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Well you're certainly welcome.
"Was the example used based on your experience? " Not sure exactly what you're referring to with that.
In the white paper I wrote on the potential problem in using a traditional volume based markup that is absolutely based on my own experience (Markup: Comparing the Traditional Volume Based Markup
vs. the PROOF/Indexed/Labor Allocated method). The story that I tell there while fictionalized actually did really happen to me. Only I simplified it to illustrate the point. Instead of two guys going into business I had a sixteen person operation. I didn't want a small solo or one or two person operator to read it and think the problem could only happen to a to larger operation.
As for the numbers I plugged into the PILAO Excel spreadsheet while I think those numbers are representative of what might be true for a typical contractor they are not based on my own operation today. I actually think it's a really bad idea to give out and share your numbers with others because no two contractors will have the same set of numbers in operation. The other day another fellow here was talking about the real dollar numbers he actually uses for burden overhead and profit and while he was doing it in the context of explaining how to come up with a realistic billing rate it made me cringe for a second in that I know a lot of people will just read that and wanting to short cut the process, they'll use those numbers rather than researching, looking up, or figuring out their own.
The point is not what the dollar numbers are but in understanding what the relationship of the dollar numbers are to each other! The PILAO spreadsheet is just a tool that works with those relationships. You have to use your own numbers for it to really be effective.
If you have any questions on it feel free to ask. I want to build a Frequently Asked Questions page to support it but I need people to ask questions.
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Hello Jerrald,Basswood here again, do you ever feel like someone is following you?As far as overhead is concerned, I calculated my overhead last year at 15% (perhaps this means I'm missing something). I am a one man show and work out of my house. My work vehicle is a 2002 model purchased from an insurance auction (totaled due to cosmetic storm damage, looks pretty good--minor dings and dents and only 9,000 miles on it when I picked it up). That saved me 20K over buying a new 3/4 ton rig, and it works like new. The only advertising I did last year was handing out 250 business cards. This year I will spend more on the new website, overture, etc. and I am driving more to work in a more upscale market. Anywho, I know I have been running a lean business so I have been listing overhead as a separate charge on my bills, they read like this:
Materials:
Labor:
Overhead:
Total:I am the only contractor I know of in this market that does this. Most add the overhead into the materials and labor or just labor as you advocate. I may take your advice and recalculate overhead as entirely related to labor, but I would still like my customers to see that I keep the cost of doing business low and that what they pay for labor really goes into paychecks not pickup trucks.Some, less savy customers, may view my overhead charge on their bill as an extra charge since most contractor bills read simply:
Materials:
Labor:
Total:The next logical step for me would be to list profit as a separate charge on my bill. I thought better of this. I know this would not be well recieved around here. I have enough trouble explaining the overhead charge. Most seem to happily agree to the separate overhead charge if it is explained reasonably well at the time of the bid so they understand the method to my madness by the time they get the bill.
waddayathink?
bass... pull out your schedule C.. what does it list ( what do you list ).. for your overhead ?
15% is chump change.. are you bragging that it is low ?.. that is what you seem to be doing by expressing it that way..
do you think your customers are impressed that your overhead is low ?
the ones that are businessmen are not... the ones who don't know anything about business are probably pis*ed because you are charging them for your overhead
now....let's talk about business..
who is your salesman? what do you pay him/her ?
who does your books ? how much do you pay him / her ?
who maintains your vehicle .. what do you pay for that ..
how much are you setting aside to replace your vehicle.. how much is your health insurance.. who pays your life insurance..
how many paid holidays do you get ... what about your vacation ?
does your employer match your savings for your retirement ?
when you lose money on a job.. who pays the loss ? how do you make it up ?
what do all of the things i just listed add up to ?...
if you try to grow your business ... what are you going to use to grown it?
are you going to become more efficeint than your competition?.. will you reduce your overhead so you can increase your profits?
what is your goal ?.. to state a low overhead or to make a bigger profit ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
MIKE! NICE!
Bravo! "Clapping".
EXACTLY!
Now... that should be it's own thread. Just the way you put it... and so thorough.
Call it... Advice for Rookies.
BTW, I don't get this playing down the price by backing out profit and overhead into separate categories to make it look like your hourly is low. People see through that kind of thing. They don't work for free-most don't expect us to.
I go this way. Here's the price, materials in, labor in, tax in. XXX,XXX.00 And here is the payment schedule. But I don't normally have competetive quotes, and the job is sold mostly on the initial (paid) consultation.
Profit is a necessity! And my salesmen get between 10-40%... depends on what they are selling and how much profit is involved. They do tough work and they deserve every dime.
L
GardenStructure.com~Build for the Art of it!
Calm down.Like I said in my posting, I am probalbly missing some things.I also wrote that my business is a one person operation. There has been no business office, no sales staff, no advertising, no bookkeeper, no paid holidays, and as I mentioned a salvage title work vehicle (that looks pretty good and runs great).I wasn't trying to brag (except about that insurance auction). Every business charges their customers overhead, they just don't tell them what it is (it is "hidden" as labor or some other cost).
I know my overhead has been very low (chump change in your words) and that it is going to increase. I just think that my method of billing is good for a business that is relatively efficient. I guess I don't have to show my overhead on my bills and I suppose that as my overhead % increases it may be less helpful to my business to show that value separately. So far it hasn't hurt my business any.The way I have been billing, shows me for each job, how much I spent at the lumberyard (materials), how much I get to pay myself (labor), and how much I need to leave in the busisness account to pay for gas and the few other expenses I have (overhead). To be fair to me, I bet overhead is one of the foggiest subjects that upstart contractors like myself have to deal with pinning down. To put it in context, I have 20 years experience in the historic renovation, custom home building and trim carpentry business, but only started working for myself as sole proprietor about 3 years ago. So I had all the tools and skills I needed already, no big investment required to go out on my own. However, I should also say I know very little about being a businessman.
I have mostly worked for other people. And I have always been most interested in how excellent craftsmanship is achieved on the job rather than how how to profit from it. I am enjoying working "on my own"
but am pretty clueless about business finance.I should be saving more in the business account to pay for tool replacement, and I need to pay more into retirement, but when it comes time to replace to the work vehicle, I'll be back at the insurance auction. That was a good deal.
bass.. got to go to work... i'll be back.. mebbe we can lure jerrald out for a conference...
we already got lawrence to respond... that 's a feather in your cap..
hey lawrence... hye you booked a room for OhioFest yet ?Mike Smith Rhode Island : Design / Build / Repair / Restore
great post Michael....Completely enjoyed it!!!
Be well to you and Helen and yer new grandkid
Yer friend a...The secret of Zen in two words is, "Not always so"!
When we meet, we say, Namaste'..it means..
I honor the place in you where the entire universe resides,
I honor the place in you of love, of light, of truth, of peace.
I honor the place within you where if you are in that place in you
and I am in that place in me, there is only one of us.
Mike, I just popped in for coffee (close to home today) and saw your note,I have to admit you sure put me on my heels.I guess I had it coming based on the responces.I don't want to waste time on excuses for my "chump change" overhead.However, here is a timeline that may inform this discussion:1999: Left Mennonite community where mantra was "live simple that others may simply live" among other things. No tech to low tech was admired. "Progress" was viewed with suspiscion. Didn't quite fit in, but still hold some of those values.
2002: Started the transition to sole proprietor. Was kinda in the boonies & worked as jack of all trades to stay busy in the local market.
2004: Decided to focus on high end trim. Actually got a cell phone.
2005: Realized I need to cross the digital divide and drive to the good stuff...
...Jan.: got email, fax/copy/scan/print machine
Feb.: started a lame webpage & got Overture & ServiceMagic listing
Yesterday: visited Breaktime for the first time...tough crowd. Really I am only a half-fool, check these out:
oh, man... i've got cable.. that is nice work..
now you're in real deep doo-doo
those files are HUGE !.. if you want to post pics on BT.. best to resize them to under 100K
the program most of use to downsize is called IrfanView..... and it's freeware
google on Irfanview and download the program so you can resize your picsMike Smith Rhode Island : Design / Build / Repair / Restore
I'll figure out the file shrinker thing, thanks for the tip. That was my first attempt at photo uploading.
bass.. i'm not trying to pi8s you off.. i'm relating that MOST people who go into business for themselves have pretty much the mindset that you do.. i know i did
i know you have the wrong mindset.. you told us....
<<<
I also wrote that my business is a one person operation. There has been no business office, no sales staff, no advertising, no bookkeeper, no paid holidays, and as I mentioned a salvage title work vehicle (that looks pretty good and runs great).>>>
you are the office manager.
you are the sales staff
you are the advertising copywriter
you are the bookeeper
all of those things take time.. time is not only money.. it's your life.. add up all of those hours.. bet you're working more than 60/week
how much money could you make working 60 hours a week ?
say 40 at a regular job... and 20 at a part time job ?
you take UNPAID holidays
you get an UNPAID vacation
you are carrying your vehicle at an undervalued cost
do me a favor..
take out a form 1040... and take out your Schedule "C" ---Profit or Loss from a business"
look at all of the items in part II "Expenses"
you should have a number for each one of those 27 items.. because if you succeed, you will have all of those expenses.. but you can't grow into that success unless you budget for those expenses..
and part V-Other Expenses
bank charges
dues , subscriptions
telephoe/cable/ fax
truck gas & oil
emotionally, you are on top right now...you're the boss.. but it doesn't take long before you start to realize that this source of income is really an expensive hobby
if you want to turn it into a business, you have to run it like one..run it like the kind of company YOU would like to work for... because.. guess what.. you are going to be working like a slave ... or, an indentured servant....much better to be an employee of a good company.. with a living wage, decent benefits, and a retirement plan..
those things can ONLY come from your overhead.... not your profit..
you can do this as a "sole proprietor".. as long as you treat yourself as a split personality.. one guy is the Owner.. he gets the profits and he pays the workers.. who is .....
you..the worker.... all of the things you need as a worker are part of your overhead..
even uncle sam recognizes this.. why don't you ?
TRUE.. he won't let you deduct any salary paid to yourself.. but you ought to be thinking of your self as the most valuable employee of your company.. no you..no company
i found it much, much easier to think and operate my company as a business after i incorporated.... but it isn't really neccessary
as to seperately stating your overhead ..not a good idea.. leaves you open to 2d guessing by your customers.. it complicates things in their mind... make it easy for them.... here's the price
if you want to get into detail.. do it in the specs.. but don't break things out unless they need something to base a scope-of-work decision on..
gotta go.... time for me to put on another hat..... chief designer/estimator
don't 'cha love this business ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
Mike,
You got me thinking (ut-ohh) so I DL'ed a sched C and plugged it into Excel to come up with an IRS Style OverHead Planner.
It's for part II only, but easily expandable.
SamT
now , that's cool !
are you a sole prop ?
or inc.?
did you plug in the last two years to see what shakes out ?Mike Smith Rhode Island : Design / Build / Repair / Restore
Sole prop or inC? dunno yet. Prolly SP to start.
Have no "last years". I'm starting anew, properly for the first time.
Love Excel, ya oughta see my footings and foundations estimator. Right now I'm trying to decipher VB so I can build a control for navigating with copied links.
Wish I had a copy of Access to play with.
SamT
SamT - "Wish I had a copy of Access to play with." And forget about MS Access. Try FileMaker 7 instead. You'll be up and running producing working worthwhile stuff a lot faster in FileMaker than you ever will in Access (and with better looking interfaces too). Try out the 30 day demo. I'll even send you a starter file you can work from with a lot of standard fields in it that the people at Core Solutions recommend using.
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Good idea Sam. I was planning to write a set of instructions for the next revision of the PILAO worksheet and that's got me thinking maybe I should work something along the lines of what you have there in too.
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Good feedback.Thank you for taking the time to deal with the "greenhorn" issues.
bass..you said
<< And I have always been most interested in how excellent craftsmanship is achieved on the job rather than how how to profit from it.>>
the problem is.... those of that love this work have to get paid for it..
the more excellent the craftsmanship... the more time allocated to the task.. if you want to get the great jobs.. you have to be able to devote the time to making them conform to your quality of craftsmanship..
this means you have to get paid enough so you can afford to spend the time to deliver that craftsmanship..
if you are the low bidder, you don't have enough money in the job to deliver the quality..
quality takes the right craftsman & his care, time, the right tools , and the right materials.. all of those things take money
so .. your task is to find out how much it really takes to deliver the level of quality you want to acheive..... once you have that figured out.. you have to find the customers (marketing ) , make your proposal.... and SELL the job at your price
your emotional well being will thrive if you are making money on your work.. and you can deliver higher and higher standards of quality..
if you are the low bidder, you are constantly under the gun to just get the job done so you don't lose TOO MUCH money...
there are lots of great craftsment out there who will never get a chance to work on the great jobs because they can't make a profitMike Smith Rhode Island : Design / Build / Repair / Restore
right again, damn it!i keep thinking you will get tired of reading my whining posts and just give up on writing back with more sage advice...I'm wrong again.today i figured out a way to build one-piece frames out of mdf for a frame and panel cabinet door order, no rails and stiles to assemble. the panels will be perforated steel (to ventilate computer stuff). i built a pattern and am using a pattern following bit in my router to cleanly trim out the inside of the mdf frames after i rough cut them with a sliding miter saw. i should do ok on this one.in my town i have been getting most of the demanding work, i am not the low bidder, i am the only bidder...others look, but don't touch...actually i guess the only bidder is still the low bidder (and the high bidder too). if they don't like my bid on these jobs, it's probably not getting done. i do name my own price, usually fair to all concerned. i just did an adult-size custom changing table for a client with a 20 year old son with CP(needs all the everyday functions of life assisted). built it over a 6' bathtub out of laminate countertop (solid 1-1/2, laminated on all sides) adding a dropleaf to support the front edge on the tubdeck when folded down, gate latch holds up in locked-position against the wall, commercial door closer assists the folding up & down, attached with piano hinge to custom onsite-laminated cleat lag screwed & scribed to the wall (wavy). custom cut and laminated the tight radius opening in the top allowing it to swing past the plumbing. took a full 8 hrs. when i made that comment you quoted, I was just admitting that i haven't paid enough attention to the business side all these years. i learned from some of the best craftsmen in the business all about how to do the best work on the jobsite...i also know something about getting the sale and estimating jobs, but i could have been picking up the kind of advice you guys have been giving out all these years...i just wasn't paying attention to that part of it. too bad for me really. the lookout was asleep in crowsnest. glad to have found this forum finally.respectfullybasswood
shucks.... you don't need no advice from me... i'm mostly giving pep talks to myself .. just using you as an excuse
one thing i always have to remind myself..
just because i think it's too much money, doesn't mean my customers will..
you oughta think about joining us at Calvins in Ohio in AugustMike Smith Rhode Island : Design / Build / Repair / Restore
charged $1000 for the changing table (2/3's for materials--mostly the special order laminate top). almost used a fold down bed hardware kit from Rockler, but it was too expensive. a local charity helped the family pay for most of the cost. i googled for adult-sized changing table for several hours before deciding to just build the thing...couldn't find one ready to install. No easy way out.tomorow i finish up the cabinet door frames (16 doors, two different sizes) and then if i have time i finish installing a set of arched top storm windows i made out of 5/4 pine for an old brick victorian. the glass shop liked the storm frames i made so much they asked if i would take orders...i thought, oh...no, i'll never get out of the shop.i thought i was charging too much on all of these projects--got the jobs anyway. the owners of the brick victorian close on a bank repo house tomorrow. today they asked if i would bid replacing the windows and remodeling the kitchen in that one...they said they want me to do the work already so i should make sure it will pay for me when i work that one up...it's a dump of a rental w/ poop smeared on the walls...really real little brat sh#t wiped all over the walls of a bedroom. I won't go near the place until some poor professional cleaning crew or wrecking crew or both go through it.i end up taking some not so glamorous work, especially this time of year, but always stay busy...need to start driving to some more upscale stuffhope the web marketing starts working soon.
Mike the Schedule C thing, did you pick that up from Irv Chassen? Becuase I often say the same thing so I'm thinking maybe that's where I picked that up from.
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probably... i remember he was a big eye-opener to me
i also remember some articale in probably JLC about setting up your books based on a schedule C..
every sole prop. has a record of their business expense already listed.. it's their schedule c.. i remeber after reading that, i went back and pulled out mine for the previous 4 years... quite an education..
here were the things that uncle was WILLING to allow me.. and i wasn't tracking all of them..
an example: i decided a long time ago that i want a coffee break in the morning..
we start at 7... break for half hour lunch at noon.... coffee around 9 am
i don't want some of the guys getting coffee and others not.. and i don't want them going to get coffee..so i always fly and buy...
crew coffee is deductible at 50% so ... uncle gives me back about $400 every year...just for keeping some petty cash receipts
and all the other petty cash reimbursibles are deductible at 100%
anyways.... i thought the guy had a great idea ... if people were new to the business.. they might appreciate a pretty unsophisticated method like the Schedule C.
Mike Smith Rhode Island : Design / Build / Repair / Restore
you know, jerrald... i think there should be a special place in heaven for people like Irv Cassen.. can you imagine how many businesses he saved ?Mike Smith Rhode Island : Design / Build / Repair / Restore
That's a really great point and I think that all the time. Taken his seminar was certainly a seminal moment in my career as a business owner. And in spite of the fact that I know this stuff pretty well now and find myself teaching it to others that loose leaf notebook from the seminar is always within arms reach at my desk.However as much as I think we all would like to think he came up with the method he teaches all on his own in doing some research a while back into cost accounting practices I could see that the problem of using one markup number applied across the sum of Direct Job Costs that is what we think of or call the "Traditional Estimated Total Volume Based Markup" was discovered and written about by the people who ran shipyards building warships during the period right after the Spanish American War! Irv Chassen is an old guy and he's still kicking around but he ain't that old.Ellen Rohr who writes for the plumbing and mechanical trade magazines and conducts a lot of seminars in that industry teaches the same philosophy and techniques that Irv Chasen taught us. David Gerstel in Chapter 5 of his book on pgs 167 through 168 describes the method as "Capacity based markup" so he's and advocate too. And the more and more I read about and study what's called ThroughPut Accounting as it relates to the Theory of Constraints I think the method could be called a "Throughput based markup" too. In the automotive repair business its called an "Indexed markup".Regardless of what we call it, or where we learn it, for the life of me I can't understand why anyone would still stick to using a "Traditional Estimated Total Volume Based Markup" method! Plus I think that the "Traditional" label that someone gave it gives it more credibilty and authority than its worth.
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well, i read "The Goal"... i guess that's where i learned about the Theory of Constraints..
so i guess what you're saying is that labor is the constraint.. so we apply our markup to the constraint..
(1600 or so hours per employee )
as you may have surmised by now.. you are way ahead of me in the applications of these systems
if i were 10 years younger, i'd think about growing up to be you... hah, hah, hah
how many guys have you actually been to listen to in business seminars?
i remember Irv..
and Jud Motsenbacker
Walt Stoeppleworth,
that redheaded guy from Virginia.... Crider ?
oh , yeah... another one from the DC area...still publishes in Remodeler... kind of a guru for new construction .. can't remember his name...
edit: Al Trellis.... writes for Builder magazine
one thing about all of them that always struck me...
if they had it figured out.. why didn't they stay in the construction business ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
Edited 2/15/2005 7:44 pm ET by Mike Smith
Basswood - "As far as overhead is concerned, I calculated my overhead last year at 15% (perhaps this means I'm missing something). I am a one man show and work out of my house."
Well that may or may not mean something. It depends upon first of all what you are calling overhead and then again you are a one man operation which could attribute to that too. Some people when they talk about Overhead they are talking about Gross Profit which is Overhead plus Net Profit so that confuses things at times. It sounds like you were referring to Overhead as just Overhead, what's on your schedule C.
Still whether that good or bad and does it tip us off to the idea that you might be missing something I/we still can't tell because it all depends on how your operation is set up. I had a friend who is a one man show tell me a two years ago that his Overhead was 10% of his Gross Sales and I was sure that had to be too low and he had to be missing something. We went over his operation together and I found he was wrong. His overhead was 8%. I was stunned at first but then I realized what he was doing and it made sense to me. The guy travels around with a phone stuck in his ear all day, does no labor himself, and just coordinates subs and pushes through a tremendous volume of work (1.25 to 2 million per year). He's doing remodeling projects for the most part but he operates like a builder (who statistically have lower overheads) and so for him working with a 10 plus 10 markup he makes money hand over fist. But that he is and that is a rare case!
While there are other factors to consider when determining whether a certain percentage is okay or not that I not going to get into here according to the NAHB Remodelers Cost of Doing Business Study the average remodeler's operating expenses are 21% of Sales. So maybe you are just low, or maybe you've missed something, or maybe your not average but hey, it always worth looking at your operation again to check and see what is really going on.
"Anywho, I know I have been running a lean business so I have been listing overhead as a separate charge on my bills, they read like this:
Materials:
Labor:
Overhead:
Total:"
While I will on occasion break things out as labor and material (and subs) when I produce an estimate or quote I would never breakout Overhead or Overhead & Profit as a separate category. Our Overhead is recovered as part of our Labor so it's built in to the labor figure. What the heck makes you think the clients are qualified to make a judgment on how much Overhead is acceptable and how much is not? They should judge the project based on the value delivered for the total price you are charging. Introducing OH as a separate figure just invites confusion and uncertainty in on their end.
When I buy a Macintosh computer I don't make my decision on based on how much is Apples parts and labor and how much is for Overhead & Profit. It's based on whether or not I think an Apple computer is worth $2400 for what I want it to do. When I do get an estimate that is for parts and labor for something like my car it doesn't show me Parts, Labor, and Overhead. The Overhead is figured into the labor rate. How can I make a qualified judgment on how much my mechanic should be charging me for Overhead? How should I know how much his rent is or how much time he spends doing office bookkeeping and how much of that I should pay for based on my repair?? That's not the point. The point is how much do I think repairs to the cars AC system are worth to me.
"but I would still like my customers to see that I keep the cost of doing business low and that what they pay for labor really goes into paychecks not pickup trucks."
Well I guess that's really your prerogative but I wouldn't do it. Like I said I think it confuses the issue and I might even be inclined to think of it as disingenuous a$$ kissing if someone presented it to me that way. I could also think it means this guy isn't charging me enough to pay for the tools he needs to really do the job correctly (that is what I actually once thought when a painter gave me a price for a particular project).
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Jerrald,Thank you for the good feedback. I am certainly not doing the kind of volume in your example. I just picked up some accounting software, will do some more reading, head scratching and keep better track of schedule C items in this new year. I will also take a closer look at things from this past year. These are the kind of things I know I need to do to take my business to the next level (or perhaps just survive some unforseen setback).The 15% figure I quoted was for 2003. I am still working up the real value for 2004--will probably be higher. I know 2005 will be higher. Before I know it I probably will be in the 21% ballpark.I thought I was supposed to keep overhead as low as possible starting out, actually I still think I should run a lean business, but there are some future costs I haven't been saving for in the business account (as I mentioned, tool replacement, adequate funding of retirement, etc).I guess the reality is that I have not been keeping enough money in the business for it to be sustainable. The focus of my business is changing, the sales, profit, and overhead are all on the rise.Point taken on the separate overhead charge. Maybe people have put up with my quirky bidding and billing of those charges because they generally trust me and like the work, service and the total price. Some people get away with taking their dogs to work too.
basswood - " I thought I was supposed to keep overhead as low as possible starting out, actually I still think I should run a lean business, but there are some future costs I haven't been saving for in the business account (as I mentioned, tool replacement, adequate funding of retirement, etc)."
Well you do want to work to keep your actual Overhead expense low as possible regardless of what size operation you are but when pricing your projects you obviously don't want to use a low figure if your actual expenses are high or higher.
You also don't want to get a reputation as the low cost provider in your market area too. Sure then everyone will call you and you'll always be working but you'll never make any money as in Net Profit. Shedding the lost cost label is virtually impossible too. I know one guy who did it by changing his company name and identity and that in and of itself was expensive.
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One other question comes to mind too. When you do show your estimate as would you show it as something like this for a project having costs of Materials 2000 and your Labor cost of $3000?
Materials:
$2000.00
Labor:
$3000.00
Overhead (15%)
$750.00
Total:
$5750.00
Because if your Overhead is 15% of your Sales marking up your costs 15% will fall short of returning you the cost of your Overhead. In other words marking up costs 15% will not return a 15% margin. That $750 is only 13% of Sales! To cover your Overhead if it is indeed 15% you need to markup costs 18%.
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