Figuring Overhead

Schwartz04

I am new here and fairly new to the business. I am having trouble figuring in what my overhead per job would be I know what it is overall but is there a formula or something that can break it down on what I need for each job or is it just an educated guess or something along that line.
Thanks in advance
Adam

Vinny

Adam, you should consider posting this in the section for "excavating and site work" as well, but while we're here, I'll do the best I can

Overhead is generaly accepted to be any expense that can not be alocated directly to any 1 job. So given that context, your shop / yard is an overhead expense and probably anything to do with maintenance of the shop and or utility's for the shop.

In the E&SW trades most all else is usually thought to be job atributable and there for expensed on the job quote / cost.

I however cannot agree with this. Or, let me restate that. I dont agree with that philosiphy unless your company fits the model its intended for.

If your a 1 or 2 machine 1 man band type you might be able to make that work, or, if your a big contractor with alot of iron and alot of crews out there doing the work, you can make the model work for you.

But if your like most guys, somewhere in the middle, 6 or 7 pieces 2 or 3 operators and a couple of trucks, not all the iron running all of the time. You probably own the redundant iron from a matter of convienience or you need 3 different size excavators because you do a wide variety of work and theres no one size fits all, then chances are you need to look at all expenses outsid of your raw COGS as a form of overhead and figure them into jobs on a percentage of the total sale price based on an acceptable margin that recaptures enough O.H. every time you go out.

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If you say you cant, your a loser. If you say you wont, your a quiter. Which one do you want to be?

Kenny K

define your gross profit /job based on your mark up of product. this would be your cost of good sold including labor,material and commission. the rest is your overhead cost of administration, payroll,etc. usually 10-3o percent depending on your business

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john elliott

"overhead per job" doesn't really make sense because overhead is the expenses that exist whether you are working or not.

Naturally this overhead needs to be recovered when you are working, and the correct way to do this is to is in your hourly rate.

So, add up all the overhead, work out how many hours a year you can and will sell, then divide the overhead by the hours and that is the figure that you need to add to your hourly rate to recover the overhead costs.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

AtlanticWBConst

Your overhead consists of the overall expense you incur, in the course of operating your business per a specific time period. This may be on a year to year basis (i.e.: Jan 08 to Jan 09). It may be on a month to month basis. It can be on a 6 month to 6 month basis, etc, etc....It may also be on a job to job basis.

The overhead may consist of your gas (operational/transportational), costs associated with running payroll, fleet maintenance, also garage/storage/building/ office rental, any insurances obtained to run the business, permit fees, annual licensing/registration/certification fees, I could go on...
Additional overhead may also involve the time that is spent reading over plans, trips to townhall, reviewing site related paperwork, etc.

The point is that the overhead is different for each specific buiness, because of teh differencs of what it takes to keep their specific business, up and operating whether annually, or on a job-to-job basis.

If these costs are not factored into each job, the money ends up coming out of your own pocket. When it comes out of your own pocket, you take the hit for it.

So, lets say that, you did a $20K excavation job. You based that price on the amount of gas/time on the job/some onsite expenses.
But, you didn't fully figure in all the transportation-gas, insurance certificates pulled, your additional time spent reviewing the plans, bidding, related meetings, your annual business operational costs (liability and Workmans Comp), all your required travel time related to the job. The incedental costs could amount to $1500.00+. So, you really didn't do a $20K job.
Let's say you do 10 such job, in the course of a year. Each one, you failed to aacount for your overhead costs. That's 10 x $1500.00+ = $15K coming out of your own pocket, that you should be including in the pricing of your bids, or accounting for it to be paid in one way, or another, but it shouldn't be getting paid as an after-thought...

There is alot to be added to the explanation of what overhead is, and how to figure it out. I am covering just a small portion of it.

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john elliott

Most businesses wouldn't count costs which are variable (if he didn't do that partcular job then he wouldn't have the expenses related to that particular job) as overhead. I agree that those costs are difficult to classify and are easy to miss when bidding a job but they aren't really overhead as such because they vary depending on the job you are doing.

Best way to figure overhead are those costs you incur when you have no work and sit in the office, with your adverts in the newspaper, your machinery standing outside, the heating on (etc etc etc) waiting for the phone to ring

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Schwartz04

Thanks Very informative
Adam

AtlanticWBConst

I agree. As stated ealier by others, overhead costs are relative - per company - per job.
All the costs, I mentioned, may, or may not, qualify as overhead...based on the different way a company or person breaks down their job related costs, and "overhead" costs.

The main thing is to account for EVREY expense that exists, either presently, or known future expenses.....in one way, or another (or in one category, or another)

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Vinny

I never heard of including a sales commision in your cost of goods sold. That is generally seen as sales expense, variable

Not saying its wrong, but I've never seen it

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The Right Way Driveway Company
If you say you cant, your a loser. If you say you wont, your a quiter. Which one do you want to be?

Vinny

John thats one way but your OH is higher on jobs that are more labor and equipment intense so they require a larger share of overhead alocatted.

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The Right Way Driveway Company
If you say you cant, your a loser. If you say you wont, your a quiter. Which one do you want to be?

Vinny

Thats the best answer here.

I always find it fascinating to see and hear how we each define overhead and how we each manage our buisness and this thread is a great example of why true wealth and success elude so many in these buisness.

There is no absolute correct way thats taught in a uniform manor, so we(individually) continue to wander aimlessly seeking the truth.

I figure I'll find the answer the day before I'm boxed up and shipped off

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The Right Way Driveway Company
If you say you cant, your a loser. If you say you wont, your a quiter. Which one do you want to be?

nadonailer

http://en.wikipedia.org/wiki/Overhead_%28business%29

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George Z

Aren't these job costs?

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Double-A

Not necessarily. Heavier equipment use can turn into more maintenance cycles for the month/year than originally planned and/or unscheduled repairs.

On the labor side, you can have more supervision for larger crews or overtime, higher tool costs...

These would fall under variable overhead, not fixed overhead.

Now, if our supervision is dedicated to that job, and not doing multiple jobs, you might not count it as overhead, unless they were accruing vacation/sick/comp time.

Also, with overtime, this might have the effect of raising your insurance premiums as well. Some of that would be job expense (workers' comp) and some of that might be overhead (vehicle insurance for addition supervision).

Its a ripple storm that has to be well thought out.

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New York Times, July 20, 2006

john elliott

A better way of describing what you are saying here would be that you need to recover more overhead on jobs that take longer. The overhead itself hasn't gone up, just the requirement, and opportunity, to recover it.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

George Z

Never thought of it that way.
Isn't it still the abillity to adjust your overhead to the new realities
and still be able to adjust it back to what it was
if that project was an exemption to the norm?

If a simple tax change, rent increase etc. can change your hourly rate slightly
shouldn't major annual equipment expenses common to most jobs
be overhead?

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Double-A

Yes it is, that is why is so important to look at your numbers regularly, but especially when there are things happening out of the normal.

Yes, you can change your hourly, but I'd suggest you look at the overall picture first. You might find something like deployment equipment costs (the trucks you use to move your machines) has gone down some, which might be good enough to offset any change you might be tempted to make to the hourly.

Yes, maintenance and repairs should be tracked in overhead. That is what I meant by more maintenance cycles per month/year, but, again, these rightly belong in variable overhead.

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"My clients’ wishes are the center of my attention." -- David Guido, a contractor in Woodstock, N.Y.
New York Times, July 20, 2006

AtlanticWBConst

I just went over our workmans comp rates, categories, etc. - yesterday.
In order to basically, do a bi-annual check/review on our "actual current overhead" operational costs.
As stated, it needs to be reviewed on a regular basis. Costs change, expenses change.
It something that should have clear numbers to it, at all times, if you want to be in control of your bottom line, and price your estimated and extra charges properly.

(By extra charges, I mean, the ususal added work that seems to be put on alot of jobs. Overhead should also be factored into those, and not just the original contract work)

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Double-A

Excellent point Vinny. I missed that the first four times I read over this.

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"My clients’ wishes are the center of my attention." -- David Guido, a contractor in Woodstock, N.Y.
New York Times, July 20, 2006

trav007

I try to skip the hourly basis and use a daily rate....OH/days in a year.
This way if a job will take 4 days, I just add 4 days worth of OH plus 20% to account for the days that I take off. It seems to be working pretty good. Even better if I don't take off as much time as I anticipate. How does that sound?

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