr. Fixed Overhead Costs x 40 hrs = $1400). So if and employee, all the employees work 40 hrs., during a week all the Overhead Costs, Fixed and Variable, have been covered for that week.
Therefore if the company's overhead costs for the week are all paid for at the end of a 40 hour week if that employee then works putting in 8 more hours of overtime since his or her associated Overhead Cost for the week have already been covered then in theory if the contractor continues to bill for the overtime at the regular rate he or she has earned an extra surplus of $280 for that time. That's obviously not the end of it there though in that the contractor by law has to pay the employee time and a half for that overtime so that works out to the $25 per hr. regular wage x 1.5 which comes to $37.50 x 8 hrs = $300. (While W.C. is based on payroll it is based on regular time and not the time and a half wage so it doesn't figure in to the equation).
So if a contractor (with these wage and markup figures) has an employee work 8 hours of overtime it only costs that contractor $20 ($300 - $280) which is for all intent and purposes a wash.
If a contractor charges the client time and a half for that time for that premium time ($66.25 x 1.5 = $99.38) the contractor then makes a surplus of $245 for that extra eight hour day.
I'll never argue that the contractor shouldn't get that extra $245. Far from it in fact. The contractor has delivered a premium value added service in having that employee work overtime to speed up the delivery of the project so they've earn that premium. But the math involved is not at all what most contractors think it is.
"We do it for both reasons. If we have to pay them 1.5 and 2x on the bennies, we cant make a dime at 50."
Yes to the 1.5 on the wage but where did you get 2x on the bennies?
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Union rule on overtime is 1.5x on the check 2x on the bennies
I get close to $20.00 on my check and my bennies are close to $10.00 if not slightly over. My overtime cost to my boss is (20 x 1.5)+(10 x 2)=$50.00 where do we make a dime when we do overtime on a cost plus job for the same rate?
You have my attention don't lose me now.
jeremyThe bad news is you've done exactly the right things to be exactly where you are today. "IdahoDon 1/31/07"
bstcrpntr - "Union rule on overtime is 1.5x on the check 2x on the bennies"
Interesting, I did not know or think of that. But that's a negotiated arrangement and not one that is necessarily driven by the math.
Things like heath insurance are usually based on program cost which the employer then allocates the cost to the average time that employees will work in a year so in our case when you get to 40 hrs in a week (actually 34 hrs.) the health insurance contribution has been paid for. The retirement contribution however we never figured at 1.5 for the OT hours and now that I think of it that doesn't seem really fair. I'm wondering why no one has ever brought that to my attention before.
"...where do we make a dime when we do overtime on a cost plus job for the same rate?" You don't make any money if you charge the same rate. But it's virtually a wash and not a money loser like so many contractors think it is. That was my point.
Just the other week I was eaves dropping on two contractors talk about overtime in while drinking coffee in a deli and one of the guys was saying he pays his people straight time for overtime (which is illegal) since he "hadn't figured OT into the cost of the original bid". I was thinking aside from the fact that he was a robbing his employees pockets he hadn't really figured anything since OT doesn't really cost the contractor anything ( like I said, it's a wash).
The "not figuring OT into the cost of the original bid" is an excuse or rationalization I probably hear at least once every year from some contractor somewhere.
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I will agree that it is a wash, if we didn't change our rates.
I tend to not question the boss on his business practices, but I will ask him on this one. I am interested.
Even though it doesn't cost more for OT why would you not charge more, everyone knows that OT is 1.5, so if it is discussed before the start of the project, why wouldn't you change your rates.
This residential road we are reembarking on as a company seems to be doing well, and 4 of the 5 houses I built since the change have been cost plus.
I can tell the homeowner at any moment where he is with labor, and give them a close guess on labor for change orders. All of my paperwork is done on the job, that is thing that kinda spooks people in the beginning. Me standing at a print table making calls or doing paperwork for the last hour and a half of everyday. If I didn't do it there I think I would get behind and they would think it to be free.
Starting one tomorrow, that is saturday. OT has been explained and owners still want me to start tomorrow.
Wondering thoughts I know, any comments.
JeremyThe bad news is you've done exactly the right things to be exactly where you are today. "IdahoDon 1/31/07"
bstcrpntr - "Even though it doesn't cost more for OT why would you not charge more, everyone knows that OT is 1.5, so if it is discussed before the start of the project, why wouldn't you change your rates."
Well if you can charge more for OT you certainly do. If your working T&M and the owner/client approves the use of OT you should certainly charge a premium for it. Same thing if you are on a fixed price job and the client asks for acceleration then you charge for it.
But lets say your on a fixed price job and for whatever reason your a day behind through no fault of your own and with no penalty (in other words you were behind because of something like a rain delay and not just behind because something took longer than usual). Would you work the weekend paying your people OT even though you figured the job at the regular time rate just so that you can start another job you had previously scheduled to start on Monday and therefore put of it's start until Tuesday? The answer is you work the weekend OT at the regular rate (it's a wash) but because you are able to then start the next job on time you haven't lost any throughput days.
The theory there is a little bit envolved for discussion here tonight and it's known as Throughput Accounting (wikipedia). But in that case I just described if the contractor doesn't put in the weekend work regardless of the work being done at the regular rate the contractor would lose the Net Profit earning from that lost throughput day so not working the weekend at a wash would end up costing him or her money in the long run.
"I can tell the homeowner at any moment where he is with labor, and give them a close guess on labor for change orders. All of my paperwork is done on the job, that is thing that kinda spooks people in the beginning. Me standing at a print table making calls or doing paperwork for the last hour and a half of everyday. If I didn't do it there I think I would get behind and they would think it to be free."
That exactly the right thing to do and what most modern savvy business consultants will say to do too. The closer you keep the record keeping to the action being taken or having taken place the more accurate your information will be. I got in a big debate over in the JLC forums a few years ago where I was pretty much standing alone against a bunch of guys who were arguing for saving all the record keeping till the end of the week for all sorts of what I though were stupid or naive reason..
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In your example of a fix cost job, I get to make the call on schedule. If it would let me keep a promise to a client, we would put in the extra hours with no extra charge. We have done this on fixed cost jobs before, but fixed cost jobs are not figured at the same rate as cost plus, I don't know what we charge for these jobs, but I know it's more because I don't figure CO's on fixed cost jobs.
I have learned a bunch on this accounting stuff today, think i'll start my own business tomorrow, not. Thanks for the lessons.
Glad to hear I am doing the right thing with my paperwork. I have tried the end of week crap, but can't even do my own time sheet after three days much less time for 5 guys and any invoices that came in that week.
Your brain is a fascinating place to visit. May I have it when your done?
JeremyThe bad news is you've done exactly the right things to be exactly where you are today. "IdahoDon 1/31/07"
Jerrald,
Just to let you know...those books came yesterday. That how much do you charge book is barely bigger than a pamphlet. Can't believe it costs so much but I spose' its what in it that counts. I'll let you know how I find it...so far after justa few pages I do like it.
BTW...I tried clicking on your REPLY button on your posts to post back to you here and you weren't workable for some reason. A dark screen comes up that you can't type in so I just got it from above where it says "others".
Hey....thought you'd appreciate this...lol
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http://www.youtube.com/watch?v=zFexyK8J1Iw
http://WWW.CLIFFORDRENOVATIONS.COM
andybuildz - "Jerrald, Just to let you know...those books came yesterday." by those book do you mean How Much Should I Charge? and Where Did The Money Go? or just one of them or something else altogether that we've talked about. We've talked so much about this book and that one lately that I might have lost track.
"Hey....thought you'd appreciate this...lol"
Yeah I do like that but being a Yankee fan what I really want to get is one of the "Got Melk" t-shirts that I have heard have been going around for outfielder Melky Cabrera.
You do of course realize no one here is going to have any idea of what or why we are talking about Got Milk.
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How Much Should I Charge and Running a Successful Construction Company just arrived this weekend.
Unfortunatly the RASCC came supposidly new but every page is stuck together, its hard as a rock and all the edges of the pages are yellow.....geeezzzzzzz. I wrote them to ask then whats up with that!$16.50 shouldn't be for a used book I hope...oiy. Never had a problem before w/Amazon...
Yeh...I knew no one would know what Got Milk meant...I didn't want to give away your trade secrets : )
I first tried pasting it on an Email to you to no avail so this was easier in the end being I was here anyway...and it wasn't about a
T-shirt...just saw it and thought of you're ad campaign was all.
http://www.youtube.com/watch?v=zFexyK8J1Iw
http://WWW.CLIFFORDRENOVATIONS.COM
Ironically completly independent of any thiking I had regarding marketing my brother's company Sirius Innovations has a plan in the works around the expression
Got IT?
Get IT?
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I would like to adress this to jerrald------,but for some reason I am un-able to answer his post by clicking on his message-----sorry Andy!
at any rate Jerrald---in the roofing business--i am trained to look for "what can go wrong"---and "how to prevent it?"---" what's the downside?"--" how likely?"
it's a findemental difference in approach I think-----to most of you all---your trade is basically to accomplish something---mine is to prevent something------"leaks!"
in your model--you position something as a fact--------that I don't think is a fact.
let's use mikes figure of 1600 hours--and say each worker needs to earn their share of the overtime with 1600 hours work.--if they work 1600 hours straight time-----theoretically this is accomplished--no problem--it can be done in ,what 40 weeks of 40hours/week.
but what if we are really busy---so we work OT--a 50 hour week.
at the end of 32 weeks--we have worked our 1600 hours----but using your method--we haven't earned 1600 hours of over head expenses-rather only 1280. also- despite WORKING 1600 hours---we haven't produced as much as 1600 hours straight time.---now we have a problem---- we need 320 hours more work---to earn the overhead expenses we would have earned in 1600 hours of straight time.
what if the economy slows-what if key man sick?-what if,what if,what if?----no matter how i slice it--i have wored 1600 hours-haven't earned the same overhead in this method that I did in 1600 hours of straighttime
regaurding liability----your position is that it's negligible--a percentage of sales.
perhaps for YOU
not for me-my perception of liability and risk is undoubtably different.
i don't argue that your method"works" for you-or that it" works" for mike
my doubts are--how WELL it works--does it actually work as well as conventional wisdom implies that it should ?
i think not. let's keep in mind that YOU, and Mike etc. are exceptional people---you have above average experience, track records,sales ability, longgevity---and essentially an above average ability to make a less than perfect system work satisfactorily.
however---let's look at a 25 year old carpenter.- reasonably bright guy---6-7 years experience--has a good handle on his trade skills--has saved up some money-has accumulated a stock of tools he has been using on side jobs---since he is a reasonably bright guy-he has been reading the "conventional wisdom" books--and he has been paying attention in the market place--he knows what the " going rates " are for his line of work.
our young carpenter decides to go into business--and he follows the "conventional wisdom'---- I don't know---let's pick a number out of a hat-- say he becomes a framing remodeler--or a siding installer--- hires 4 workers.
what is our young friends long term chances of success?---assuming 1600 hours?
Can our young friend sell8000 hours of work( 5x1600)---and can he get it done? what are his chances?
pick a number out of a hat---for our purposes-say he is trying to bill at $75/hour per man---substitute $60---0r $50----- pick any number.
what if our young friend sells only 10% less than his conventional wisdom implies he must--that is he sells only 7200 hours??????-what happens?-he is screwed I think.
he has a $60,000 shortfall.--does he know it?--does he know it in time?--what can he do about it?-------- he can lay a guy off---but will that solve the problem--no----only complicate it--he can post-pone some expenses-planned purchases------------again doesn't solve the problem----and long term only complicates it
can he dip into his savings and make up the shortfall---only short term
basically-we are dealing with a suprisingly precarious position here--WHATEVER number you plug in----but primarily dependent on our young friends ability to plug 8000 hours of billable work into the machine( and if some of that 8ooo hours work is OT--even more precarious)
now--i do NOT doubt YOUR ability or Mike's ability to come up with that 8000 hours of sales----because you are exceptional---but what about our young friend??????
THERE I have doubts
---as an aside- I love "this old house"--and "new yankee workshop"--but what intriques me---is everything always goes perfect---old norm never explains how to solve the unexpected. the " conventional wisdom books share this problem---they do not address what to do when your precarious construct---hits a snag on the "input' side of the machine. the closest conventional wisdom comes---is "increase sales,reduce costs"
I truly feel bad for a lot of folks out there--who read the conventional books---and implemented them----and then hit a snag like MANY are hitting now. As far as they can tell--they did everything right-everything conventionally-----but missing a sales target by a small % has un-neccissarily large consequences.---talk to Frenchy about how many Lulls he is taking back--or contractors missing payments etc.
more later---
stephen
Edited 3/5/2007 8:41 am ET by Hazlett
Now----let's please keep in mind that i do NOT have all the answers-far from it.
and---I don't even want anybody to do as "I" do----at least without thinking it through. Frankly-i KNOW it won't work for everyone.
AND- i am not going to re-hash exactly WHAT I do----as i have done that countless times before
BUT---
lets look at our same 25 year old friend.
IF he DID do what I suggest---what are his chances of success--relative to the " conventional wisdom"
Well for starters---he only needs to sell 1000 hours of work his first year----NOT 8000
and--experience tells me that by late august /early september he is going to have an EXCELLENT idea if he is on track to hit his 1000 hour target( it's easily trackable)--and if he is NOT on track---he has plenty of time to do something about it.
what if our young friend experiences the highly unlikely event that he does NOT hit his 1000 hour target--say he misses it by 10%------well that is a $7500 problem--which i personally prefer to a $60,000 problem--personally i would simply solve it by doing a few things "in-house" that i would preferr to sub out--or step up my sales efforts---or accept a few projects that meet my pricing objectives--but that I would preferr NOT to do---any number of comparatively simple and painless solutions---it's a matter of scale.
the reality is---it's harder to LIMIT yourself to 1000 hours than it is to MEET 1000 hours.
Now-Jerrald---touchy subject alert. i am actually afraid to bring this up.
without naming MY figures or anyone elses----------
in the last 9 years or so here on Breaktime------- i have been seriously shocked to learn that the payoff from "conventional wisdom" is typically less than my 1000 hour model. I was dumbstruck when i first learned thisseveral years ago --i haven't still got over it yet. and i have learned essentially the same thing from several sources----and that knowledge bothers me terribly
the risk/ reward--is not in line with each other. the conventional model" factory model'--the risk is manytimes my risk---and yet the payoff is not manytimes my payoff.
here is the touchy part--it appears-the payoff is typically roughly about the same as mine---but with MUCH more risk, much more time and effort and money invested.
most of the figures related to me( in person AND by Email) actually showed a payoff under mine, but very roughly comparable.--and these folks are seriously hustling. I would have assumed that the payoff typically would be at least several times mine.
and that jerrald is what seriously bothers me. i do quite modestly ------and i think in line with my efforts----but i can only assume that there is a leak in what i call the "factory model'--through which a LOT of money must be dribbling----because i can't explain the in-equitable results any other way.
well-i really have to move along now---have to get my biking in, and have to make a sales call, and have to decide if weather will permitt about 3 hours of roofing this afternoon.
Best wishes, All
Stephen
stephen...
your method works great... and your market supports your method
my market works great in good times.. when it goes in the toilet, then i have to go to geater extremes just to keep swiming
the one thing you, and i, and jerrald , and lots of people with years in the trades all have in common is whatever method you use to recapture overhead, and add profit is this
you have to get your price
that is what Stoeppleworth taught me
that is what Irv Chasen taught me
and Judd Motsenbacker ( though not as good as the first two )
the thing is.. you looked at your historical numbers, figured out how much you had to make to feed your family, then built a business plan that would get you to that goal
jerrald did the same.. i did the same.. lot's of people have done the same
but the MAJORITY of those 25 year old dudes and duddettes going in business for themselves are going to just keep banging their heads against the wall by buying jobs at the going rate instead of selling jobs at the rate they have to get to implement their business plan
and business is business.. the rules are the same... if you are selling at a loss ( not YOU, but the generic "you" ), you can't make it up in volume
i went in business for myself because the guy that i was working for wanted me to stay, he took me on as a partner... but after three years of working for wages, and the company never making a profit i could see that he wasn't going to change.. so i went on my own..
it took me many years to figure out what i could do differently from him that would get my bottom line ... me paying the household bills... into the black
i went to many seminars and listened, but did not apply the lessons..
the lesson is this... figure out what you have to charge and get it.. if you can't get it .. find a different line of work
that is jerrald's bottom line.. your bottom line.. and mine
now .. you can live on cash flow ( which is different from profit )
living on cash flow means basically, robbing peter to pay paul..... it works .. until the music stops.. then god help you
ok... "materials markup"...
[( Direct cost of production + owner's salary + company overhead + profit ) = job price]....
you can allocate it any way that makes sense to you.. as long as it works
you know what i like about your system ? it is very pragmatic.. truth be told... you can get 1600 - 1700 production hours out of employees
1800 is iffy...
but the guy who's running the show ? trying to keep it all together... you are one of the few who actually admits in his business plan that he really is only going to get 1000 hours of production
me... i'm way too ADD to get any more than that.. i also have to be father, husband, salesman, citizen, friend, brother,golfer, estimator, designer, superintendent, home owner, General Contractor.... when you stop and think about it
i find it amazing the you really get 1000 hours in !
give yourself a big pat on the back... you've done well, my friendMike Smith Rhode Island : Design / Build / Repair / Restore
MikeSmith - "
stephen...
your method works great... and your market supports your method"
Mike I'm not sure I understand just what Stephen's method is yet. Maybe you can help sort it out for me. I really trying to get a handle on just what he's supposed to be getting at.
As for "you have to get your price'". I think that is it too and I'm in total agreement. You have to sell work at a profitable price plus as I just inferred above too you also have to have a realistic expectation of just how much work you really think you can get too.
And:
"the lesson is this... figure out what you have to charge and get it.. if you can't get it .. find a different line of work"
That is really the bottom line. I have had guys who set up their rates using the Capacity Based Markup Worksheet tell me that they can never charge the rate that it tells them they need to charge and really the only thing I can tell them is then either pick out a whole bunch of Overhead Costs you can completely do without, in other words give something up, or go and find a another line of work or get a job working for someone who can sell that number.
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from what i've gathered over the years.. stephen's method is CAPACITY BASED MARKUP... maybe you should try it (?????)
he sat down and figured out what his nut was...( how much he had to make for his living expenses & his company expenses )
then he figured out how many hours he was going to work
then he divided his nut by the number of hours
( Nut / 1000 hrs = $ multiplier )
when he looks at a job.. he figures.. hmmmm i can do this job in 25 hours
so... (25 hours x $multiplier = minimum LABOR) (+ )
(subcontractor cost & material cost ) x MU = PRICE
but it really is based on those 1000 hours
does any of this sound familiar ?
i think some years he challenges himself to reduce the number of hours of work & increase the number of hours of bike riding
what he needs is an incentive... like GOLF !Mike Smith Rhode Island : Design / Build / Repair / Restore
an incentive... like GOLF !
Getting ant-sy aren't we?A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
http://www.quittintime.com/
we got in 18 on sunday
looks like next sunday as wellMike Smith Rhode Island : Design / Build / Repair / Restore
Well, you lucky dog.
See, I know not much about capacity based .........
But two JUMBO buckets both sat and sun was about all the capacity I had.
We will not see much of a warm up this weekend, but towards the end of the following (and daylight savings time soon) I'm looking fwd to the real mc-koy. Still some snow (hard) on the ground and a couple more tonight. Man, I'm ready for this white and grey to end.A great place for Information, Comraderie, and a sucker punch.
Remodeling Contractor just outside the Glass City.
http://www.quittintime.com/
MikeSmith - " from what i've gathered over the years.. stephen's method is CAPACITY BASED MARKUP"
It's funny because that's what I've been thinking so I'm not so sure I understand the arguement he presenting regarding the real cost of Overtime.
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well , like one guy said to me the other day.... we will violently AGREE !
'sides... i'm sure there is a nuance i'm missing someplaceMike Smith Rhode Island : Design / Build / Repair / Restore
Yes mike----- you have described it pretty well-not exactly--but pretty well.
stephen
None of these systems are supposed to tell you how much to charge per hour. What they do is tell you what one billable hour's share of your annual "Nut" is, so you can make a fully informed decision about how much to charge.
The 1600 hour figure everybody is throwing out is based on billing 80% of the 2000 working hours available in a conventional year. It is assumed that the employees will be paid for 2000 hours.
let's use mikes figure of 1600 hours--and say each worker needs to earn their share of the overtime with 1600 hours work.--if they work 1600 hours straight time-----theoretically this is accomplished--no problem--it can be done in ,what 40 weeks of 40hours/week.
Well, no. They are going to have to be paid for 2000 hours a year. That includes Vacation time, time spent running parts and tools, maybe travel time, maybe safety meeting time, (that might be billed to the client,) and all sorts of other time consuming tasks that can't be charged to a client.
what is our young friends long term chances of success. . .pick a number out of a hat---for our purposes-say he is trying to bill at $75/hour per man---substitute $60---0r $50----- pick any number.
Picking a number out of a hat avoids and negates all these exersizes so you can't say that they apply to him. The sole purpose of any accounting system is to get rid of the hat.
Jerralds' system requires knowing three things; Total Annual Operating Expenses other than materials; Total annual Billable hours; and desired profit.
The Billable Rate under his system is (Annual Expenses + Planned Profit) / Billable Hours. That's it, that's all.
Calculating annual labor burden ignores unplanned OT of course, and what Jerrald is saying is that the additional expenses of Unplanned OT is such a small % of Total Annual Expenses that it can be ignored. I once worked for a company that scheduled 60 hour work weeks. They charged for 20 Crew Hours OT a week, believe me.
Under Jerralds' system the Billable Rate breaks down to maybe, 30% Total Annual Burdened Labor, 65% other OH, including Principles' Draws, and, 5% Profit. Of the Total Annual Burdened Labor, only 80% is to pay for the time worked on Billable Hours. Non-construction crew labor is part of other expenses.
If the time spent on OT is to correct a mistake it is a loss.If it's to deal with Acts of God, send the bill to the Insurance Co, or take the loss.
However, if the purpose of the OT is to get ahead, or catch up on the job, (somebody forgot the Buffer,) then:
The regular time portion of the OT is already included in the Billable Hours of the Bid and only the 1/2 time portion is considered. The 1/2 time portion costs do not include any of the Total Annual Expenses or Profit and its' only cost is wages, SS, and Income Taxes. Since we are talking of unplanned OT, let us guess that it will happen 4 times this year and twice it is for 1/2 day and twice for a full day.
That, 2 x 1/2 day and 2 x a full day, is 24 hours pay, but only at the 1/2 portion of the OT rate, or effectively 12 hours full pay, 12 out of 2000 is 0.6% additional Annual Burdened Construction Crew Labor cost. Since the that cost is roughly 30% of Total Annual Expenses, we have increased Total Annual Expenses from 95% to 95.018% of sales.
BTW, I do not consider Jerralds' system to be a one size fits all solution. He thinks otherwise. I think. . .(|:>)
Any accounting system must satisfy two requirements; First, give outside parties, especially the government, what they want to know, but a box of reciepts and invoices will do that. Second, tell the business owner what he wants to know. IMO, the better the businessman, the more he wants to know.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
sam--- you are arrangeing the numbers---to prove your pre-arranged truth.
as I tried to point out previously--that " formulae works---only if you continue to cram orders/work/hours into the mix.
If we assume worker needs 1600 hours of straight time to make the numbers work
NOT assigning overhead to OT hours might "work"-IF the employee works 1600 hours straight time-------and some OT over and above that
all the formulaes seem to operate on that premise-----and the numbers are massaged to support that premise.
My observation is----that's a precarious premise.
imagine our crew working in july----ton's of OT hours theoretically possible--work seems abundant
but we hit a snag in september/october.--sales slow-weather less cooperative, material shortage, key man illness------many potential causes
and--at end of year we discover---employee worked1600 hours---but 200 of them were OT----we didn't capture our overhead expenses.
maybe employee actually worked1700 hours---but 200 of them were OT--we still didn't recapture overhead expenses
heck---employee could work 1800 hours----but if 300 of them are OT---we haven't captured the overhead.
jerralds premise, I think is that OT doesn't really cost you anything extra---and he has mathmatical models to show this----but his premise is dependent on still achieving 1600 straight time.
My observation is----the OT matters-a LOT--specifically WHEN you have the OT.
in short----if you have the OT---and you don't achieve the 1600 straight time------problem
If there is a lot of outside work-----it's pretty easy NOT to achieve the 1600 straight time-----even if MORE than 1600 hours are actually worked.
best wishes, stephen
The map is not the land.
Without a target, you can't even hit the 1 ring.
He who fails to plan, plans to fail.
And I also like "The map is not the land." & "Without a target, you can't even hit the 1 ring."
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Stephen,
maybe employee actually worked 1700 hours---but 200 of them were OT--we still didn't recapture overhead expenses
heck---employee could work 1800 hours----but if 300 of them are OT---we haven't captured the overhead.
As long as in each of those cases, 1600 of the hours worked were billed for at the regular rate, yes, you did cover your nut.
NOT assigning overhead to OT hours might "work"-
The only case where it would be possible to assign OH to OT in JHs' system would be when the OT is planned for at the time you are making your Cash Flow projections, IOW, at the beginning of the fiscal year.
If your normal scheduled work week is 6x10s, you should allot OH to 60 hours a week. You could allot 1.5 OH to 20 of those hours.
If, when reviewing the past few years , you find that you work 100 hours +- OT every year, then I would say that it is safe to allot OH to 100 hours OT. On the other hand, if you see that your OT is all over the ballpark, you should not.
If you find that you only average 1000 Billable regular hours/year, then for the next year you should plan (assume) on recovering OH in 1000 hours + your foreseeable (assumed) OT hours.
Every plan contains assumptions and SWAGs and true information. The fact that you must SWAG and assume is not a reason not to plan.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
Stephan,
In all this, I am only trying to justify Jerrald's system as it is.
I am not trying to justify your using it as it is.
I don't know enough about your business to even guess what an appropriate system for you would be.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
Sam with regard to Stepen saying "sam--- you are arrangeing the numbers---to prove your pre-arranged truth." there's nothing wrong with the numbers or logic your presenting to him as far as I can see. I'm certainky getting what you're saying. However....
"BTW, I do not consider Jerralds' system to be a one size fits all solution. He thinks otherwise. I think. . .(|:>)"
Like I said above in Msg#86318.94 I invite the challenges. I might very well be wrong. I know I haven't thought of all the possibilities that are out there but I have looked at and considered a whole lot of them. As I mentioned in that post too the case you presented a while back (Msg#76802.28) I thought didn't work becuase your weren't marking up Materials and Subs for Net Profit as in:
Job Price = (Labor_Cost x CBM_Markup x NetProfitMarkup) + (Matls_Cost x NetProfitMarkup) + (Sub_Cost x NetProfitMarkup)
Or did you have another case in mind that I'm not thinking of?
Yes I think the Capacity Based Markup is extremely robust so I'm always looking for the changelles to that line of thinking.
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Edited 3/6/2007 7:15 pm ET by JerraldHayes
Jerrald,
CBM is not the best choice when total annual labor is not fixed at 2000 hours/man, IOW, when Capacity is a variable.
In the specialty field of concrete contractors, in my locale, all concrete bids are expected to be quoted by the yard of placed concrete. This works for most contractors and GCs because that is what they are used to. It only works because the ratio of material to labor on a concrete job is pretty much constant and because labor is directly related to materialsold.
OH and P are fixed and the Material to Burdened Labor Ratio is fixed. Total Labor, by itself is a variable that depends on material. If I used CBM, I would have a variable OH. IOW, the Labor portion of OH would depend on how much material I sold.
SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
Edited 3/6/2007 11:31 pm by SamT
My apologies that I haven't been around to fight this one out this week but I been really busy on a couple of things. Still I have been reading along. Up until now I been in agreement with what your saying and really only taking issue with what Stephen is saying but now I not at all sure what you're getting at. Okay getting back to things...
SamT - "CBM is not the best choice when total annual labor is not fixed at 2000 hours/man, IOW, when Capacity is a variable."
Well I would agree with that statement on a prima facie basis but I can't think of genuine business situation where capacity can't be pegged down, measured, budgeted, or targeted to some degree. And while in reality capacity is "variable" to some degree, we base our figuring and capacity projections on the actual timecards we keep, and when we say 1700 billable hours we know no one is going to hit that mark exactly. What we're really saying is we're targeting around 1700 billable hours for a particular employee.
"In the specialty field of concrete contractors, in my locale, all concrete bids are expected to be quoted by the yard of placed concrete. This works for most contractors and GCs because that is what they are used to. It only works because the ratio of material to labor on a concrete job is pretty much constant and because labor is directly related to materialsold."
The same thing (ratio of material to labor on a concrete job is pretty much constant) can be said for roofing by the square, drywall by the SF, painting by the SF, or electron beam welding by the centimeter. So maybe I'm still not getting your point in that regard. The point of a Capacity Based Markup is to determine the labor rate (or wrap rate) to attach to the time it takes to place a particular quantity of concrete, drywall, or seams to be welded.
"OH and P are fixed and the Material to Burdened Labor Ratio is fixed. Total Labor, by itself is a variable that depends on material. If I used CBM, I would have a variable OH. IOW, the Labor portion of OH would depend on how much material I sold."[my emphasis]
I don't understand or see you came about that conclusion.
And your IOW throws me a little too in that in a Capacity Based Markup system the "Labor portion of OH would depend on how much material I sold." doesn't have anything to do with how much material you sell. The whole point of a CBM system to isolate and protect the recovery of your overhead costs from the fluctuations and variations that most contractors experience in material and subcontracting sales.
My buddy Tommy who does concrete work for us has a Capacity Based (Loaded) Labor Rate that he uses for the time his guys spend placing concrete. When he places concrete for us on our projects he essentially sells us that labor and also sells us the concrete he is placing too (marked up for Net Profit). However I seen that when we are both working on projects for R.C.C. and some other GCs for that matter too he is only charging his Capacity Based Labor Rate for the labor to place the concrete since the GC is buying the concrete directly from the same yard that Tommy buys from. He still recovers his overhead (and earns a Net Profit on his guy's labor) in spite of not selling any materials on those jobs.
Maybe you're talking about something else that I'm just not getting?
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My bad.I should have written:
CBM is not the best choice when total annual labor is not fixed, . . . IOW, when Capacity is a variable.
For example:
In the specialty field of concrete contractors, in my locale, all concrete bids are expected to be quoted by the yard of placed concrete. This works for most contractors and GCs because that is what they are used to. It only works because the ratio of material to labor on a concrete job is pretty much constant and because labor is directly related to material sold because help is only hired when a job is in progress.
OH and P are fixed and the Material to Burdened Labor Ratio is fixed. Total Labor, by itself is a variable that depends on material. If I used CBM, I would have a variable OH. IOW, the Labor portion of OH would depend on how much material I sold.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
SamT - "My bad.I should have written:
CBM is not the best choice when total annual labor is not fixed, . . . IOW, when Capacity is a variable...."
Okay but I still don't see any situation where your labor for the year can't or shouldn't be estimated.
in your example:
"In the specialty field of concrete contractors, in my locale, all concrete bids are expected to be quoted by the yard of placed concrete. This works for most contractors and GCs because that is what they are used to. It only works because the ratio of material to labor on a concrete job is pretty much constant and because labor is directly related to material sold because help is only hired when a job is in progress."
I would use the capacity based markup to figure my loaded billing rate per hour and then treat the total direct job cost cost of the temporary labor as a subcontracted cost and mark up the Temp Labor Cost for for a Net Profit. The is essentially the Capacity Based Markup method as applied by a Project Management firm.
That's also just what we do when we get enough work that it extends us beyond or current capacity. We go out and hire labor from any one of two temp agencies or a couple of labor only subs we know and our labor then becomes more supervisory.
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Stephen it's getting hard to follow all your numbers. Have you put all this into a spreadsheet and modeled the scenarios you are presenting? If you have it would probably really help us understand what you are trying to get at and I'm pretty sure then I could pick out a real huge problem in your logic.
Not having that I try and take apart something you said here and hopefully point out to you where I think it missing the mark.
"let's use mikes figure of 1600 hours--and say each worker needs to earn their share of the overtime with 1600 hours work.--if they work 1600 hours straight time-----theoretically this is accomplished--no problem--it can be done in ,what 40 weeks of 40hours/week.
but what if we are really busy---so we work OT--a 50 hour week.
at the end of 32 weeks--we have worked our 1600 hours----but using your method--we haven't earned 1600 hours of over head expenses-rather only 1280. also- despite WORKING 1600 hours---we haven't produced as much as 1600 hours straight time.---now we have a problem---- we need 320 hours more work---to earn the overhead expenses we would have earned in 1600 hours of straight time.
what if the economy slows-what if key man sick?-what if,what if,what if?----no matter how i slice it--i have wored 1600 hours-haven't earned the same overhead in this method that I did in 1600 hours of straighttime"
First of all what mike is saying when he coins the figure 1600 hours is that for an employee that works 50 weeks a year 40 hours a week for a total of 2000 paid hours only 1600 of them are billable hours. Just want to make sure we are clear on that. That means an employee who works and gets paid for 40 hrs in a week on average only worked 32 hrs that could be billed to the client. The other 8 hours of non-billable or non-productive time are budgeted for paid vacations & holidays, paid time while attending training programs or trade events, company meetings and the other time that is spent fixing the table saw, driving back to the shop to pick up a tool the worker forgot, etc. The employee is getting paid for that time but you don't bill the individual client for those activities. However all you clients as a group pay for a proportional amount of that time in that the cost of those hours is allocated and spread across the productive billable hours the employee actually does put in.
but what if we are really busy---so we work OT--a 50 hour week.
at the end of 32 weeks--we have worked our 1600 hours----but using your method--we haven't earned 1600 hours of over head expenses-rather only 1280. also- despite WORKING 1600 hours---we haven't produced as much as 1600 hours straight time.---now we have a problem----
No you don't have a problem there at all and in fact you are doing better than expected. While your employees have put in for 1600 total hours with only 1280 hours of Regular Time they have done that 1280 in only 32 weeks not 50! They still have 18 weeks left in the year to put in 320 more Regular Time Hours.
Let me emphasize and repeat that, in your scenario:
They still have 18 weeks left in the year to put in 320 more Regular Time Hours.
The only way for what you are saying to be true (that there is a problem) is if they don't get any more work for the rest of the year. While that (not getting any more work) is in theory possible it is not very probable at all. In fact if all those RT Hrs were productive time they are at the 32 week point ahead of the game and only need to generate an average of 17.75 productive billable hrs per week for the next 18 weeks to hit the mark they need to hit.
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Jerrald--
#1------ spreadsheet-me???----c'mon--don't make me laugh!!!!
#2------- employee works 1600 hours---but only 1280 were straight time----again--you are overlooking the previously discussed and relevant point---
1600 hours worked, only 1280 were straight time----this 1600 hours will not produce as much as 1600 hours straight time.-the overtime hours are less efficient due to working tired,hungry, stressed, angry at missed TBALL games etc.
#3---------32 weeks, not 50
bingo---you have at last arrived at the truth!!!!!!!! what i have so ineptly been trying to point out to you---this is the flaw in your system
remember-we are talking construction trades here--not assembling widgets
for many--perhaps most of us---50 weeks is not possible--or even wanted
you keep wanting to turn this into some algebra problem or quadratic equation or something--unfortuneately- the real world keeps intruding.
jerrald--there are simply NOT 50 potential weeks to work for many of us. theoretically-we all inhabit the same solar system--and have the same time
but in reality------------perhaps YOU can install stair railings 50 weeks a year--but can we roof 50 weeks, side 50 weeks, frame 50 weeks, pour concrete 50 weeks
of course not.
I am looking at more snow today--although irritating--it's not a problem for me---because my calculations don't assume 50 weeks.
historically I know---can't start untill late march-early april as a practical matter
gonna end the season---roughly thanksgiving.
figure in rain, summer vacation at the beach, material delays etc.---MAYBE 32 productive weeks
this is the flaw in your system-that you keep ignoring
you say no problem-you are doing great--1600 hours-but only 1280 were straight time--------and you have 18 more weeks to make up the missing 320 hours
perhaps--for you
perhaps--for mike
perhaps for sam
but not for me--there ARE not 320 more hours.
i can't put this any clearer jerald-- your numbers work-IF there are 320 more hours
but they fall apart if there are NOT 320 more hours
jerrald--if we look closely at the majority of the people posting on this board---- i bet MORE of them fall into the category of" there are NOT 320 more hours"---- than fall into YOUR category.
how many of them are sitting home today--because of snow?---and were home most of last week?--and the week Before?
the danger is--------- how many of them have done the math----simple arithetic---not quadratic equations---to know--next october 15 there aren't 320 more hours available to them.
BTw, jerrald- I am NOT saying " don't pay the overtime-or don't work the overtime"-- i am saying--" overhead has to be accounted for---even in overtime hours"
Best wishes,
stephen
that's my man....
don't wimp out to jerrald
best way to win this arguement is to VIOLENTLY AGREE !..
kinda like watching diesel & blue play verbal ping-pong
man, i love you guys Mike Smith Rhode Island : Design / Build / Repair / Restore
mike---you are largely correct RE: diesel & blue
in THAT case----diesel was looking at the trees-and willing to take offense if he felt the trees were being besmirched
blue was in complete agreement about the trees---but age and experience had given him the perspective to step back and see the whole forest----and so comment on the whole
i see where you are going with this---- there ARE similarities
but i think HERE it comes down to--jerrald loves numbers and equations and business books
he has an equation "X+2=4"----that's well and good---if x has the value he has assigned to it
but in probability-------x is going to have some OTHER value
stephen
BTW, jerrald-- i forgot to cover risk.
your love for numbers and excessivley complicated theoretical equations--is causing you to overlook the obvious
risk.------------ liability-------------
let's say I complete 1 roofing project-----there is a certain amount of risk and potential liability exposure
if I do a 2nd similar project----- I just doubled my total exposure
if i do a 3rd roof---again- I add more exposure
so-having identified my "nut"--- i want to cover that by doing as few roofs as possible,
because there is no way around more roofs= more potential liability.
If 1 roof requires 30 hours--- i would want those 30 hours to be straight time
BECAUSE--if some of those hours are overtime--------that's an added cost( I net less on a 30 hour project if I pay 10 hours overtime vs. 30 hours straight time.
YOU claim this isn't so---because in YOUR accounting system you are not charging overhead against the 10 overhead hours----thereby claiming it's essentially a wash-----and perhaps for YOU it would be
but for me---- the 10 hours OT would add a cost to the project----meaning I net less from the project---meaning to cover the annual nut-- I might have to do another project---meaning more liability exposure
now jerrald--- my system admitedly has several flaws/potential problems-----and in fact previously i pointed out some of those potential problems---and how I do----or would realistically deal with them if they arise.
your system has problems as well---but you are pretending it doesn't. given enough hours funneled through your "equations, factory,machine"----you don't HAVE to face those potential problems---but they are STILL potential problems. essentially--you are making up for them in volume.
Best wishes,
stephen
stephen.. you do understand that one of these systems is macro and the other is micro , right ?
jerrald is working with 30,000 hours , let's say
and you're wroking with 1000
and i'm working with 6,000 to 8,000
also... as you pointed out... we're working with 50 weeks ( our employees wouldn't stay long if we couldn't let them base their lives on 50 weeks )... and you're working with 32
all of the systems are based on the historical data of the respective companies
so ..... MR. YOUNG DUDE... he ain't got no historical data... he/she has to pick a model they WANT their company to strive for
you and jerrald are both pointing out that NO ONE will ever get 2000 hours out of an employee ( except lawyers... they can bill more than 2000 hours , while working less than 2000 hours ... you know that , right ? )
so.. what we are really talking about is figuring some way to recapture ALL of the overhead in a company , provide profit for the company .... and an income for the Owner of the company
one of those ways is to markup materials..
and of course we should tell MYD to look at a schedule C to start... i would guess that that would be one basic document that all sole proprietors should be able to refer to as an historic compilation ... or a guide as to what data they must collect to make a business modelMike Smith Rhode Island : Design / Build / Repair / Restore
mike---you are exactly correct in the macro vs. micro assesment
that'sWHY I entered this in the first place.
jerrald---and the conventional business books---present these formulaes so authoritatively---and gloss over or ignore some crucial points
that implementing those formulaes--is going to be dangerous for our mythical young dude----very dangerous.
mike----when you read through a lot of the threads in this forum----do you get the sense that a LOT of guys---are "whistling past the graveyard"?---a certain un-easiness that something is wrong---but they are distracting themselves?
i am absolutely NOT gonna name names---but I can think of several younger folks here--who just 2-3 years ago--were talking about how well things were going------
and now have either LEFT self employemnt/business-or are exhibiting signs of un-easiness.
luckily, mike- i was raised by "children of the depression"( you also,I bet)
and I started my little business in a recession---and i have tried hard not to lose that recession mentality( also many of my customers SHARE that mentality)
but some of these younger folks---especially the ones covering new construction--------------- they can be in their mid-late 30's----and have NEVER faced this.-they have been making it up in volume
they have miscalculated the value of X----but have been able to ignore that---because for 15 years a surplus of work has obscured the value of X
i would be happy to be wrong about this--i WANT to be wrong about this
but i am not going to do back flips to constuct formulaes "proving" X is what i want it to be.
instead i am gonna look hard at what x REALLY is.
what if X = this--what then.
what ifX = THAT, what then
what if x= something else, what THEN.
i can't stick my head in the sand and assume x= what is convenient for me
If it turns out I am unduly pessimistic about the value of X---well then KACHING!
but i don't think that will be the case
stephen
Stephen,
What would you say to Mr. Young Dude Roofer if you were advising him how to fix a section of rotten sheathing and he said, "I'm a roofer. Saws can't be used for for laying shingles." The problem is not the saw and it is not the 110VAC vs the 120VAC.
The real problem is his lack of education/information about a secondary skill that roofers need to know about.
You say that you know that your system has some flaws, but you're not sure where or how to fix them.
IIRC, you want to shift some or all of your business to other types of work and we all know that you want to have more bike time :)
No, Jerralds system is not the first tool you pick up when trying to get a handle on your future business model. IMO, it is one you should apply at least once before you turn the new model loose in the real world because it can tell you things about your model that nothing else can.
Building a new business model has all the steps that an architect uses when he designs a house, and calculating load paths is not the first thing he does. In this analogy, Jerrald is calculating load paths. It's darn near the last thing done before wet stamping the plans.SamT
Be not trying to force you to use a saw when you're laying shingles.
sam,
you have brought up at least 2 interesting points
1)-my method has several problems and limitations. this is true----but it is NOT a matter of " not knowing where or how to fix them"----
it IS a matter of-" I don't NEED to fix them"-- since I KNOW what the limmitations are-- I can steer clear of those problems ( we will talk about those limmitations in a moment)
2) guess what----Jerralds method has limmitations as well---HE doesn't need to fix them either------instead of fixing them---he can simply overwhelm them by plugging enough hours into his "machine"
BUT---here is the danger( not for Jerrald-------but for perhaps other people adapting jerralds' formulae)----you can't pretend the limmitation doesn't exist.
jerrald says to our mythical young dude-" hey--you are in over your head---you just bit off more than you can chew"---------- well ,sure THAT'S true!----but he bit off more than he could chew-----by following Jerralds method WITHOUT being aware of it's limmitations.
Because jerrald is able to compensate for his formulaes limmitations---he is able to pretend they don't exist-----BUT---his formulaes would be MUCH more usefull-and less dangerous IF he pointed out their limmitations--or that they were based on certain assumptions----and that those assumptions might not hold true for MOST folks-----instead of just saying" overhead hours don't really cost you more"----( perhaps--perhaps not,LOL)
now--as far as the flaws in my system?--well the most important one is---that it is based on being able to charge a fairly high hourly rate----based on the percieved danger of the trade.
for instance-- a self employed carpenter--surely by most measures a more intelligent and skilled worker than myself--generally can't charge enough per hour to make my system work.
i pay attention to what most of the self employed carps. here volunteer as their hourly charge------and almost without exception my hourly charge( that makes my system work) is about DOUBLE what the carps are chargeing
last year i worked621.5 hours roofing ,132.75 hours-carpentry, and 318.5 hours overhead---approx. 1073 hours--of which only 754.5 hours are directly billable.
further complicating matters--is that carpentry --for the reasons outlined above-generates a lower billable rate
in essence----roofing is subsidising my foray into carpentry.
i am aware of that-and I compensate for that by---whenever possible--leveraging my own efforts by the use of subcontractors.
if carpentry rates are roughly xy/hour, roofing rates done by my own hand are typically in the range of 2xy/hour--------BUT-if I involve a sub---I can usually manage maybe 3or4xy/hour----which goes a long way into off setting carpentry lower rate.
also-the more I use subs-the less I personally work with tools--but my OVERHEAD hours increase----not 1/1--but significantly.
point being Sam-- i am aware of these limmitations---and can take steps to compensate for them------instead of ignoring them.
BTW---- I think Jerralds efforts here are immensley helpfull------but I think they should come with a disclaimer----" Warning-Masters level business classes ahead"
Best wishes--time to go do a little carpentry repair for a customer
stephen
Warning-Masters level business classes ahead"
LOLSamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
SamT - "No, Jerralds system is not the first tool you pick up when trying to get a handle on your future business model."
It's not? Then what is? Admittedly I at times get into some complex subtleties and complex applications of the methodology but the core premise:
Job Price = (Labor_Cost x CBM_Markup x NetProfitMarkup) + (Matls_Cost x NetProfitMarkup) + (Sub_Cost x NetProfitMarkup)
is actually incredibly simple and basic especially when you reduce it down further to:
Job Price = (Labor_Cost x CBM_Markup) + Matls_Cost + Sub_Cost
In fact the criticism that I sometimes see regarding Ellen Rohr's excellent book How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image and even AndyBuildz alluded to it here is that is so short, simple, and basic.
While most contractors don't figure out this part before they go into business (I know I didn't) I think it is absolutely the most important thing to figure out and understand first.
"Building a new business model has all the steps that an architect uses when he designs a house, and calculating load paths is not the first thing he does. In this analogy, Jerrald is calculating load paths. It's darn near the last thing done before wet stamping the plans."
If on the other hand you are referring to the subtlety and nuance of the "real cost of overtime issue" yes that isn't at all important to the guy just starting out. It's is in fact a good bit further on down the road.
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While most contractors don't figure out this part before they go into business (I know I didn't) I think it is absolutely the most important thing to figure out and understand first.
Reading that, I would think that you are saying that "Jerrald's system" is the first thing contractors need to understand when they are designing a business model.
Knowing you, it isn't. What is "it?"
SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
Edited 3/9/2007 10:10 pm by SamT
SamT - "Reading that, I would think that you are saying that "Jerrald's system" is the first thing contractors need to understand when they are designing a business model.
Knowing you, it isn't. What is "it?""
What is "it"? It is the thing that I have been talking about in this discussion. "It" is understanding exactly what to charge for your (and/or your company's) services.
It is a Capacity Based Markup system although I could extend that to say a Uniform Percentage Markup system too in that I think any system or real pricing methodology is better than none. Given that I had write out the Capacity Based Markup equation right before I wrote "While most contractors don't figure out this part before they go into business (I know I didn't) I think it is absolutely the most important thing to figure out and understand first." I thought that was pretty clear.
And of course you know IT is not "Jerrald System". I didn't invent it. I first learned of it as the PROOF method because that was the name of the management consulting company founded by Irv Chasen who taught so many contractors like me the method (PROOF being an acronym for Profit Research On Operating Factors). While Mr. Chasen certainly deserves tons of credit for teaching the method (I learned it from one of his seminars) he didn't invent the method either. Doing a little bit of research I found the method was around back during the Spanish American War where it was used shipbuilders at the time. In the auto repair industry it's referred to as an Indexed markup. I prefer to refer to it as a Capacity Based Markup since that is a descriptive term about how it actually works and is the name David Gerstel gave it in his book Running a Successful Construction Company (Chapter 5, pgs 167 through 168).
"Knowing you, it isn't."
Do you think there is something more important that should come first?
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Jerrald,
I have filled this page a dozen times, but since everything I have to say would upset you, let's just drop it.
Respecfully,SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
SamT - "Jerrald,
I have filled this page a dozen times, but since everything I have to say would upset you, let's just drop it.,"
Come on Sam nothing you have ever said has "upset" me. I happen to disagree with some of things you sometimes say regarding the science of markup and that's why I'm engaging in the conversation here.
You've apparently developed some of you own theories and reasoning about "variable capacity" ("CBM is not the best choice when total annual labor is not fixed, . . . IOW, when Capacity is a variable.") and I disagree strongly with that. You say a Capacity Based Markup is not always the best choice for different sized contractors ("BTW, I do not consider Jerralds' system to be a one size fits all solution. He thinks otherwise. I think. . .(|:>)") an I disagree with that and believe I can show you why your wrong.
In my "other job" I consult coach and teach Capacity Based Markup to contractors and if there is a flaw or weakness in the system and methodology I am teaching I want to know about it so I am always interested in engaging in dialog to explore the possibilities and have the paradigm I use and teach challenged.
Don't confuse or mistake disagreement for me being upset. Kick a dog or spit on a old man and I'll get upset. Debate on the science of pricing & markup I always encourage and appreciate.
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:)SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
Hazlett - "
mike---you are exactly correct in the macro vs. micro assesment
that'sWHY I entered this in the first place.
jerrald---and the conventional business books---present these formulaes so authoritatively---and gloss over or ignore some crucial points"
I'm not glossing over anything and that's not even something that is part of my personaltiy. If anything I go into more detail and precision than most people ever want.
And I diasgree with the "macro vs. micro assesment". The baseline numbers may shrink and grow as a business does but the equations and principles as to what your numbers and their relationships to other numbers stay the same.
that implementing those formulaes--is going to be dangerous for our mythical young dude----very dangerous.
No quite to the contrary not havine a plan or method and target expectations is what's wrong with the "mythical young dude" contractor and there are statistical studies to support that contention.
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I'm in love with Forrest McDesign's model of cost plus 67 percent!
I am soooooo undercharging it make me sick!
Walt Stoeppleworth developed that markup percentage about 25 years ago..
Walt says it should be the standard for all remodeling contracotrsMike Smith Rhode Island : Design / Build / Repair / Restore
Walt put job supervision and things like trucks and tools below the line, right?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
i can't remember...... i thought he took all costs and used the 1.67 multiplier....
Mike Smith Rhode Island : Design / Build / Repair / Restore
JonBlakemore - "Walt put job supervision and things like trucks and tools below the line, right?"
That first of all depends on what YOU mean by above or below the line. To me above the line means it Overhead since it is above or over the line but I've been in discussions here and there where that perspective changes person to person.
As for what he (Walt) actually wrote in the examples in his books from back then "Production Supervision" is and Overhead Cost as well as "Truck" and "Tools & Equipment" too.
I think it's a big mistake to figure "Production Supervision" as an overhead cost since it is often so variable project to project depending upon the exact nature of the project. Much safer to figure it as a Direct Job Cost instead of trying to cover for it in your markup.
As for "Truck" and "Tools & Equipment" it's arguable and subjective as to whether they are Fixed and Variable Overhead Costs but neither Walt nor Michael Stone ever mention or take a look at the difference between Fixed and Variable Overhead.
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jerrald.. so, we gonna do lunch at JLC ?
( like to get the important things out of the way first )
i went to my 3-ring binder ( MFSA PLAN ) and looked thru it.. and there was an olde HomeTech spiral bound folder which i guess i picked up at one of Walt's things
and sure enough.. there it is...
he puts Job Supervision in an OVERHEAD category... yuuuuucccchhhhh
maybe if it's a hands off.. oh wait.. Walt is in love with the "lead-carpenter" concept.. so that explains everything
in his model.. the Lead Carpenter is actually doing the "job supervision" .... everything i do
and his "job supervision " is what my boss does.. that lazy no-good SOB who spends most of his time hanging out on BT...... so YEAH... in that case " job supervision " is overhead
but if you don't use the "lead Carpenter " model... then job supervision goes below the line and becomes "field labor"
i think that is where the over/under question comes fromMike Smith Rhode Island : Design / Build / Repair / Restore
JLC Live, man I forgot all about that and let it sneak up on me. It's in two weeks, geez! Yeah I'll be there. I'll have to figure out this weekend and plan for when I'll go.
Here's the Walt Stoeppelwerth book I pulled of the shelves and checked:
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Jerrald,
That first of all depends on what YOU mean by above or below the line. To me above the line means it Overhead since it is above or over the line but I've been in discussions here and there where that perspective changes person to person.
I'm using "above" and "below" the line as you would view them on a P&L or income statement. My understanding is that it's common to refer to everything that is a part of COGS is above the line, whereas all overhead items are below the line.
I've read all 143 posts, but I may have missed it this has been covered. My experience is that overhead does indeed cost more than regular time, although not as much as 50% more.
My basis is that many things that we call "fixed overhead" are somewhat of an amalgam between fixed and variable overhead.
Take for instance truck expenses figured as labor burden. While it seems that since you've already contributed 40 hours of burden to that line item any overtime will not have to recover this amount, thereby reducing the overhead for overtime hours.
I don't think this is accurate. Your fuel costs will likely be 20% more that week that a five day work week. Your insurance, registration, tags, etc. will stay the same no matter how many hours you work that week. Your payment will be the same, but if you always worked 6 days a week it is likely that you would have to replace your vehicles more often because you are adding 20% more wear & tear.
Office overhead is also going to increase. If you complete your jobs more quickly, the sales staff will have to sell more to keep up. The marketing budget will need to increase to generate more leads. The payroll clerk will have to enter one extra day from everyone's time card that week.
Office and storage rent will likely not change, unless the increased capacity of the company makes it necessary to expand the office space since you now need 6 six salesmen instead of 5 to keep up.
Obviously, working one Saturday will not force you to build a new office, but I think the example shows the marginal costs of increasing your capacity.
I calculate that overhead costs one half of the employee's wage and payroll taxes over and above regular time. In our operation, there's just not too many line items that don't increase when hours increase.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
JonBlakemore- "I've read all 143 posts, but I may have missed it this has been covered. My experience is that overhead does indeed cost more than regular time, although not as much as 50% more."
I'm thinking what you might have really meant to say was that "My experience is that
overheadovertime does indeed cost more than regular time, although not as much as 50% more."Going on that assumption I'll look at what you're saying piece by piece.
"My basis is that many things that we call "fixed overhead" are somewhat of an amalgam between fixed and variable overhead"
An amalgam? As in a "a mixture or blend of" the two? I don't think that's a good idea to blend the two together. I think that is one of the big mistakes that Walt Stoeppelwerth and Michael Stone make in looking at the problem with the Uniform Percentage Markup Method they advocate is they never draw the distinction between Fixed and Variable Overhead costs and deal with how they occur and act as drivers to what you costs really end up being. They "gloss" over the difference and treat them both as "Overhead"
"Take for instance truck expenses figured as labor burden. While it seems that since you've already contributed 40 hours of burden to that line item any overtime will not have to recover this amount, thereby reducing the overhead for overtime hours."
One of if not the key differences between Fixed Overhead and Variable Overhead (which is a more encompassing phrase and term than Labor Burden) is that Fixed Overhead Costs occur regardless of whether you do any work or not while Variable Overhead / Labor Burden costs are only incurred when work is taking place.
The question here then is do you look for an budget for truck expenses as a Fixed Overhead Cost or Variable Overhead Cost? I like the more expansive term Variable Overhead to Labor Burden because Labor Burden is often thought of as just the employer taxes, insurance, and benefit costs that occur when an employee works and hour and not the wear and tear on the tools and equipment that goes with that hour.
I don't if your one of the people who actually uses the PILAO Capacity Based Worksheet but I think it would be a real good guess on my part to think you at least have copy of it somewhere on your computer. You'll notice that in the "Labor Cost Worksheet" section there is an area to enter costs for the wear and tear on the truck, tools and equipment that go along with that employee working any hour.
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So in a Capacity Based Markup system (the way I practice and teach it) the "wear and tear" extra truck and tool use is defined and budgeted for as part of your Direct Labor Cost and only occurs if there is work going on (this is a principle that's in Activity Based Costing and one of the reasons why I say ABC and CBM are related if not just different names for the same thing). It part of the cost of any hour regardless of whether it's regular time or overtime.
"I don't think this is accurate. Your fuel costs will likely be 20% more that week that a five day work week. Your insurance, registration, tags, etc. will stay the same no matter how many hours you work that week. Your payment will be the same, but if you always worked 6 days a week it is likely that you would have to replace your vehicles more often because you are adding 20% more wear & tear."
That is true. If you work a 5 day week and then work one more day that's should consume 20% more fuel and there is 20% more wear and tear on your tools and equipment too. But if you plan and budget for them as Variable Overhead they become a Direct Job Cost and aren't part of your Fixed Overhead so they are paid for as you and/or your crew actually does work and it doesn't matter if that time is Regular or Overtime.
If however you look at and put those costs for fuel and "wear and tear" on tools and equipment as Fixed Overhead yes then you are out of luck and the OT is then starting to cost you money because by planning that way you didn't leave any flexibility in your budgeting to account for possible OT hours. But even then for the company that let's say has a full office staff as part of their Fixed Overhead that addition 20% in fuel and wear and tear is a drop in the bucket compared to those costs and I think that is what Alan Hanbury is thinking and saying in his article ( Myths, Mistakes and Misinformation ).
"Office overhead is also going to increase. If you complete your jobs more quickly, the sales staff will have to sell more to keep up. The marketing budget will need to increase to generate more leads. The payroll clerk will have to enter one extra day from everyone's time card that week."
Well it (Office overhead is also going to increase.) conceivably could but that's not likely. As for "the sales staff will have to sell more to keep up" I first mentioned this in the context of "if you have an option to use a weekend of work to makeup a day in the schedule that you lost with no penalty would you do it or do think that OT would end up costing you money?" to which I said work the weekend it's not making you anything but it also not costing you anything. Only when you start to extend that thinking in to accelerating your production velocity does the "the sales staff will have to sell more to keep up" come into play. And while 99.9% of the time sales is looked at as a Overhead Cost reporting wise in reality most of the time it's really not a fixed cost at all. Sales people more often than not are paid on commission so if the sale isn't made the cost doesn't occur.
But then again if your long term strategy is to accelerate production and your sales staff is on salary instead of commission then plan for that increase in cost and work into to the price you sell at. I have never said not to charge more for OT hours. I have only said that working OT doesn't hurt you negatively like so many contractors think it does. It basically a wash. You don't make any money with overtime but you don't lose any either. Since the idea or "the Goal of a business is to make money now and in the future" then plan to make money. Charge for your OT so you make a profit on it.
"Office and storage rent will likely not change, unless the increased capacity of the company makes it necessary to expand the office space since you now need 6 six salesmen instead of 5 to keep up."
True.
"Obviously, working one Saturday will not force you to build a new office, but I think the example shows the marginal costs of increasing your capacity."
My whole point (Alan Hanbury's too) is that Marginal Cost is not nearly as big as most mistakenly contractors think it is.
Hey in the example I put forth early on in this discussion the OT actually cost the contractor money. I think it ended up costing 20$ per day per person for OT. How often have in our careers managing projects have we heard ourselves say "What I would give for just one more day"? Is getting back a day in the schedule worth an extra $20 bucks to you?
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Jerrald---why on earth would I work another week that i neither want to work,nor need to work----just so YOUR formulae will work out?
when I reach thanksgiving Jerrald----perhaps there will be weeks suitable for roofing left in the year---perhaps there WON"T be-----doesn't matter to me either way.
Perhaps there will be work available-AND weather--or perhaps there won't be--doesn't matter to me in the slightest.
we are playing 2 different sports jerrald.
best wishes, stephen
I gotta give some props to all you guys that have been able to stay in this discussion. I admire your tenacity. I wish my brain could concentrate long enough to understand whatevery you guys talk about.
The one thing I can understand is shutting down after Thankgiving! That makes sense to me! And I dont even want to think about starting up berfore April Fool's day! I think there's some irony in that.
blue"...
keep looking for customers who want to hire YOU.. all the rest are looking for commodities.. are you a commodity ?... if you get sucked into "free estimates" and "soliciting bids"... then you are a commodity... if your operation is set up to compete as a commodity, then have at it..... but be prepared to keep your margins low and your overhead high...."
From the best of TauntonU.
just compiled my LABOR numbers from 2006 :
i had two guys working all year and a third guy worked until May and then left (19 weeks/52 weeks )
total hours : 4661 hours in 123 man weeks
durning 2006, each carpenter got paid for 38 hours / week
and 1.5 of those hours were not chargeable to a job ( overhead ... holidays, safety meetings , shop maintenance )
and they averaged 0.33 hours of overtime each week
so my production hours were (36.5 hrs x 52 weeks = 1898 hours per man )
on a theoretical basis we could get 52 x 40 = 2080 less 9 paid holidays (72 hours ) or 2008 hours possible
1898 / 2008 = 94 % of possible production hours
now keep in mind .. i like a stable workforce and i try to work our schedule so we have inside work during inclement wether .. but all -in-all... that ain't bad......
now... now much production do you get when it's 5 degrees or 90 degrees .. who knows ?
just thought you might like to know Mike Smith Rhode Island : Design / Build / Repair / Restore
I'd say that's pretty danged efficient, Mike.
This will be my first year with a full time employee. I'm shooting for 1600 billable hours for him and 1300 for myself. Still gives me a 17.00/hr overhead nut though. Remodeling contractor who once visited the Glass City.
We've been enjoying some lucrative kitchen upfit work. By upfit, I mean we have been taking bare wall bare floor kitchen spaces in new high end condominium units, and doing the space and equipment design and specs, then furnishing and installing cabinetry, countertops, flooring, backspash work, lighting and electronics, then furnishing and installing all appliances. We do the carpentry, tile work, appliance installs and finish detailing and cleanup, which typically has two of us inside the space five days more or less, and we sub the rest.
The fact that the material packages are including appliances (typical cost range $15K to $20K) is what raised my earlier post about markup on appliances.
With this new two thirds markup approach, we can net each of us an additional twelve to fifteen thousand, over and above what we've been getting. As the kids say, sweet!
Either that, or we'll price ourselves out of the kitchen upfit market! ;-)
MikeSmith -
"Walt Stoeppleworth developed that markup percentage about 25 years ago..
Walt says it should be the standard for all remodeling contracotrs"
As I understand it what Walt did back in the sixties was look at the pricing chaos that was rampant in the emerging remodeling industry and tried to figure out what remodeler's needed to do to professionalize their operations and really turn a Net Profit like every good business should.
What he found in his study and analysis was that the successful remodeling contractors he saw were typically generating Gross Profits ranging from 33% to 50% with the average being a 40% Gross Profit margin. As you and I both know that 40% Gross Profit margin when you reverse engineer it looks like a 1.67 markup applied to the sum of the Jobs Costs.
So seeing that it was easy and sort of obvious thing to tell contractors that to generate a 40% Gross Profit margin you need to markup your cost 67% (multiply your jobs costs by 1.67).
The problem was he never saw that two parts of a company's Job Costs were highly variable (Materials and Subs) and threw that formula all out of whack in many operations.
Indeed what was probably going on back then and still goes on today is that the contractors who consistently generate those 40% Gross Profit margins are marking up their Labor Costs 90% to 135% (multiply by 1.90 to 2.35 ) and marking up their Material & Subs Costs to generate a Net Profit on their portion of sales 11% to 15%.
Walt had the Margin target number down correctly but not the method that would most consistently hit that target number.
And still though today ya know what really bothers me a lot more than the debate over which method to really use? When I hear a contractor say they use 1.67 that tells me that they never really looked at their numbers and actually figured out just what their number really should be. They just read that number in a book or article somewhere and started using it. You ever notice how you rarely hear someone say that they use a markup of 1.63 or 1.69? It's almost always 1.5 or 1.67 or 2.0. it amazing how the markup figure they have figured out to use almost always hits the Gross Margin targets of 30, 40, and 50%.
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Gene_Davis - "I'm in love with Forrest McDesign's model of cost plus 67 percent!
I am soooooo undercharging it make me sick!"
How about my model of Labor Cost plus 212% (and then you can just ignore the Materials & Subs costs)?
Now Gene I've got to ask you, I know in this discussion here I mentioned Markup: Comparing the Traditional Volume Based Markup vs. the PROOF/Indexed/Labor Allocated method in context to McDesign why would you think that Forrest McDesign's model of cost plus 67 percent! (which is the method that Walt Stoeppelwerth and Michael Stone write about is a better model than the Capacity Based Markup that Gerstel, Rohr, Chassen, and I talk about?
And yes you very likly are either leaving money on the table or not charging enough.
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Hazlett - "BTW, jerrald-- i forgot to cover risk.
your love for numbers and excessivley complicated theoretical equations--is causing you to overlook the obvious
risk.------------ liability-------------
let's say I complete 1 roofing project-----there is a certain amount of risk and potential liability exposure
if I do a 2nd similar project----- I just doubled my total exposure"
Yes that is true but if you do a "2nd similar project" you also just doubled your coverage too. Your liability insurance is based on your gross sales and your workers comp on payroll cost. As you do jobs that generate those numbers the insurance costs you pay increase with them to. So what's your point?
OT work isn't any riskier in the eyes of the insurance company. In fact they figure and charge WC as if the OT hours were at the regular time payroll cost.
'but for me---- the 10 hours OT would add a cost to the project----meaning I net less from the project---meaning to cover the annual nut-- I might have to do another project---meaning more liability exposure"
Just what is the extra cost that you think you are being hit with?
" now jerrald--- my system admitedly has several flaws/potential problems-----and in fact previously i pointed out some of those potential problems---and how I do----or would realistically deal with them if they arise."
To tell you the honest truth I don't think you really understand the system your working with because as best as I can tell if it is as Mike describes in msg#86318.99 and you then affirmed it's a Capacity Based Markup system and in fact I think I know more about YOUR numbers than you do.
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perhaps--for you
perhaps--for mike
perhaps for sam
but not for me--there ARE not 320 more hours.
86318.105 SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
SamT- (quoting stephen) -"perhaps--for you
perhaps--for mike
perhaps for sam
but not for me--there ARE not 320 more hours."
86318.105
SamT"
I have no idea what your message is with that post Sam, can you explain what your getting at?
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I have no idea what your message is with that post Sam, can you explain what your getting at?
That was correctly addressed to Stephen.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
SamT - "That [message] was correctly addressed to Stephen."
And I read it in that context but still didn't understand the point you we're trying to make.
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Hazlett - "Jerrald--#1------ spreadsheet-me???----c'mon--don't make me laugh!!!!"
So then where are you coming up with all this stuff you're talking about then? Where are you doing the math? post the scratchshhet with the numbers your using and maybe then I can spot where you missing on the logic here because Stephen you're just not getting it (that the cost of overtime work charged at regular time rates is virtual wash).
"#2------- employee works 1600 hours---but only 1280 were straight time----again--you are overlooking the previously discussed and relevant point---
1600 hours worked, only 1280 were straight time----this 1600 hours will not produce as much as 1600 hours straight time.-the overtime hours are less efficient due to working tired,hungry, stressed, angry at missed TBALL games etc."
I didn't overlook anything Stephen and you seem to be ignoring or just not understanding th point I illustrated in my example that "They still have 18 weeks left in the year to put in 320 more Regular Time Hours." They've only worked 32 weeks in your example.
"bingo---you have at last arrived at the truth!!!!!!!! what i have so ineptly been trying to point out to you---this is the flaw in your system
remember-we are talking construction trades here--not assembling widgets
for many--perhaps most of us---50 weeks is not possible--or even wanted"
There is no flaw in the system that I've been describing. In your case when you first presented it you didn't say how many weeks of working season your hypothtical contractor planinnng was based on calculated. I showed you the math for a contractor basing his planning on a full year of work which is what most contractors do. If a contractor plans his overhead recovery on 50, 51, or 52 weeks of work and then only can drum up 32 he or she has an whole other problem that no math or markup formula is going to help. They are a failure in that business (or hey are in the wrong business in the wrong place at the wrong time) and they should close up shop and go to work for someone else.
In fact if that is the case they probably wont even make it to 32 weeks and they probably wouldn't have drummed up enough work in the first place to generate any overtime in the first place to the arguemnt and example is moot.
If however on the other hand the hypothtical contractor does like you do (see Mike's explanation of what your method is (msg#86318.99) which is essentially a Capactiy Based Markup System) and plans on a a 1000 hr working season (25 weeks) then what's the big deal? Provided he or she still hits that 1000 hr. target any Overtime incurred in the context of that 1000 hrs. is still a wash as far as cost is concerned. The math still works.
"you keep wanting to turn this into some algebra problem or quadratic equation or something--unfortuneately- the real world keeps intruding."
What the F are you talking about? Cut the histrionics and get down to simple (and they are simple) facts and numbers, and this has everything to do with understand how the real world works. You have real hours to work in real life and and real dollars to pay for your real costs of doing business. In an article about markup entitled Science, not art, and certainly not guessing one of my seminal teachers in all this (irv Chassen) wrote: "If I make a lot of money and don't know why I could lose a lot of money and not know why" and understanding the simple math here is really what it is all about. If you don't understand the princibles and math as to why Overtime is a wash and doesn't really cost the contractor money then fine don't ever let your employees work any overtime unless it figured at a premium rate. Meanwhile smarter contractors and managers (like all those guys above) who do understand can take advantge of this knowledge to make gains in their throughput or catch up on schedules.
Also any employee or worker who hears an employer tell him that he going to pay that employee straight time for the Overtime worked since he "the contractor" didn't plan for that added cost can then tell that employer to hell with that, you just don't really know your numbers (or the law) and I'm going to go work elsewhere.
"you say no problem-you are doing great--1600 hours-but only 1280 were straight time--------and you have 18 more weeks to make up the missing 320 hours
perhaps--for you
perhaps--for mike
perhaps for sam
but not for me--there ARE not 320 more hours."
The method (CBM) still works for you and it's exactly what you are doing (based on your 1000 hour season). And even in your case if you don't hit the 1000 hours in 25 weeks unless you are going to work in a different job, another line of work somewhere else you actually still have those remaining 25 weeks to hit the target you may have missed.
I however do work in two different businesses. I have a carpentry operation and a business consulting gig too. I happen to have tageted billable hours measures in both that let's say for arguements sake work out to 1000 here and 1000 there. If I don't hit my 1000 hr target then I am in trouble becuase I don't have any free time to make it up. I have a 1000 hour commitment to the other buisness and there are only so many waking and working hours in a year.
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wow jerrald-ya really tore me a new one---feel better?
Btw- It is not so much a matter of not being in the same league as you( although that is true!)---as it is a matter of we are playing 2 different sports-----that critical difference is important---but you fail to aknowledge it---even as you state it!
" THEY STILL HAVE 18 WEEKS LEFT IN THE YEAR TO PUT IN 320 MORE HOURS "
see Jerrald----this is where you are wrong.
YOU have 18 more weeks in your system---- but I have clearly shown you that "I" DO NOT have 18 more weeks
also-I do NOT want 18 more weeks
and BECAUSE I don't use your system--I don't NEED 18 more weeks
32-35 weeks ARE JUST fine for me
but using YOUR system in that 32 week period-would bankrupt me.
Gee Jerrald---those weeks this winter when it was 3 degrees above zero and we had a foot of snow on the roofs?----were those some of the 18 weeks you think I should have been out roofing?
and this spring Jerrald----when it rains every day for 9 consecutive days---am i to tear off a customers roof-----'cause Jerrald thinks these are part of the 18 weeks I SHOULD be working?
c'mon Jerrald-get your nose out of your spreadsheet and look at the real world.
Sam has grasped this---he already knew it. Probably why he won't continue in this discussion.
ALSO BTW,--Jerrald- you can call me bush league---but if anything-I have a firmer grasp of MY numbers---than you have of yours--and I don't need a spread sheet to track 'em.
I am heading out now for a 17 mile bike ride-----you can continue grinding out your additional 18 weeks that you need to make your formulae and spreadsheets operational, LOL
Stephen
but using YOUR system in that 32 week period-would bankrupt me.
I disagree, but if you had said
but using your NUMBERS in that 32 week period-would bankrupt me.
I would agree. CBM is based on using fixed numbers, 32 weeks in your case, to recover the overhead. That does not mean that I have an opinion on whether or not CBM is best for your situation.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
Well put.
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Hazlett - "wow jerrald-ya really tore me a new one---feel better?"
Actually Stephen no. If what I'm saying so strongly upsets you that does bother me and I apologize for that but I don't think you are making any effort at all to listen to and absorb what I have said to you.
I've read what you're saying your theory is and I can explain the how and why it works within the context of it being the same system and methodology I've been talking about and you just don't want to hear it. I think I understand and see something in your interpretation of the Capacity Based Markup system that your just not seeing. I think you are intuitively smarter than you think you are but you just not seeing the logic and math.
"YOU have 18 more weeks in your system---- but I have clearly shown you that "I" DO NOT have 18 more weeks"
Clearly? I don't think your clear as to what you are showing me at all. Listen I know you want your business season to be 32-35 weeks but if you lose a week somewhere in that season due to a week of rain or sub-zero snow why can't you make up that week by working a week out of the 17 to 20 weeks that remain? I asked you about this already and even presented you with one possible rational answer that can be logically argued to support that reasoning and you didn't take it.
Other than "I don't want to" is there any reason why if you lose a week in your 32-35 week season you can't make it up from time in the 17 to 20 week "off-season"?
"c'mon Jerrald-get your nose out of your spreadsheet and look at the real world."
Okay do you feel better now?
"Sam has grasped this---he already knew it. Probably why he won't continue in this discussion."
I'm not so sure Sam does agree with you. In msg#86318.65 I thought Sam was right there with me (and Alan Hanbury for that matter too) about the true cost of OT. Did he change his mind on that issue at some point after that post that I missed?
This debate and arguement here is about the True Cost of Overtime, that's the issue I'm defending, or has it morphed into something else in your mind?
"ALSO BTW,--Jerrald- you can call me bush league---but if anything-I have a firmer grasp of MY numbers---than you have of yours--and I don't need a spread sheet to track 'em."
I certainly didn't want to ever imply that you were "bush league" and I thought in my most recent posts to you here I saw myself as defending what I though were your attacks on level of business management professionalism that most Breaktimers aspire too or should aspire to. As I just said I think you are intuitively smarter than you think you are but for some reason you are just just not seeing the numbers in the way that I can see them. Given that I therefore think I have a firmer grasp on your numbers than you do. Given what I have been able to pick up from this conversation I think I can provide a far better explanation of why your business model is successful and works than you can.
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"jerrald--if we look closely at the majority of the people posting on this board---- i bet MORE of them fall into the category of" there are NOT 320 more hours"---- than fall into YOUR category.
how many of them are sitting home today--because of snow?---and were home most of last week?--and the week Before?
the danger is--------- how many of them have done the math----simple arithetic---not quadratic equations---to know--next october 15 there aren't 320 more hours available to them."
Just what are you saying with that? That most of the contractor here are running their so-called business operation on a wing and a prayer?
First of all I don't agree with the the idea that most of the contractor here have no numbers or targets or goals and even if that was true they need to aspire to achieve a more professionally run business operation or they will find soon themselves on the scrap heap and closing up shop s this market tightens back down to a realistic level of activity.
And ya know I think that's a good thing too. I mean we (the business) need to weed out the wing and a prayer contractors and it will be a better place for everyone. Consumer, business owners, and employee. But that's a whole other discussion.
"BTw, jerrald- I am NOT saying " don't pay the overtime-or don't work the overtime"-- i am saying--" overhead has to be accounted for---even in overtime hours""
Stephen you're either not understanding the math involved or trying to include the bush league non-professional wing and a prayer operations in with all the folks who are really trying to run their businesses professionally.
If a contractor runs the business part of their operation professionally and has realistic targets and hits those targets then the by they time they get to the weekend and those OT hours the proportional amount of OH cost that week was supposed to cover is taken care of so the cost of any hours of OT they actually do work ends up being a wash.
However if the contractor is a bush league wing and a prayer operation that doesn't know week to week if they are going to have any work or not then that contractor morally shouldn't even have any employees so the issue of the cost of OT is again moot. And regardless that BLWAP contractor has far bigger issues to worry about and should really think hard about what Mike said earlier:
"the lesson is this... figure out what you have to charge and get it.. if you can't get it .. find a different line of work"
That means you have to understand what it takes to "get it", you need targets and you need to hit them or know what action to take when you don't.
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Hazlett - "regaurding liability----your position is that it's negligible--a percentage of sales.
perhaps for YOU
not for me-my perception of liability and risk is undoubtably different."
Stephen , what's your real number then? Just what is this terrible extreme exposure you think you incur working overtime?
As finish carpenters yes our liability (and W.C.) is lower than yours but I'd like to know just what this number you are talking about is and where it came from. I regularly read the roofing trade magazines (because there are some really good business writers writing in some of them, Ellen RohrView Image, Jim Olsztynski, & Monroe Porter (of PROOF) being a few of them) but I have never read anything that would lead me to think your exposure working OT is radically outlandish.
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Hazlett - "i don't argue that your method"works" for you-or that it" works" for mike
my doubts are--how WELL it works--does it actually work as well as conventional wisdom implies that it should ?"
I invite the challenges, and have been inviting them for a while, to find a case or a business model where the Capacity Based Markup method fails and to date no one has really presented one to me.
I can however think of one myself where for it doesn't work or to make it logically apply you have to jump through hoops and that is in a retail environment.
I know Sam disagrees with my contention that the method works virtually everywhere (are you listening/reading Sam?) and he once presented a case (Msg#76802.28) but in the case he modeled the problem was he wasn't marking up the Material and Sub Costs for Net Profit . He wasn't using the formula as I described it above:
Job Price = (Labor_Cost x CBM_Markup x NetProfitMarkup) + (Matls_Cost x NetProfitMarkup) + (Sub_Cost x NetProfitMarkup)
While they don't call it a Capacity Based Markup per se I've seen the methodology applied to costing in a electron beam welding aerospace job shop that produces after burner assemblies for jet engines. I seen it used in graphic design studios. I seen it used in a physical therapy studio, it's essentially what is used in doctor's offices and law practices. It's used in service businesses all over the place. Robert Kaplan (at the Harvard Business School and of Balanced Scorecard fame) writes on what is essentially the same methodology calling it Time-Driven Activity-Based Costing. I have a couple of commercial roofing contractors who use my software who run their operations using essentially what is the Capacity Based Markup method.
To the very best of my knowledge and experience the method and thinking works.
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Hazlett - "our young carpenter decides to go into business--and he follows the "conventional wisdom'---- I don't know---let's pick a number out of a hat-- say he becomes a framing remodeler--or a siding installer--- hires 4 workers.
what is our young friends long term chances of success?---assuming 1600 hours?"
and
"now--i do NOT doubt YOUR ability or Mike's ability to come up with that 8000 hours of sales----because you are exceptional---but what about our young friend??????"
Our young friend just bit off more than he or she could chew. That mistake is not in the methodology but in the application, making a prediction or having expectations that are unrealistic or impractical. That kind of expectation is on par with the folly of the contractor who buys the brand new pickup, crane, fork lift, and dump truck before he or she has lined up any business at all.
What the young neophyte does, the conventional wisdom I recommend, is they start basing their expectations on a one person operation first and then as the business grows they go back and readjust their figures as they add work and add personnel.
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OT most definitely DOES cost the contractor something... at least his share of the employee's SS tax. I think it is at 7.65% nowadays.
Furthermore, for the contractor that does not offer benefits, there is no wash to speak of so the 1.5 OT costs real money to the contractor.
Even WC, in Ohio, is based upon payroll.... as is my insurance rates. while these two factors may be very miniscule in the grand scheme of things, they amount to something.
So, I don't see how you are so adamant about OT not costing anything.... am I missing something?
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
PeteDraganic - "So, I don't see how you are so adamant about OT not costing anything.... am I missing something?"
Yeah i think your missing on something or some things.
"OT most definitely DOES cost the contractor something... at least his share of the employee's SS tax. I think it is at 7.65% nowadays."
With regard to that the additional wage cost due to time and half, as well as the additional SS tax, and unemployment, and other payroll driven costs are OFFSET by the cost of your weekly overhead that you no longer have to cover since it was covered by the 40 hrs of regular time work.
Plus you do know that SS and unemployment taxes generally have a cap, a topping out limit, after which you have paid in a certain amount in a fiscal year you (and the employee) no longer have to contribute any more.
"Furthermore, for the contractor that does not offer benefits, there is no wash to speak of so the 1.5 OT costs real money to the contractor."
Nah, it's still pretty much a wash regardless of whether an employer offer benefits or not. The big portion number in OT is the 50% on the wage for the OT. Generally speaking for the typical non-union contractor who offers benefits the amount to only around 10% of the wage paid.
"Even WC, in Ohio, is based upon payroll.... as is my insurance rates. while these two factors may be very miniscule in the grand scheme of things, they amount to something."
While G.L. is a small figure in the grand scheme of things I wouldn't say that about W.C. And in the case of some trades W.C. can get to be a very large percentage. Still if you're paying 1.5 more for the W.C. on your employee's overtime hours either it's different in Ohio than most every other state I know of or you had better speak to you insurance agent to see if you've been overcharged on your OT hours.
The point I was trying to make with regard to OT being billed at the Regular Time Rate being a wash was depending upon just what all your number are it may cost you a few bucks or it may even earn you a few bucks but it is "pretty much a wash". In fact in the February issue of Profession Remodeler Alan Hanbury wrote in his column Myths, Mistakes and Misinformation about basically the same thing I'm saying
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With regard to that the additional wage cost due to time and half, as well as the additional SS tax, and unemployment, and other payroll driven costs are OFFSET by the cost of your weekly overhead that you no longer have to cover since it was covered by the 40 hrs of regular time work.
I would use slightly different words;
Regular Billable hours have to cover Fixed Expenses, Variable Expenses, and Profit.
OT Billables only have to cover (some) Variable Expenses to break even.
SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
SamT- "I would use slightly different words;
Regular Billable hours have to cover Fixed Expenses, Variable Expenses, and Profit.
OT Billables only have to cover (some) Variable Expenses to break even."
That's good. As many ways as we can put this the better. There are just so many contractors who just don't see that.
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No, I was asking what the markup is supposed to account for...for instance.... just the expense of acquiring the materials or is there meant to be profit made on the part?
BTW, construction services are non-taxable in Ohio... for the most part
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
Edited 2/26/2007 11:01 am ET by PeteDraganic
When we work t+m, which is a large % of our business, the customer pays for all time spent on their job - including resaearching, ordering and chasing down materials.
The company makes a profit on every billable hour.
The company makes a profit on every part that goes into that job.
I guess I'm not inderstanding your question, Pete. Remodeling contractor who once visited the Glass City.
I suppose what I am asking, in part, is whether profit should be made on the cost of the material or as a separate charge above the markup via a charge for the time involved in aquiring the material.
ie:
EITHER, I add 20% to the material cost as compensation for running around and picking it up.
OR, I add no markup and simply charge for my time on an hourly basis for picking it up.
OR, I charge both a markup on the materials (making a profit on them) AND I charge for my hourly time in picking them up (making an additional profit).
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
The answer to what should you markup materials is the same one I offered to Gene the other day when he asked about a Kitchen package markup...it depends upon what markup method you used to come up with the $65 per hour rate you say you use.
If you're using a Uniform Percentage Markup Method the markup probably needs to be in the range of 1.5 to 2.0 or you'll be left short in covering you overhead cost. If your working under the Capacity Based Markup method in which you labor rate is designed to cover your overhead costs, you only need to markup materials for a Net Profit which will probably fall somewhere in the range of a 1.11 to 1.25 markup to earn a Net Profit of 10%-20% on the sale of those materials.
A month or two ago in another topic here I asked you how you came up with your rate but I don't think you ever replied.
"My rate is established at 65 per hour. BUT, I can't justifiably charge them that rate for picking up the part so even if I supplied the closer at cost but charged for my time, I imagine that there may be up to 2 hours involved and that would amount to 130.00 more than the cost of the part. That seem exorbant."
That's the kind of thinking that get tons of contractors into trouble. If it takes you an hour (at $65) to go and get a box of screws that costs $5 the cost of that box of screws to the client has got to be $70 or you are giving yourself and your money away! It has to be. the way around that is to consolidate material purchases. Plan ahead and with that 1 hour trip to the supplier pick up a couple of hundred dollars of materials for other clients and projects to help amortize and spread the cost of that 1 hour across.
"No, I was asking what the markup is supposed to account for...for instance.... just the expense of acquiring the materials or is there meant to be profit made on the part?"
As I already mentioned, it depends upon which method (Uniform Percentage Markup or Capacity Based) you used to come up with your rate.
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Jerrald,
The thing I've always hated most about this business is estimating.
So, you are going to love my simplistic method for determining my hourly rate. I want to make about 500 per day for hourly work. 8 hrs X 65 = 520... plus I add for materials. The 520 covers all operating expenses for the day such as gas, insurance, truck, etc. I will charge an additional amount to have additional help on the job, per manhour.
If I charge a flat rate, I'll usually earn in excess of 500 per diem on commercial projects.
I will even offer consultation services at 100 per hour... maybe even as low as 85 per hour depending on circumstances.
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
How much do you make per hour on an employee?
Thats an area where I don't have great set rates when it comes to hourly work. Typically the jobs big enough for a few guys are thoes that were bid a flat rate.
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
PeteDraganic - "So, you are going to love my simplistic method for determining my hourly rate. I want to make about 500 per day for hourly work. 8 hrs X 65 = 520... plus I add for materials. The 520 covers all operating expenses for the day such as gas, insurance, truck, etc. I will charge an additional amount to have additional help on the job, per manhour."
Yeah I like to see a little bit more pragmatism in setting an hourly rate. Like I think you (all contractors and all businessmen for that matter) need some real solid reasoning as to where a number like "I want to make about 500 per day" comes from. Like do you know what your "break even point" is? Of that $500 you want to make how much of it is earmarked for your overhead costs of doing business and how much is yours to take home after after your burdened costs are accounted for? Yeah I know it's all in there, and $65 per hour may very well be a good rate for you in your area of the country, but do you know what the proportions are?
Without knowing all that, having an intimate knowledge of what you billing rate is made up of, I think any decision about how much markup to put on materials is baseless and really just a crap shoot then.
My suggestion (and it's the one I make here over and over again) is that if you have David Gerstels book Running a Successful Construction Company read through pages Chapter 5 on pgs 167 through 168 and set out to adopt the capacity based markup methodology and thinking he describes there. Ellen Rohrs book How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image is on the same methodology and on pages 45 through 52 she's details and explains what that "intimate knowledge" I mentioned above is and starting on page 53 she presents a great rational for figuring out what to charge for materials. You might also want to check out my Capacity Based Markup Worksheet too to see if after filling it out with your real costs of doing business you get a $65 per hour rate. Even if your rate comes out to $65 per hr. it will also give you things like your break even point so you'll always know what your target numbers are.
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Jerrald,
I know I haven't read the book or applied any of the methods but my gears are turning on this one.... and somethings don't add up for me.
With so many variables in this business, how effectively can a small operation like mine apply such regimented parameters to what I do.
My operating expenses are largely fixed. My truck payment is X my insurance premium is Y my phone bill is Z... and so on.
Now, I have no way to tell you what projects or how much work I may have over the next few months. If I apply a standard of earning/profit calculation to account for my expenses based upon certain assumptions of sales and those assumption do not transpire as assumed, then the entire structure becomes meaningless to me.
I think of my pricings in a less formulaic manner and essentially, not trying to sound fiscally crude, I try to charge the most that the market will allow me to. If the going rate for my service is is 65 dollars per hour, then I want to charge 65 dollars per hour. I know that sounds so archaic. My equal concern is to make sure that I have enough work constant to earn enough to cover all expenses and make a reasonable profit.
Furthermore, many projects are simply flat rate. A portion of which is a blind shot because of the unknown factors that are an inherent part of this industry. I often earn a good amount of money on such projects because I charge a good rate and am a productive worker. However, sometimes things happen and the profits are consumed to some degree by certain unforseen factors.
If my business was based simply upon a T&M structure, or purely on costs that were absolute and I were merely managing the efforts of others to accomplish a steady stream of tasks, then I could see the application of structured financial parameters.
Although....
If I were to conform to a set standard that dictates that I will charge X% above my cost and that results in my selling a service for 30% less than the industry standard, that would make no sense to me.
Now maybe I am simply misuderstanding the concept of what you are putting forth here and admittedly I haven't read the book so my understanding is limited on the specifics of the program and methods.
When you're this good, EVERYONE wants a crack at you!
http://www.petedraganic.com/
All good questions and thoughts Pete. I'm going to try and break this up into seperate posts.
"With so many variables in this business, how effectively can a small operation like mine apply such regimented parameters to what I do."
Well you really have to (no matter what size the business) otherwise you have chaos. If you prepare a plan and budget for a year and have X amount of dollars planned for marketing and advertising you can't very well then decide to add a $20,000 web site or for the small guy a $2000 without you numbers and/or projections and goals changing somewhere else. Everything is linked and you need to understand the key relationships between all the areas. For instance adding an employee, just one employee, in many cases doesn't change any of the costs associated with your Fixed Overhead but it does change what we know of as Variable Overhead. You have to be aware of and know just how that change in you Variable Overhead affect the price you need to charge for your services or you will lose money by not increasing your billing rate accordingly or possibly lose jobs by increasing your billing rate too much.
"My operating expenses are largely fixed. My truck payment is X my insurance premium is Y my phone bill is Z... and so on." True and what you are describing is your Fixed Overhead. A while someone will argue those numbers aren't set in stone they are largely fixed.
Still you have to pay for them and the cost of paying those expenses needs to be spread across or allocated across some realm of revenue. The two schools of thinking are that you spread and allocate your overhead costs for the year across what you anticipate will be you total sales volume for a year (the sum of your own labor sales, material, and subcontracting costs) and that is what we know of as the Uniform Percentage Markup Method (aka Estimated Total Volume Based Markup). The problem with that is as you were sort of intimating about when you said "If I apply a standard of earning/profit calculation to account for my expenses based upon certain assumptions of sales and those assumption do not transpire as assumed, then the entire structure becomes meaningless to me." is that you can't really predict with any kind of reasonable accuracy just what your total sales volume for a year will be.
While you can say with reasonable accuracy that you plan to work 40 hours a week for 50 weeks a year for a total of 2000 hours you can't predict whether your clients for the coming year are going to want high priced cherry custom cabinets or just low cost Mill's Pride knockdowns. So unless you're a mind reader or fortune teller you can't really predict you material sales. Likewise for your sub-contracting. You don't know and can't know ahead of time just how much subcontracting (electrical work, plumbing work etc.) you projects will require until you actually get your projects.
So in a Uniform Percentage Markup Method scenario where the pricing formula reads:
Job Price = (Labor_Cost x ETV_Markup) + (Matls_Cost x ETV_Markup) + (Sub_Cost x ETV_Markup)
which if you recall your math from 9th grade can be rewritten as:
Job Price = (Labor_Cost + Matls_Cost + Sub_Cost) x ETV_Markup
...two of those cost variables, Matls_Cost and Sub_Cost are potentially highly variable if not completely unpredictable.
Still though the Labor_Cost variable is something we can reasonably define and predict. There are only so many hours in a year that we can "sell" or plan to "sell" as work or billable hours. The question of How many billable hours
can you/we can create in a year is something we can answer and answer with relative accuracy.
Soooo the Capacity Based Markup method says instead of spreading and allocating your overhead costs across an unpredictable sales volume spread you plan to recover those costs across the one thing you can relatively predict which is just how many billable hours in a year you want to, or feel you can generate. Essentially you are selling to your clients a portion of a fixed amount of time or CAPACITY that you have available in a year.
In the Capacity Based Markup then anything you sell in the course of the year in the way of Materials and Subcontracting you add a percentage to it as a markup (11% to 20%) to generate a Net Profit on sales of 10% to 16.6% and that becomes essentially gravy or icing on the cake. You are not dependent upon sales of Materials and Subcontracting to cover your overhead but have them there for you and your company as a potential source of revenue and Net Profit.
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PeteDraganic - "I think of my pricings in a less formulaic manner and essentially, not trying to sound fiscally crude, I try to charge the most that the market will allow me to. If the going rate for my service is is 65 dollars per hour, then I want to charge 65 dollars per hour. I know that sounds so archaic. My equal concern is to make sure that I have enough work constant to earn enough to cover all expenses and make a reasonable profit."
Just how do you know what the market will allow? My own anecdotal surveys tell me that 90% of contractors are under pricing because they undervalue their own work product and often because they never have taken the time or they don't know how to value their work product. The Capacity Based Markup Worksheet (aka the PILAO worksheet) is a tool that tells them how to value their work product.
A while back now I had a contractor from somewhere out in the midwest call me to tell me that either the markup worksheet was set up wrong or he had filled it out incorrectly because he could never charge the rate the workbook was telling him he should charge (actually I get a couple of calls each year like that). Well the spreadsheet doesn't lie. Either he didn't really know just what the "going rate" was (a real good possibility) or he had overhead costs that were out of control (another possibility). Either way it was telling him he had to do something. With his fixed costs staying at what they were the way we got his rate down to a level where he thought it was okay and something he could work with was to lower the wage he would pay himself down to where he was earning around ten dollars and hour. Either he has to work at selling at a higher rate or has to cut overhead costs dramatically or he has to be willing to work for peanuts. That's all there is the number don't lie.
I can remember in my own case where I had my own epiphany about just what the market will allow me to charge. I thought I was up there in what I was charging at the time but then decided on a couple of projects that I didn't really care if we got or not to bump the price dramatically. When we ended up getting those jobs I realized while I thought I was charging "the most that the market will allow me" I was really wrong with that accessment.
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PeteDraganic - "Furthermore, many projects are simply flat rate."
By that I'm assuming you mean a fixed price bid or contract instead of a T&M gig.
"Furthermore, many projects are simply flat rate. A portion of which is a blind shot because of the unknown factors that are an inherent part of this industry. I often earn a good amount of money on such projects because I charge a good rate and am a productive worker. However, sometimes things happen and the profits are consumed to some degree by certain unforseen factors." [my emphasis]
I think that statement is a big huge hunk of apologist bologna. Sure there are few unknowns but they are not out of control or as unpredictable as a lot of contractors would have you think. We my company build more projects with a greater uncertainty than most typical companies in that from time to time we build what we call "theatrical spaces and interiors" or "themed environments" building stuff that is truly one of a kind. A yet again in building those unique projects 80% of the task involved are tasks that we do over an over again in other projects just in a different order and application when we do those unique kinds of projects. Another 15% to 18% of the tasks are similar to tasks we commonly do so we are not estimating those entirely blind either. An as for the 2-5% that we really do have very little or no experience with there are way to estimate that kind of work too (Estimating Work You've Never Done Before).
As for "uncertainty" the is a whole school of management thinking that revolves around dealing and managing "uncertainly" called the Theory of Constraints and Critical Chain but that's a whole other discussion.
Well anyway the point I wanted to make is that a fixed price bid or contract (what I think you are describing as "flat rate") is and should still be based on the cost of your time. It still takes a certain estimated amount of time to do the project and the cost of that time has to be based on something. I'll never understand why so many contractors say they don't really need to know their hourly rate because they only do "fixed price" work. Just what are they basing the "fixed price" on?
"Although....If I were to conform to a set standard that dictates that I will charge X% above my cost and that results in my selling a service for 30% less than the industry standard, that would make no sense to me."
That is rarely if ever that case with you average contractor. But lets say you actually do the math and crunch the numbers and find out to make the wages/salary and corporate earning you want you find that you need to charge? Let's say my worksheet tells you you need to charge $70 when you think $65 is all you can get? what do you do then.
And furthermore what the planning and number crunching I'm talking about does is tell you the minimum you have to charge to cover your overhead costs, pay yourself and your employees a decent wage, and earn a minimum of Net Profit. There is no rule anywhere that says you shouldn't charge more when you deliver a service or product that has "value added" above and beyond your base billable hourly rate.
You might recall a discussion from way back called Pricing for "Perceived Value". In it I described how with some of our stair projects (msg#21655.10) we were able to identify they unique areas where what we do really does have added value and after pricing accordingly the work we were doing in those areas we could think of as earning $240 per hour!
"Now maybe I am simply misuderstanding the concept of what you are putting forth here and admittedly I haven't read the book so my understanding is limited on the specifics of the program and methods."
Probably, but what I am talking about, with the possible exception of Pricing for "Perceived Value", is in all those books and tools I described. In my estimation this is Financial Management 101 for contractors.
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Dude...you rock! I've been telling my partner that we need to get a good understanding of ourcost, overhead etc. for months, but neither of us have taken the time nor known where to look for our answers [ever browse the business/ start up/ accounting/etc. section of a book store?] I've copied all your links and amazon should pay you a finders fee. The most embarrassing part? We actually had 70 employees last year and I could never figure out if we were making money or not! We've scaled way back, are moving from labor force [mostly framing] to gc and specs and while we've learned alot about what not to do your info will surely prove invalluable.
I think alot of us hands on types think that all that's needed are skills + mass effort + non stop enthusiasm to carry the day. This is my second construction business, and while I made good taxable income the first time I didn't have a clue about profit, overhead, and those elusive costs like fuel that the uninitiated overlook. I also didn't think I had to do my business homework because I was so small at the time it just seemed like too much effort...live and learn.
I've also been perusing the internet on business subjects in general and one of the overall themes is goal setting{obviously getting off the subject tho I think it ties in] After a lot of work resulting in a hit and miss "success" rate, I've decide to suck it up and try to emulate the success of others through seemingly profitable practices. I think this is a cool page, The 7 Secrets To Statup Success. http://www.entrepreneur.com/startingabusiness/startupbasics/article173484.html
Markup and profit and to cover the overhead, risk, and profit.I do like to markup some things more than others. For instance, I buy all my screws and nails in bulk, getting myself bigger discounts, but that ties up some money and real estate so I need a return on investment to cover keeping them handy. I charge about 50% markup on those items.Something like a custome door that I might replace in a day but could cost me three grand to have made gets a bigger markup too. Ther eis more risk, and more time measuring, ordering, delivering...especially as a one-off item compared top doing ten doors on a total remodel.Then there is the rep[lacement risk -
You have to know your sub-industry - for instance wood doors nationally have a rate of close to 15% for warps and other damages that require replacing. You have to account for or reduce that rate in your business if you are in the door replacement business. If all you are doing is replacing panic hardware, find out from the manufacturer what their cycle rate is and if there isa way to buy them at bulk cheaper and if an upgrade model will save you return trips.your markup has to cover the risk of returns for warrantee work. You have to weigh what that is.In remo work I can do a lot for 10-15% markup on large jobs, but for the way I think you are setting up as a handyman business almost, I'm thinking you would need a t least 50% markup, maaybe more.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Piffin- "Something like a custome door that I might replace in a day but could cost me three grand to have made gets a bigger markup too. Ther eis more risk, and more time measuring, ordering, delivering...especially as a one-off item compared top doing ten doors on a total remodel."
In our business operation (running with the Capacity Based Markup method) we don't need to make up for that 'time measuring, ordering, delivering' with a heavier markup on the material portion of a job because we figure for that in billable hours and charge for it accordingly. That way if the customer ever does find out what the actual cost of the custom door was they don't freak out of feel like we are ripping them of by charging them and extra $1500 on a $3000 door. A markup of 11% to 20% for a Net Profit of 10% to 16.6% is far more palatable.
Our method also gives the customer's more leeway and incentive to choose more expensive products and the more expensive the product the more money we still earn as a function of that 11% to 20% markup.
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Thanks for the reminder Jerrald...I just ordered those books! Been meaning to for quite a long time already. The days are numbered...lol.
Be well
andy
"As I was walkin' - I saw a sign thereAnd that sign said - no tress passin'But on the other side .... it didn't say nothin!Now that side was made for you and me!" Woody Guthrie 1956
http://WWW.CLIFFORDRENOVATIONS.COM
I do work for a large public utility company that has scores of employees dedicated to scrutinizing my T&M sheets. While I hear horror stories from other contractors, I have never had an invoice kicked back. The secret is simple…be honest and upfront. I provided the customer with a complete breakdown of how I would be billing before I ever began working with them. We agreed on a 15% mark-up on all materials, subcontractors, and equipment rental. That is 15% after sales tax calculated is added to the cost. Here in NJ, we are required to collect sales tax only on labor charges since we pay sales tax when we purchase the materials. Your cost of the materials is purchase price plus sales tax paid. Yes, on a small job, the mark-up may seem insignificant but consistency is easier to explain than unexpected mark-ups on the bigger ones.
Homeowners are charged a 20% mark-up since they tend to be a bit more, ehh, selective when it comes to materials (“I thought copper was silver colored”, she cried after seeing her newly installed cabinet pulls.)
Here in NJ, we are required to collect sales tax only on labor charges since we pay sales tax when we purchase the materials.
As I read my tax info, If you seperate labor and materials you only charge tax on labor. But, if you charge a fee that includes labor and material you charge tax on the hole amount.
Headstrong, I'll take on anyone!
I imagine that there may be up to 2 hours involved and that would amount to 130.00 more than the cost of the part. That seem exorbant.
There are many ways to charge for T&M jobs and there's nothing wrong with only charging for time spent on the job, which needs to be higher than if all time related to the job is charged.
We charge for every minute spent directly on or for the job. Wake up in the middle of the night to scratch out a materials list for the uber-doggie door and it's billed to the nearest 1/4 hour.
I wouldn't have a problem whatsoever charging $130 for a $100 part, or a $.50 part, if that was the least expensive way to get it and it was necessary for the job.
Personally, there are only 50 hours a week that can be worked or productivity falls and fatigue sets in. That's it on average--it might as well be written in stone. During those 50 hours it's easy to see if time is being given away and how to minimize the downtime.
If clients ask why they are being charged to run down a part I simply tell the truth that it's productive time out of my day spent directly on their project.
Having said all that, there are some who hate the idea that they're being charged for time not spent on the jobsite. However, many of our clients are lawyers and all have accepted it without question. I'd base it on how your clients react to the various billing options, rather than what works for someone in a different niche than yours.
Good billing.
Beer was created so carpenters wouldn't rule the world.
Pete,
I do 10%. I know some guys will markup to 20%. In fact, my building supplier adds 10% to all my account invoices which I get back monthly when I pay my account. I find this quite helpful. If a customer happens to see my invoices they don't feel they are beeing taken for a ride.
In your case I would go 10% and have my hourly rate reflect the fuel costs and vehical maintenance that you will have. If your doing 35 locations plus your regular business your going to find that your expenses are going to spike.
I hope that helps.
Dave
Doctor Dave - "Pete, I do 10%. I know some guys will markup to 20%...."
Dave you do know that marking up materials 10% only returns 9% . Given that 10% of sales is considered a pretty meager profit why not markup 11% to get that 10% return (9.9% actually)?
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Actually Jerrald,
I don't use it as a method to make profit. I use it as a buffer when pricing. It covers most small unforseen things. You won't much when doing small jobs, but on larger jobs it really helps at the end of the job. When a customer adds on little bit here and there I don't have to keep up-charging. I hate that. It looks unprofessional and the customer doesn't feel like they are getting ripped off. For difficult customers I would be inclined to add a little bit more %
Dave
i mark up all labor and material 20%
What is your hourly?
Dave
i do small jobs mostly and work by myself, i have no employees but sometimes use temps and subcontractors, i live in south texas where wages are low, i charge $30.00 per hour, i have many customers that dont request bids but just a bill for the job when i am finished
Me and Walt add 67% to all "raw" costs. That's actual employee's hourly rate (not burdened) + material costs as shown on receipts (copies to client, if desired).
Works for me and mine since 1999.
Forrest
McD, I worked with Walt's method (the Uniform Percentage Markup Method), and I actually learned it straight from him back in 1985 and up until 1988 when I was blind sided and felled by "the problem with it".
I first learned about "Markup" in seminar I took taught by Walt and bought his books Professional Remodeling Management and I learned to use what can be variously described as Traditional Estimated Total Volume Based Markup method or Uniform Percentage Markup Method:
Job Price = (Labor Cost x UPM_Markup) + (Matls Cost x UPM_Markup) + (Sub Cost x UPM_Markup)
or
Job Price = (Labor Cost + Matls Cost + Sub Cost) x UPM_Markup
I can't tell you how much of an improvement that made in running my business vs. what was my previous method at that time which was a mix of "charging what I think other contractors are charging" and "pure guesstimates as to what to charge". All of a sudden I discovered I was really running a business that was making money vs. a "sometimes I make money, sometimes I don't scenario". I had a real pricing methodology that was actually working out.
I think I ran along using that method for for two or three years building decks and small additions for homeowners when a new line of work came along that I was very interested in doing. I had the opportunity do all the interior and exterior finish work for a design/build architect/builder on a series of homes and remodeling projects that represented six months to I was thinking maybe three years worth of work so I jumped at the opportunity. Aside from the attractions of getting to do "architectural woodwork" on what were at that time what I though of as luxury homes I was attracted to the work because I wouldn't have to supply materials for the projects or coordinate the work being done by subs. It seemed like a no-brainer to me. In fact I thought it seemed like a gold mine opportunity. What could be easier.
What I written about as "the problem" in my paper Markup: Comparing the Traditional Volume Based Markup vs. the PROOF/Indexed/Labor Allocated method while a fictional scenario was based on the true story of what happened to me.
We started working on those projects in August or September of 1987. I remember not thinking too much of the Black Monday Stock Market Crash when it hit in mid-October that fall until I started to find that payments on the work we were doing were now not as timely as they once were and things started to get tight . The architect/builder we were working for was getting paid slower by his clients (who were financing their projects off of the gains they had made in the stock market up until then) so we were in turn getting paid slower and I attributed the tightening in the cash flow to that that delay. I never even saw what was really happening.
Nowhere in what I had learned up until then was it written (and there wasn't much written on the topic at that time anyway) that if you are going to use a Traditional Estimated Total Volume Based Markup method you have to carefully look at monitor and maintain the same mix and/or ratio of Labor, Materials and Subs that you computed your markup on initially otherwise it wouldn't work and it would leave you short if one of those factors changed in the future. I still had the exact same Labor Costs as I always had (12 employees) and my Overhead didn't change at all and in fact may have even gone down in that time period because I stopped renting a shop and storage place for materials that I had since I no longer needed it. What changed for me was I no longer had Materials and Subs generating cash that would contribute cash revenue towards the Overhead I had.
I do remember for sure what the ratio of Labor, Materials and Sub Costs that I had back then was but I think it was probably close to Labor 50% to Materials 30% to Subs 20%. Take the Materials and Sub Costs out of the equation (they total 50%) and your only covering half of your overhead! That was what was really killing me not the slow down in the payments but I never saw it.
And my accountant-bookeeper didn't tell me either. Maybe because her emphasis was on Financial Accounting as opposed to Cost Accounting she didn't see what was really going on. Her advice to me was to get paid by client in a timely fashion (which I wont ague against, that is always good advice) and to get more work which made no sense to me at all at the time and even less sense given what I know today. Get more work!?! How we were working at our full capacity as it was. I even gave up or neglected supervising to bang the nails to help out and yet we were still not making any money. Or at least I thought we weren't making any money, as it turned out it wasn't that we weren't making any money it was that we were actually losing money!
To cut costs as work continued that following spring I fired the accountant-bookeeper. Or maybe she quit or just stopped working since I couldn't pay her anymore and I took over those chores. Beginning that summer I told my guys I couldn't make ends meet any more and that they should look for other jobs and phased them out. I guess still not wanting to give up and quit entirely the last day in July I took a seminar sponsored by JLC called How to Survive and Prosper in the Contracting Market taught by Irv Chassen of PROOF Management Consultants. It was probably the "Survive" part of the seminar title that caught my attention.
A lot of if not most of everything that was covered in the seminar flew over my head at the time but the key message that tying overhead recovery to labor as opposed to tying it to all three volume components, Labor, Materials and Sub Costs would insulate and protect your company from any variances in Material and Sub Costs. A better more robust bullet proof way to calculate a Job Price:
Job Price = (Labor_Cost x CBM_Markup) + (Matls_Cost) + (Sub_Cost )
but taking into consideration that you still want to generate a Net Profit on the materials and subcontracting you are providing it really should look like this:
Job Price = (Labor_Cost x CBM_Markup x NetProfitMarkup) + (Matls_Cost x NetProfitMarkup) + (Sub_Cost x NetProfitMarkup)
It's sometimes argued that you still have the variance in labor cost to contend with but that's not really all that true. Provided you are not hiring and firing employees (which to me indicates another management problem altogether) you pretty much stick with the crew of people that you have and they pretty much work a constant or relatively constant number of hours per week, per month, and per year so you costs for them will be relatively constant. Or at least more predictably constant.
At the very least instead of having to estimate your company's expenses for the year in three separate areas for the purpose of tying them to overhead recovery you only need to estimate the cost or expense in one area; labor. That's also a lot simpler.
I don't necessarily think a Traditional Estimated Total Volume Based Markup method is intrinsically or inherently bad or broken. I think my point is the traditional markup method is potentially and dangerously vulnerable. It's also not as scalable or as accurate as a Capacity/PROOF/Indexed/Labor Allocated method but that another discussion in and of itself.
One of the other advantages to using a Capacity/PROOF/Indexed/Labor Allocated markup is with what you charge for materials in the eyes of your clients. Generally speaking the prices for materials are known quantities to the public or at least readily attainable information. Using Traditional Estimated Total Volume Based Markup when you "sell" that door to your client you have to tack on a markup typically on average of maybe 50%. So a door that cost a $1000 dollars you have to "sell" to your client for $1500. The client then sees that door in a Home Depot flyer and wonders and argues with you why you're gouging them for that 50%, an extra $500! Whereas if your using a Capacity/PROOF/Indexed/Labor Allocated markup your selling them that door at cost or with maybe an 8% to 12% markup for Net Profit which is a lot more justifiable. In fact if you bought the door at a discount that 8% to 12% may only bring the door to its MSRP (Manufacturers Suggested Retail Price).
Where this really comes in to play and using a Capacity/PROOF/Indexed/Labor Allocated system becomes an advantage is when you are working on a very custom job where you have to break out materials as different options or price them as allowances. If the client chooses the less expensive options your not penalized or hurt and if they choose the more expensive options you still make a nice Net Profit on the sale. Your overhead was recovered and paid for by the labor you provided on the installation and not as part of the material sale.
Yup I learned the PROOF or Capacity Based Markup method (David Gerstel's term from his book Running a Successful Construction Company) from Irv. It's worked for me a whole lot of others since 1988.
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jerrald-------- let me first apologise--but i think you are wrong about this.
It looks to me like you have made a couple honest but faulty assumptions
1)---your mathmatical constructs seem to assume that overhead is a weekly nut-----that's probably NOT the best way to structure things for several reasons. overhead as an hourly nut is more effective
I believe you roughly assume that overhead is an weekly nut----------so---when the employee has worked his 40 hours-he has earned the nut----when he works overtime at time and a half----the half can come out of what would have gone towards overhead--since that nut has already been made.------------- that's where your system falls apart
it depends on40 hours a week, week after week--pretty much in perpetuity-----and it falls apart if the work is actually 10 hours this week and 50 hours next week. additionally--i think your model is assuming---that increasing the employees work production from 40 hours/week--to say 50 hours/week carries NO increased overhead in itself---but in reality---tools wear out faster, more gas is consumed, more heat etc.---really---overhead has to be captured EVERY hour.
I capture my overhead in 1000 hours per year--it doesn't matter to me financially if it is 20 hours per week/50 weeks or 50 hours per week times 20 weeks. actually-I shoot for roughly 30 hours per week /32 weeks
If i have an employee--and he works 10 hours this week--fine,no problem.
if he works 50 hours next week---problem. he will have to earn 50 hours of overhead--plus I will have to pay him time and a half for 10 hours, plus my workers comp for roofers would be over 30% of payroll---so for each of those 10 OT hours I will be paying45% ------------ really--there is very LITTLE incentive for me to let anyone work overtime---because "I" don't make anything from it-------probably at BEST I might break even--and i probably lose.
but it gets worse----------those 10 OT hours represent increased liability and potential warranty issues----a responsibility I then have to accept--merely to break even--not a good business move.
let's also peek at work load---vs, effectiveness.
i try to keep my actual production each day at around 6 hours or less----because I KNOW that past 6 hours I become less effective. If i work 8 hours-------- believe me the last 2 hours do not produce 1/3 of what i produced in the previous 6.--hour 7 and 8 are MUCH less valuable to me
additionally---if i work 10 hours--and plan to work 10 hours--i really only produce about what I would have in 8 hours-----because I subconciously end of "pacing myself" from hour one---to gut out the 10 hours.
I seriously doubt that an employee working at 3:00pm on saturday--say in his 47 hour--is as productive that hour as he was at 9:00 am on tuesday
best wishes, stephen
stephen...
well... you have to allocate the Overhead to some construct
i'm pretty sure that jerrald has historic data that tell him he averages about 1600 (?)
production hours form each employee.. so vacation time... non-billable time, etc.. doesn't go into his computation
i know mine is pretty even.. i'm asuming 1600 hours and a burden of .60 ( rate x 1.6 )
then i have to add overhead & profit to those billable hours ( billable and extimated production hours are the same in my computation )
anyways..... week after week.. month after month.. my guys /gals are getting 40 hours.. as real employees .. that's what they base their household budgets on
when i can't deliver 40 hours , we're in crunch time..
so , i guess that your business model is different than jerrald's.. i know his is successful... i know your's is successful ( wow , and how ! ).. so.. they are just different..
but his is based on a company with hourly EMPLOYEES.. if one is working with subs, then one needs a different allocationMike Smith Rhode Island : Design / Build / Repair / Restore
mike---------- i am looking at his model---and trying to project for an employee---------and that's where i think his model breaks down
pick a number out of a hat---let's say $75
for arguments sake say we figure our bid at $75/hour billing rate---and the job XYZ is going to take 40 hours---on paper-no problem. we do the jobXYZ in 40 hours as planned-we EARN exactly as we planned.
BUT--if,say 8 of those hours are performed on Saturday---after a 40 hour week working on the previous project--we have just added an additional expense to job XYZ. job XYZ then becomes much less profitable than originally planned.
perhaps you have noticed contractors who are extremely busy--yet they aren't making the money their volume of business would seem to justify-----here is one culprit.
we are tiptoeing around the edge of something that has bothered me since I arrived at "Breaktime" -what, 9 years ago?
I am going to phrase this badly-because I don't fully know how to put it into words--however
conventional wisdom on this forum-and coventional wisdom in all the "running successfull construction businesses" type books---seem to imply that the flow of work is like a" factory"--------lets say 5 employees and we are trying to earn x amount of profit per hour on each of those 5 employees---and so all we need to do is plug enough projects at a certain rate---in one end of the factory--keep everybody working productively---and our profits,along with the finished projects will emerge from the other end of the factory.
again my apologies-that is phrased poorly--but i think it reveals the essence.
In reality---a more accurate model---is that EACH project is a seperate investment
each project MUST earn independently of the preceeding project AND independently of the following project
but as i showed above----operating on the "factory" system---allows a seperate project you did on TUESDAY to effect the profitability of the project you might be doing on SATURDAY
however--if you never pay overtime--say employees never work over 38 hours/week------------- previous projects don't end up "stealing" from THIS projects' earning rate.
again-i will apologise for not stating all this as well as I would like--------------
but i think the most widespread problem i have seen here on "breaktime" is the failure to view each and every project as a seperate investment. i see this problem evertime i read someone commenting on "building a company" that they wish to pass on to their children--or possibly sell in the future-----as if it is simply a machine--a money making machine that operates on it's own.
It's not( more accureately)-- it is at best a cooperative organization of people who make a series of investments.
viewing this as a series of investments--means that there is no compulsion to takeon low paying projects
compared to viewing it as a machine or a factory--------it must be fed-raw materials must be supplied(projects) to keep the factory humming along--or the whole construct breaks down----and so the pressure to take on lower paying projects to keep the machine operating( workers working)
best wishes, mike--time to hit the bike,
stephen
Once again , Stephen, you have brought your unique perspective to a business problem.
As part of a company that is in the middle between your business and Jerald's, I see the value of both your attitudes.
We never work overtime, mainly because we don't want to do it ourselves, preferring to spend that time with our families and on our own projects. Most of our employees are happy with that and if not they are free to take on side work. We tell our customers that they will wait for us to begin their project and when we start we will continue until it is done. We want to make money on every project and usually do. We are happy with this situation.
ON the other hand, we are a business. We have a reputation for timeliness and quality that brings in more work than we can handle. The great value of Jerald's posts is that they help the contractor get a handle on what his costs actually are and allow him to make decisions about his business that are based on knowledge, not supposition.
I don't think that he means that we should stop thinking about the unique qualities of our own businesses. For instance, you make a great point about low productivity at the end of the day. When we are framing or roofing or hanging sheetrock, we are pretty much done in at the end of the day (as should be expected from a bunch of 50 yr olds). I can't work a productive 10 hour day and need a full rest on the weekends. On the other hand, if we are doing finish work or cabinets, I don't get really productive until the last three hours of the day. If there is something complicated I will often spend two hours figuring out what to do.
If conventional wisdom is what Jerrald is promoting, then I could use some of it. Most contractors have plenty of work, often too much, and they are still losing money. It isn't whether they are looking at jobs as factory raw material or investments. It is that they have no clue whether they are making money or not. I think that the only reason our company is making money is that we survived long ehough to raise our prices. If we had been as business savvy as you or Jerrald are , we would have done that a long time ago.
I just wanted to offer my thanks to all who posted in this thread. I have re-read it twice now.
The knowledge that was shared in this thread is invaluable. This is why I started coming to Breaktime.
Too many contractors starting out (myself included) had or have no idea how to figure what to charge.
I know this isn't the first time (and hopefully not the last) this has been discussed but CBM really clicked for me thanks to this thread.
Thank you
Interestingly "clicked" is a very appropriate phrase for many people . They hear about it and read about it over and over again and it not until one little element of it finally "clicks" with them that all they been hearing and reading about Capacity Based Markup makes sense.
I think that is however true about a lot of subjects. There was a bit of computer networking technology I had party to talk to over and over again that I just never really quite got. Then about a month or two ago all of a sudden I realized that okay I finally got it and a whole lot of stuff that I had been in reality just guessing at I now understood the reasoning behind.
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Schelling - "We never work overtime, mainly because we don't want to do it ourselves, preferring to spend that time with our families and on our own projects. "
I wont say we never work overtime but I do discouraged and work to avoid it for the very reasons you just presented.
"If conventional wisdom is what Jerrald is promoting, then I could use some of it. Most contractors have plenty of work, often too much, and they are still losing money. It isn't whether they are looking at jobs as factory raw material or investments. It is that they have no clue whether they are making money or not...."
Boy ain't that the truth. For many of us we can thank God we have had the flush decade and building economy we have had because for many of us if we really had to know our numbers we wouldn't have been successful or in some cases have even made it. But I don't think the times ahead are going to be as flush as the ones behind us (or as bad as some people are predicting too) but we will all probably need to get a better handle on our thinking and reasoning to continue to survive and prosper.
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Hazlett - "BUT--if,say 8 of those hours are performed on Saturday---after a 40 hour week working on the previous project--we have just added an additional expense to job XYZ. job XYZ then becomes much less profitable than originally planned."
I can understand why you are thinking that in that is what most contractors /business people think but the math does not bear that out. Once an employee has worked his or her expected average of regular time hours their overhead contribution for that time period has been reached so the additional wage cost of any overtime is then covered by what that employee is then generating as surplus Gross Profit.
"conventional wisdom on this forum-and coventional wisdom in all the "running successfull construction businesses" type books---seem to imply that the flow of work is like a" factory"--------lets say 5 employees and we are trying to earn x amount of profit per hour on each of those 5 employees---and so all we need to do is plug enough projects at a certain rate---in one end of the factory--keep everybody working productively---and our profits,along with the finished projects will emerge from the other end of the factory."
This is a good topic for a whole other discussion (we, and I think I'm primary have done a good job of hijacking Pete Draganic's topic on what kind of markup to place on materials).
That side you contention that we should look at each project in and of it self and not as being part of a larger system (is that what you're getting at?) is something I would love to get into. That is exactly what the Theory of Constraints is all about and argues against.
I'm a bit wrapped up in a software project right now but in perhaps another week or two I can get into something on that. It is a great idea for a topic.
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Hazlett - "jerrald-------- let me first apologise--but i think you are wrong about this.
It looks to me like you have made a couple honest but faulty assumptions"
Thanks for the courtesy Stephen but you don't need to apologize to me I for one really appreciate the scrutiny and the challenges to anything I write or say. It makes one think harder and look at things from a finer more precise viewpoint. It's part of the thinking around using the Scientific method.
"1)---your mathmatical constructs seem to assume that overhead is a weekly nut-----that's probably NOT the best way to structure things for several reasons. overhead as an hourly nut is more effective"
The funny thing is as I was writing I was thinking if someone was going to argue against my using a weekly time frame to consider Overhead Recovery I thought they would argue I would need to look at it from a yearly or monthly perspective, not an hourly (or daily) one. The reason I chose a weekly frame is that the time period of a week is what is typically used to calculate and figure OT. In the context of a hour or day you are not paid working on OT when you work 70 minutes instead of 60 or a 9 hour day instead of 8.
From the stand point of a year a contractor should base his overhead recovery on an estimated amount of billable hours that he or she and his company staff can generate. That can be 2000 hrs per person or 1600 per person as Mike has said he uses, or the 1700 per person that we use, or the 1000 per person that you use. Just so long as the company's work week is designed as a full 40 hour work week during the working season the math still works out to support what I, and Alan Hanbury, and now SamT and others are all saying about the true cost of OT.
Where the math can however break down is when the contractor who figures 1000 billable hours a year instead of working 40 hours a week for six months a year and six months off instead figures to work 20 hours a week year round. There are some very different mathematical gymnastics you would have to go through to figure out the true cost of OT in that case in that to even get to OT in the scenario employees would have to work an additional 20 hours per week (100% more) even before they got into OT so in that you can't really expect to double productivity and not increase overhead sure it would breakdown there.
And while no one has mentioned it another case where the math I've been using would breakdown is when a contractor bases his or her overhead recovery on lets say anything over 2080 hours in a year which is the maximum amount of regular time hours any employee can possibly work in a year. In other words if you base your overhead recovery on employees working a given amount of overtime in addition to their regular time you'll need a different mathematical model and in it obviously you will find that your employee OT hours contribute to covering Overhead.
As for: "it [my mathematical model] depends on40 hours a week, week after week--pretty much in perpetuity-----and it falls apart if the work is actually 10 hours this week and 50 hours next week." Yes it does or can fall apart under those circumstances. But in that case you've just described you have to base your thinking and calculations on yearly averages not on two weeks only looked at in the context of those two weeks and for the contractor who does have weeks that consistently run 10 hours this week and 50 hours next week you base your calculations for overhead recovery on an average of 30 hours a week. and what ever that works out to what you base a year on (typically 50, 51, or 52 weeks).
As for: "-to say 50 hours/week carries NO increased overhead in itself---but in reality---tools wear out faster, more gas is consumed, more heat etc.---really---overhead has to be captured EVERY hour." Well that is true too,... for tools. But heat is on regardless of whether you are working or not and so it therefore is always costing you money, and if the increased gas is significant it should really be accounted for as an increased Direct Job Cost and not figured for as part of Overhead. However the increased wear and tear on tools is justified to consider but #1 depending upon just how many tools you have and what the utilization percentage of those tools is the increased wear and tear my be entirely insignificant.
What I mean by that is let's say the tool we use every day no matter what is is our compressor, nail gun, and hose and that is pretty much the extent of the tools we use. If we end up working one overtime day every other week of the 2000 hr. regular time year we've planned for we have put an additional 10% of usage on that tool which while significant is still less than the total of the surplus Gross Profit generated by those additional hours. But the reality is depending upon just what kind of contractor you are and just how many tolls you have an use almost never use one tool or set of tools exclusively. You may have OT hours where the compressor, nail gun, and hose aren't used at all so whatever that percentage for additional wear and tear is it's going to get closer and closer to insignificant as the more tools you have an use increases.
"but it gets worse----------those 10 OT hours represent increased liability and potential warranty issues----a responsibility I then have to accept--merely to break even--not a good business move."
Your liability is generally based on your gross (and is also a very small percentage of your gross too) so only in the event that the OT hours increase your gross are you exposed more and forced to pay more and even then in that case if your increase in liability which will work out to a fraction of percent or one percent at best is still covered by the surplus gross profit earned from those OT hours. That's a trivially weak argument.
"let's also peek at work load---vs, effectiveness." This is in my opinion your best, and the best and only real argument against what I have been saying about the true cost of overtime. As you get into overtime the effectiveness productivity wise for those hours diminishes. there are construction specific studies that have been conducted that show that extended periods of overtime more than 4-6 weeks worth) can lead to up to a 15% reduction in worker productivity. That's a good argument and one I happen to also anecdotally agree with too.
But there is a remedy to that that's been discussed that I've read about and also agree with to called The Goldilocks Solution, which is to have not too much, not too little, but just right amount.
I don't like overtime in that I think employees are better on the job when they have other activities outside of work that they participate in and can relax. Employees should coach their kids soccer teams, garden or go fishing, build model railroads, read books, go to concerts, play in a band etc. etc. and they will be better in their lives and also better in their employee life too. However that said there are times when overtime is a necessity or helpful and productive and knowing the true cost of that overtime I never turned off from it by errantly thinking it's costing me/my company money.
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two thoughts pete,
If you spend time aquiring the materials, there is risk of purchasing the stuff and not getting paid, there is time spent ordering, receiving, getting to job said materials.
Second thought, if you buy something and install it and there is a problem down the road and you would like to be of service to the client with a warranty, the n there is overhead involved with that as well.
just things to consider
jason
"it aint the work I mind,
It's the feeling of falling further behind."
Bozini Latini