*
A really excellent place to learn about profesional money management for a construction company is a book called ‘The remodelers guide to Making & Managing Money’ by Linda Case.
Available by calling Remodeling Consulting Services at 301-588-8172. I have found it the most valuable financial resource I’ve ever seen. Writen in easy to understand language for us contractors to grasp. It really made a big difference for my company.
Discussion Forum
Discussion Forum
Up Next
Video Shorts
Featured Story
A standardized approach, quick-to-install hardware, and a simplified design make building custom casework cost-effective.
Featured Video
Highlights
"I have learned so much thanks to the searchable articles on the FHB website. I can confidently say that I expect to be a life-long subscriber." - M.K.
Replies
*
How do you all figure your overhead? How about profit, how do you figure that one? Lot's of people simply add a percentage of job costs... This seems like a rather hit and miss method at best. I've been in business for about three years and although I haven't made enough for that 33'Sloop that I keep dreaming about, I haven't lost anything yet. Except R&R...
The only way to figure overhead that makes sense to me is to total everything I've spent in order to remain in business and divide it by the number of months (or weeks) that I've worked. This gives me a number that I've spent each month (week) in order to stay in business, so that's what I charge.
It's easy to total up saw blades, office supplies and insurance, but what about all the time spent holding the hands of "potential clients"? Normaly I just chaulk it up to "free estimates", but if it adds up a lot it can really cost you. So do we somehow add this to overhead?
A while ago I had a miserable experience with some "potential clients". I had been restoring an old house with a lady. She was going to sell it upon completion, but decided one day to put a for sale sign out front and simply raise the price every day until it was sold. "Hmmm, well I guess that'd be ok, it's your house" is what I said to her. Within an hour of the sign being in the front yard there's a rap on the door. Young doctor who just moved there (Montana) from Virginia with his wife and two kids. They absolutely love victorian houses and this was ideal because they still had time to choose all the interior details.
Suddenly it no longer makes sense for me to do any work whatsoever because it would be money that the seller is throwing away. The young doctor assured me that since I had done all the work on this place and knew it better than I knew the bottom of my coffee cup, I would continue on as the builder. He wanted to act as the General Contractor though.
"Act" being the key word in that sentence. I think some people just get a rush out of acting important.Isn't it funny that "important" and "impotant" differ only by one letter?
In order to compensate, I got a few little jobs to pay the rent, but spent an enormous amount of time holding this guy's hand through construction details and cost projections. The quicker that all this stuff progressed, the quicker the house would be sold and the quicker I could get back to the job that I really enjoyed. Needless to say, The time I spent at the house with him was time not at another site earning money. Not only was I working for free, I was losing business.
So what happened?
He over-estimated the cost of everything, came up with a bogus offer based on his skewed data and schemed back the deposit that he put on the place.
Sometimes people amaze me.
The day after he pissed out on the deal a NICE couple put together an offer for quite a bit more. Being a stock broker, she is good friends with bankers and pushed the deal through in a week. (Dr. Amazeme tied it up for two months). Her husband is a NYC cook-turned-contractor.
"Oh Boy" I sez to myself.
They kept me around to finish all things carpentry while he did the phone work. Worked out great. The house is now finished, they've had their Christmas Ball and the word is it's going to sweep the historic preservation awards this May.
So here's the question: Does that time spent with Dr. Hell go into overhead? Does the fact that I can stick photos of an amazing victorian restoration in my portfolio offset the crud I went through with the good doctor? Did I just answer my first question?
I really am curious about how you all figure overhead, and hope that my rather legnthy story doesn't steer the thread too much...
Underpaid, but living on a lake and loving it,
Dan Morrison / Little Guy Builders
*Dan one of the reasons I like this site is reading your above post. After a rotten couple weeks it's nice to know that I'm not the only one without all the answers. I too have had my "doctors" who have taken me for a ride. My best was a guy who called and got my name from a firm that we do a lot of work for. He was looking at restoring 1800's house that was a builder's dream. Wanted me to do a building inspection, which I don't do and finally talked me into coming out for $500 for the afternoon. Well for $500 he got 80hrs of my time working a construction schedule for the bank.( You the man Bill!) Finally the bank declined on his financing and someone else bought the place. The realitor was also such a nice guy that he gave the new owners my construction schedule. The new owners paided to have their builder and his crew flown out to redo there new house. On overhead after a year you have your base figures on cost. Divide this by number of hours billed and you have a rough number for overhead. Add your total labor wage to this and this should give you a rough cost.Now add your profit or markup and this gives you a rough billable figure. Where all this goes out the window is when your new guy does something dumb. "I didn't mean to break that picture window." Time will allow you look at a job and know how long with your crew to do it. If someone was a bullett-proof way of doing this please share it with all of us
*Dan,Doctor hell goes into the expensiveeducation classification. Over head is quite simply what does it cost to be in business. Consider your minimum salary requirement, taxes, truck (or yugo),Tools, phones etc. that are required to maintain business for the year. that is your overhead. Profit is what you SHOULD make above and beyond overhead.Some items are simply marked up. Some items are priced on market rate. In my area I would get $135.00 for replacing a steel entry door if I based it on overhead & mark up. the market says $200.00 without making any one nervous. (We even have one home improvement retail chain at $255.00).What I would suggest is try to find out what other rates are in the area.Use what ever provides the best profit.And if you get any more Dr. Hells, a cash retainer and make sure you stay ahed of themon the $. I've been there & have felt the pain. Good luck.Rob
*After you have been in business for a number of years,figuring your overhead will become fairly simple as the above posts have pointed out.the real trick is to learn to recognize the "Dr. Hell's" before you get involved with them. I work on the principle that the job I don't take is more important to my bottom line than the job I do take. Once you learn to estimate the "pain in the butt factor"of a job or a customer and price accordingly you will save yourself tons of agravation.You will miss some jobs because you "un-fairly" evaluated someone as to much trouble to deal with,but you will save untold aggravation. If you do take a job,always make sure it is on your terms,not the customers.After all,if a customer is free to look for the best contractor Why can't you look for the best customer?Work to the highest standards possible and charge acordingly(you are worth it ,after all) PS Dr. Hell provided you with a great learning oportunity. Good Luck, Stephen
*Great question, Dan. Loved your story, too. I went to a first estimate meeting today for 2 1/2 hours about a 14x16 sunroom addition, and they're just calling through the Yellow Pages, good chance I'll be higher than some hack and maybe not get the job. But that's marketing, I digress.My obsession this weekend was a spreadsheet that is such a marvel to behold that I would gladly hand it to my customers along with their contracts, to say exactly what we charge per hour, and why we mark up materials. In fact, my idea is to enclose it as a price list for Change Orders, since everyone wants to dispute the hourly rate whenever you end up doing time & materials changes. This way it's agreed to in advance as part of the contract, and the reason we charge what we do is abundantly clear. I don't have time to give lessons to my customers on the cost of doing business (it took me 5 years to figure it out), so I give it to them in black and white. On this sheet, there is one line called "profit margin on this job", and underneath, in italics, it says "profit is the only variable on this sheet". This is a very important point to remember.I find my indirect overhead cost by adding together subcontractors and payroll expenses and subtracting that from from total expenses (Quickbooks Pro, materials are listed separately under Cost of Goods), then divide that number by total sales. This number will scare you, and you will procede to want to lower it. Don't give in to the temptation, this is real money that will come from your pocket if it doesn't come from your customer's. Now you must add what your time is worth for all your estimating, writing contracts, making phone calls, handholding, running the company. I conservatively estimate I spend 20% of my time this way, probably closer to 30%. That's at least 600 hours a year, times my rate of pay, divided by total sales. This is the percentage that you have to add for management time. Management%, overhead %, plus profit margin and any sales tax that you pay your supplier are added to materials (here we pay 8% provincial sales tax). In addition to management time, indirect overhead and profit margin, Change Order labour rates includes direct overhead costs for travel time, setup, cleanup, discussions, breaks, etc. Also, here we have 3 different payroll taxes (EI, CPP & EHT), worker's comp. insurance, vac. & stat. holidays, and we voluntarily pay 1 hour per week towards sick days. Add this all up... it's going onto your labour rate as direct overhead costs.All told, this thing weighs in this way, and I really want to hear feedback about what you think, are some of these numbers way off-base? - Business (indirect) overhead expenses: 20% - Project management time & administration: 5%- Direct (fixed) overhead on labour: 45%- Profit margin (9% after expenses) 15%Therefore, we mark up our labour by 85%, and materials by 48% (40% + 8%). Like all good accounting numbers, these percentages can be tweaked to suit your purposes. On our estimates we add another 20% to our time, because everything always takes longer in real life than on paper, but we would charge 8.9% less than our Change Order rate per hour if we did the job by time & materials instead of fixed price contract, not out of the goodness of our hearts but because we would then be charging directly for travel time, breaks, cleanup, etc., and have no risk of any loss due to not meeting the estimate.This means a carpenter who gets paid $14 / hr. is charged out at $25.90 per hour for extras, $23.59 for time & materials jobs, and estimated at $31.08 per hour on quotes. That, and a $3 two by four costs the customer $4.44.feedback? am i even in the ballpark?
*By the way, add profit and part of your overhead to subcontractors, they take over a lot of the paperwork and project supervision, but they still should be marked up 10 - 20%, depending on who they are and how much of their problems become your problems. Also, charge enough profit to pay for that picture window getting dropped every couple of years, etc.
*Thanks for the responses all of you, I see that my method is simillar to what others do, yielding me with a monthly, weekly or daily overhead fee. Ross divides his numbers by sales to yield a percentage... I'll try comparing my outcomes with the two methods. My biggest curiosity is whether to raise up my overhead fee after wasting all this time on Dr Idon'tgiveahoot. Specificly, Do my NICE customers (who pay me) have to pay for the time I waste on my CRAPPY customers (who don't pay me)? This one ordeal alone more than doubled the amount of managerial overhead I have on my little spreadsheet. I guess maybe if I include it and vow that it'll never happen that way again then my nice customers get a deal in the long run. And I've learned yet another of life's little lessons. Trust your instinct. Make the creep fork over a deposit.One more: How do you decide on what your profit margin is?Inquizitively,Dan MorrisonLittle Guy Builders
*As for overhead, you might want to take a look at return on capital. I have gotten into the habit of taking the assets in the business and multiplying by .15. I subtract this from the net profits and this gives me an idea of what my labor is worth. Why .15? Well, in small businesses most items become worthless at the end of their lifetimes, so they have no future value and you need a quick recovery time. Include in the assets your working capital - it is not free unless you are using your suppliers and they are wise this also and are trying to turn their accounts as fast as possible. It is tough and not getting easier.Dennis
*Dan and Bill, seems like an all too familiar lament. The worst is the "prove-it" types, who want 3 sources for all items, invoices or quotes from suppliers, two weeks to mull it over and a 15 day schedule... that's right, one whole (well half actually, as we have to paint, and clean up for the party) day to do the work. Couple that with the "catch you next week" payment schedule... and you've got the whole picture. Might as well factor in the dispute over the labor, "You HAD 15 days, why the rush charge?"My thanks to Ross, for insight into a better formula, now to get the respect needed to bill for time consumed. (The Doctor charges for visits, wether you like/approve of him or not.)
*Ross,Feedback, have only quickly looked at this but I know you are right with your calcs for wages 'cause I've run the same figures.A carpenter on wages gets about the same here down under but by the time you allow for insurance, holiday pay, sick pay, superanuation, lost time etc. it comes up to around $28/hour.RegardsMark
*Actually George, he's a pathologist so his patients visit him...But rest assured, he is a pathetic one!Dan Morrison
*A really excellent place to learn about profesional money management for a construction company is a book called 'The remodelers guide to Making & Managing Money' by Linda Case.Available by calling Remodeling Consulting Services at 301-588-8172. I have found it the most valuable financial resource I've ever seen. Writen in easy to understand language for us contractors to grasp. It really made a big difference for my company.
*Thanks Thomas,I've read David Gerstel's book The Builder's Guide to Running a Successful Construction Company cover to cover about five times. I'll pick this one up too.Dan