Calculating Overhead And Profit

 
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Old 03-18-2009, 09:01 PM   #1
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Calculating Overhead And Profit


just checking but i calculate it this way....
i.e.
with 10% oh and 5% profit (on say a change order)
(direct costs x 1.1) / .95 = invoice.

i am having to show a numnut gc how this is done and why...
the real question is does rs means show it to be calculated this way? i know the construction estimating institute does....

thanks.
scott.
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Old 03-18-2009, 09:05 PM   #2
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Re: Calculating Overhead And Profit


Maybe I don't understand - You are adding 15% to your actual costs. The calculation is 1.15 x your costs.

$ 1,000 for concrete x 15% is = $ 1,150

Pretty simple math.

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Old 03-18-2009, 09:26 PM   #3
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Re: Calculating Overhead And Profit


Quote:
Originally Posted by conco View Post
just checking but i calculate it this way....
i.e.
with 10% oh and 5% profit (on say a change order)
(direct costs x 1.1) / .95 = invoice.

i am having to show a numnut gc how this is done and why...
the real question is does rs means show it to be calculated this way? i know the construction estimating institute does....

thanks.
scott.

um ...


no


no no no no no no

no
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Old 03-18-2009, 09:28 PM   #4
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Re: Calculating Overhead And Profit


Markup of 10% Overhead with a 5% profit margin

Interesting way of doing it - most either go with a straight markup or margin, not a combination

So either go with a straight markup (cost multiply 1.15) or go with a margin (cost divide by .85)
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Old 03-18-2009, 10:47 PM   #5
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Re: Calculating Overhead And Profit


This is going to be an entertaining thread.
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Old 03-18-2009, 10:49 PM   #6
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Re: Calculating Overhead And Profit


The 10 and 5 was just an example, right?
Nevermind, 1 post and the guys gone.

Oh, I just read the part about the Numnut GC, haven't heard one that for a while.

Last edited by silvertree; 03-18-2009 at 10:51 PM.
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Old 03-18-2009, 11:40 PM   #7
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Re: Calculating Overhead And Profit


10 and 5? I think I just lost a job to that guy?!
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Old 03-19-2009, 11:57 PM   #8
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Re: Calculating Overhead And Profit


Agree with SLS on this one. Most contractors don't understand the difference between markup and margin. If you want to make a clear margin (O/P) of 30% you CANNOT markup your direct costs x 1.3. You won't make a true 30% O/P on doing it that way. This could be why so many of us go out of business when we figure we HAVE to make 15% OH and 15% profit to stay alive and mark up all our bids times 1.3. You don't make the 30%.

Example of Markup

10000 job costs times 30% marukup = 10000 x 1.3 = $13,000.00 job. Your gross profits were $3000.....on $13000, not $10,000. Your actual gross profit margin was only 23.1%....7% below you drop dead stay alive target. You're already behind.

Example of Margin

10000 job costs / (1 minus projected markup of .03) or .7 = 14,285.71 job. Your gross profits were $4,285.71 on $14,285.71 or 29.9999% You jus thit your goals and made money.

To make a 30% gross profit you have to mark up your job costs by 1.43.

The percentages in my example are arbitrary as we all have different mark ups for O/P. It doesn't matter which way you do it, just be consistent and know what your final numbers have to be. Don't cheat yourself out of ignorance.
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Old 03-20-2009, 11:45 PM   #9
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Re: Calculating Overhead And Profit


If you want to get Michael Stones book or read this

At conventions, contractors always tell me that learning to mark up at least 50% has saved their business lives. (Most add that they're now at 67%. More than a few contractors have said in this hot market they've raised markups to 75% or 80%.)
Still, when I introduce the 50%/67% markup concept at seminars, I always ask, “How many of you mark up at least 50%?” The number of contractors who raise their hand is never more than 10%. The smaller contractor still needs to understand why he needs 50%, why he should work toward 67%, and why he must never lower markups unless he has a total understanding of his costs.
Overhead And Job CostsOverhead is at least 25% to 30% of the total. Markup must be high enough to pay bills, as well as direct job costs. Those costs include labor, benefits, materials, sales tax and delivery, subcontractors, plans, permits, and cleanup.
Most contractors, particularly those under $800,000 volume, don't understand true job costs: They're doing six tasks themselves and aren't charging the company for that work. They don't realize the sales function accounts for 6% to 8%, production management for 4% to 6%, and office management, 6% to 7%. Plus, there's the cost of their vehicle, field and office equipment, rent, educational seminars, accounting fees, and advertising. Tack on training, legal fees, and general insurance.
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Old 03-21-2009, 01:04 AM   #10
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Re: Calculating Overhead And Profit


Silvertree-

While I agree with your overall message that many contractors may not understand what they actually need to charge for profit and overhead, I don't agree with a blanket statement like everyone needs to charge 50%/67% markup. That is not even close to accurate.

First of all, overhead is specific to the trade and to the business in that trade. Trades such as electricians or plumbers are going to have a lot more overhead then someone like myself. Such is the nature of the trade. Plus it will be dependent on how that individual operates its business to how much overhead they are going to have within that trade.

Secondly, each individuals business's profit margins could be different based on their risk/reward and opportunity costs. I personally adjust the profit margin based on the size and difficulty of the job and the other opportunities that may be out there but that just what works for me. I would never get the large custom homes if I charged the same profit margin that I do for a small kitchen remodel.

Lastly, I really hate the idea of customers out there coming on here and thinking that we all make a 30% profit on all our jobs. As much fun as that would be to make a 67% markup on a $1.5M custom home it's not a realty. With bad information out there like this, it's no wonder we all hear comments like "you builders charge more than doctors".

This is a topic that has been discussed here so many times and no one ever agrees. I recommend the OP use the search button and check it out. I don't want to start another debate, I usually just keep my mouth shut and watch it unfold but a blanket statement like that blows my mind. As I wrap up this rant of mine...I realize that maybe you were making a joke...I hope that is the case. and in that case maybe I should continue to keep my mouth shut when this topic appears.
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Old 03-21-2009, 09:09 AM   #11
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Re: Calculating Overhead And Profit


No I wasn't joking, and I'm not saying 67% is right. I am just reprinting that article to get the message across that it's more than a 10% markup.

Correct, each business is different and depending on materials sold your markup should reflect a contractors costs to do the job.
Work comp is 100% for some roofers and 14% for carpentry in some areas, that would strongly influence pricing.
I am not a strong supporter of the blanket 1.6 approach. But its something for someone starting out to think about.
You can also use a capacity based price system.
My point is 10% overhead and 10% profit is a myth. You have to charge enough to be a real business, and a contractor should know his costs even before bidding a job.
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Old 03-21-2009, 11:32 AM   #12
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Re: Calculating Overhead And Profit


What could possibly be wrong with getting more contractors to raise their prices? After reading all these threads I currently picked up that book from the library and almost finished it. The concepts are smart, the theory's are the right ones and the approach is good. Arriving at a mark-up is simple enough to punch in numbers, however there is a section of that book at the end that says "all that glitters isn't gold", there is nothing simple about figuring that word problem. I somehow got a close answer to his but took an entirley different approach..one misplaced decimal is very costly.

Which is why creating a method to monitor that system to lead you to your goals isn't easy. If I produced a couple of identical products that I can routinely install with specific man power then this whole process is cake. However if every job is different materials, man power, locations, extended dry spells or unusual weather then its more than a little chaotic. To be perfectly honest I'm not that great all this stuff so I am open to learning and reading all these threads.

I know when I install only I roll my overhead into my time rate, if I hire out subs I tack on a %. If I install, sell & supply, then I base rate expenses and then mark-up what I think I can get for all that responsibilty. Basically I know what my "current" minimum is. I can see leaving money on the table when I do a capacity type deal and I can see how volume style can become too random.

When I was reading the overhead section I first thought was "if we're pulling numbers out of the air why not set the bar low for sales to be safe and give myself plenty of vacation time with a juicy profit, all while employing the fewest possible". Then regardless of events I can find myself in a better place later-----maybe. Simply using the mark-up will put you out of the park on most bids so then what---- increase the cost with heavy advertising so it averages out the amount of lost sales with your goal sales? Dry spells will also kill you.

The points about making a profit on your venture regardless of supplies as said in the capacity style are worthy cause we should. The points about mark-ups when supplies heavily weigh the job costs in the volume system are also worthy.

I want to know a fair way to evaluate responsibility for the risk you take doing a job then I could use that factor in my jobs. Like scratching those infamous gold plated faucets or denting that $4 K door after I bought them. Replacement is expensive to replace verses a chrome fixture or cheap door. Supplying that job was a big risk. A large renovation also puts your company overhead at risk for a greater duration than a simple roof or window job. In my eyes here in lies the key.....to worthy mark-up. I want to hear more on this.....

Last edited by Tom M; 03-21-2009 at 11:37 AM.
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Old 03-21-2009, 12:00 PM   #13
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Re: Calculating Overhead And Profit


My yearly insurance starts at $10,000 and only goes up from there. The carrier's rationale is that I have the ultimate responsibility for the safety, liability and performance of all the sub contractors that I employ... not to mention the project, materials, deliveries, vehicles, acts of God, and possible endangerment to innocent citizens.

Well, that's the same way I look at my risk/reward status. I hit Silvertree's numbers just about on the head. Of course, that is figured on a baseline of pure cost of materials and labor costs.

1.67 works for me on most jobs. Larger ventures can sometimes stand a little hit to that number... but not often.
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Old 03-21-2009, 12:41 PM   #14
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Re: Calculating Overhead And Profit


Here's the problem. Most of us here have gone to seminars and read books on how to price our services. Then we get the "Old How Much" should we markup question. And my answer, which Tom and Willie agree with is selling price is inverse to your costs and risk.
We could never cover this without a record long thread, and even if we did that, many would argue that 10% or so is fine, 10% is fine if your costs are already covered by wages charged, more or less.
Any system that leaves you profit at the end, is a working system, if your like my friend Sam though.
Sam broke a million in sales a few years ago, I was at 600K and a little jealous, then over lunch Sam says "I had to borrow $25,000 from my wife to pay off my credit card"? Huh, I felt much better, I had made pretty good money on less sales. Sam was a 10 and 10 bidder. But that was over hist costs, with nothing for management, marketing and whatever else.
My advice, go to the library and get every book you can on running a business, or go to Amazon and buy some used books on the subject. There are many good books out there on this subject.
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Old 03-21-2009, 04:27 PM   #15
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Re: Calculating Overhead And Profit


the problem is guys will trip over themselves to find that "magic formula" --- when in reality there is none. Business is simple and people make it way way way way too complicated - far more complicated than it deserves to be
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Old 03-21-2009, 08:15 PM   #16
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Re: Calculating Overhead And Profit


I like that old joke about how to make money at just about anything.
Buy low, sell high.
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Old 03-21-2009, 08:22 PM   #17
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Re: Calculating Overhead And Profit


Quote:
Originally Posted by silvertree View Post
I like that old joke about how to make money at just about anything.
Buy low, sell high.
i thought it was buy with someone else's money, then sell it back to them, and then make out with their wife???

(ok, im obviously confusing two different things)
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Old 03-21-2009, 08:25 PM   #18
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Re: Calculating Overhead And Profit


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i thought it was buy with someone else's money, then sell it back to them, and then make out with their wife???

(ok, im obviously confusing two different things)
That's the way I do it. I also try to add in the 18+ daughters in there as well, I hate when people feel left out on my account
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Old 03-21-2009, 08:37 PM   #19
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Re: Calculating Overhead And Profit


Rory, didn't Mogatutu Omgubatutabu (the goat king of Algeria) offer you the hand of his oldest daughter, Fatututu the Round as part payment for a whole house remodel recently?
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Old 03-21-2009, 08:39 PM   #20
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Re: Calculating Overhead And Profit


Quote:
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Rory, didn't Mogatutu Omgubatutabu (the goat king of Algeria) offer you the hand of his oldest daughter, Fatututu the Round as part payment for a whole house remodel recently?

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