Overhead And Profit

 
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Old 12-04-2008, 06:30 AM   #1
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Overhead And Profit


1. I know my annual overhead costs. How do I fairly incorporate them in to a proposed price
2. I know what profit is, but how much to charge on each project bid.

Can some one tell me the best way to lets say to put a price together for a home improvement project that will last two weeks for my company. There is a local permit involved.
The materials with tax will be $10,000
The labor costs total will be $ 7,000

my annual over head cost is $20,500
My profit in the passed i figured around $3,000 with no overhead included. my quote would have been $20,000

Am i far off??
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Old 12-04-2008, 06:35 AM   #2
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
1. I know my annual overhead costs. How do I fairly incorporate them in to a proposed price
2. I know what profit is, but how much to charge on each project bid.

Can some one tell me the best way to lets say to put a price together for a home improvement project that will last two weeks for my company. There is a local permit involved.
The materials with tax will be $10,000
The labor costs total will be $ 7,000

my annual over head cost is $20,500
My profit in the passed i figured around $3,000 with no overhead included. my quote would have been $20,000

Am i far off??

I say this with out any malice. Order Michael Stones book: Mark up and profit. He also has a CD that you can input the numbers and give you different scenarios.

It will explain in laymen terms how to arrive at your cost and how to mark up your prices. It should be given to every contractor.

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Old 12-04-2008, 06:37 AM   #3
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
1. I know my annual overhead costs. How do I fairly incorporate them in to a proposed price
2. I know what profit is, but how much to charge on each project bid.

Can some one tell me the best way to lets say to put a price together for a home improvement project that will last two weeks for my company. There is a local permit involved.
The materials with tax will be $10,000
The labor costs total will be $ 7,000

my annual over head cost is $20,500
My profit in the passed i figured around $3,000 with no overhead included. my quote would have been $20,000

Am i far off??
Base your overhead on 2000 hours then divide and apply to a particular job. DO NOT forget to "Add A Little Extra" to each job.
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Old 12-04-2008, 07:16 AM   #4
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Re: Overhead And Profit


bad advice from 2 seemingly intelligent men....

Quote:
Originally Posted by rbsremodeling View Post
I say this with out any malice. Order Michael Stones book: Mark up and profit. He also has a CD that you can input the numbers and give you different scenarios.

It will explain in laymen terms how to arrive at your cost and how to mark up your prices. It should be given to every contractor.
problem with Michael Stone is that his entire program is based on the final revenue for the year...i.e. if you don't hit your yearly revenue, you don't cover your overhead...look into Jerald Hayes and his Paradigm method..much more useful and efficient for the average small contractor

Quote:
Originally Posted by MALCO.New.York View Post
Base your overhead on 2000 hours then divide and apply to a particular job. DO NOT forget to "Add A Little Extra" to each job.
as with Michael Stone, this is only good if you bill out 2000 hours...the average small contractor will be lucky to bill 1200 hr...this is in addition to another 800-1200 unbillable hours (sick days, estimates, paperwork, supply runs, etc...)

divide your OH by 2000 and you'll never cover it...heck, even with employees, you will only get 1700+/- billable hours in a year
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Old 12-04-2008, 07:17 AM   #5
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Re: Overhead And Profit


Quote:
Originally Posted by mahlere View Post
................as with Michael Stone, this is only good if you bill out 2000 hours...the average small contractor will be lucky to bill 1200 hr...this is in addition to another 800-1200 unbillable hours (sick days, estimates, paperwork, supply runs, etc...)

divide your OH by 2000 and you'll never cover it...heck, even with employees, you will only get 1700+/- billable hours in a year
I do agree.
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Old 12-04-2008, 07:20 AM   #6
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
1. I know my annual overhead costs. How do I fairly incorporate them in to a proposed price
2. I know what profit is, but how much to charge on each project bid.

Can some one tell me the best way to lets say to put a price together for a home improvement project that will last two weeks for my company. There is a local permit involved.
The materials with tax will be $10,000
The labor costs total will be $ 7,000

my annual over head cost is $20,500
My profit in the passed i figured around $3,000 with no overhead included. my quote would have been $20,000

Am i far off??
Is this a math test??
$10,000 mat
$ 7,000 labor for 2 weeks or 80 billable hrs = $87.50 per billable hr
(how many employees do you have)
$ 788.46 $20,500 annual O/H. $20,500 divided by 52, times 2
$3,000 profit Just under 18% of job cost

oops si daisy, I or you miskalculated if total job bid is $20,000.00

On a serious note, your labor cost, do you include taxes & ins into it?
Just curious.. Cause 2 weeks & only $7000.00 allowed for labor, not much if figuring 2 weeks as 80 hrs.
And $10,000.00 for material there should be added cost for warranty of these items. Home improvement project would to me be complete project from start to finish and if doing the entire job there should be some kind of warranty offered, I would think.

20 years ago if materials were $10,000.00 the job would be close to $20,000. Today if materials are $10,000 bid is typically between 30 to 60k
Depending on complexity of job as well as number of trades, (no matter if you do all or all separate) adds to overall cost. If different trades are needed for a job, depending on size of job each trade is required to do as well as how many trades can work at any given time adds further cost to a job. The smaller the job the more it can cost even because of down or wait time between each trade.
Always look at a job as whole, remembering your time is a cost as well and you will spend more time going to the bank to deposit money than going to see how much you can borrow to complete a job.

Maybe I need to go check the batteries in my electric calculator, but them be my sifferings

Good luck now & always
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Old 12-04-2008, 08:22 AM   #7
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Re: Overhead And Profit


I won't have a lot to offer that hasn't already been said in this thread, but

Job well done on the proper format for asking a how much to charge question!

FWIW, M. Stone's book helped me get my business pointed in the right direction and getting paid closer to what we should have been charging all along. Jerrald Hayes's method is more or less what we are currently using. We try to recoup all of our overhead on the labor charge (billable hrs. is much easier to predict than materials that may be purchased) and markup materials for their share of our profit goals.

I recommend Stone's book first because he writes in terms even a contractor can understand. Following his advice is much better than what I view as the norm for contractors I know. I took his first piece of advice in chapter 1 and got immediate results. After reading both, I agree more with Jerrald Hayes' method.

Good Luck
Dave
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Old 12-04-2008, 08:58 AM   #8
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Re: Overhead And Profit


Quote:
Originally Posted by DavidC View Post
I won't have a lot to offer that hasn't already been said in this thread, but

Job well done on the proper format for asking a how much to charge question!

FWIW, M. Stone's book helped me get my business pointed in the right direction and getting paid closer to what we should have been charging all along. Jerrald Hayes's method is more or less what we are currently using. We try to recoup all of our overhead on the labor charge (billable hrs. is much easier to predict than materials that may be purchased) and markup materials for their share of our profit goals.

I recommend Stone's book first because he writes in terms even a contractor can understand. Following his advice is much better than what I view as the norm for contractors I know. I took his first piece of advice in chapter 1 and got immediate results. After reading both, I agree more with Jerrald Hayes' method.

Good Luck
Dave
This is why I recommend Michael stone as well his writing is easy to understand in layman's Terms. You must walk before you crawl, minimum he will get you to understand the concept of mark up and profit.

Secondly if you are running a business you should be forecasting Revenue or billable hours. If you are not meeting those goals. You have to adjust your rates, prices etc, to achieve your goals. Life/business does not run on auto pilot you always need to adapt

I have glanced at Jerrald Hayes methods, I think I need to look at it some more have heard good things about his methods
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Old 12-04-2008, 04:25 PM   #9
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Re: Overhead And Profit


Hey thanks guys but I'm not a big company. maybe I'll just keep tab on my e and overhead my old way. I keep my materials cost to the penny, and up date via data base with my suppliers. i trade future material cost by phone with the owners or managers. my labor cost are more in my control. My overhead and profit are always changing. so i keep plugging in a number that by trail and error i have come up with. if things don't change I'm OK. if they do I'll make adjustments.
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Old 12-04-2008, 04:35 PM   #10
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Re: Overhead And Profit


Would you at least consider dividing your overhead by 50 instead of 52? Wouldn't it be nice to at least think you might get 2 weeks vacation?

With winter here maybe grab Stone's book, just to read on a slow day. Ours is not a big business either but his advice got me going on running a better business.

Good Luck
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Old 12-04-2008, 05:19 PM   #11
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Re: Overhead And Profit


How can your overhead only be $20,500 for an entire year?? If you're not taking a salary and including it in your O/H calculation, you're not running a business! Your doing jobs like an amatuer (not directing this at you, particularly, TDG, just generally). That is why so many contractors fail. They have the philosophy of doing a $5000.00 job with $1000.00 in materials and $1500.00 in labor and 'they' made $2500.00. WRONG! How is that different than paying $5.00 for a scratch off lottery ticket, scratching it to reveal a $5.00 winner, and telling your buddy "I WON $5.00"? RBS is right. Stone is the 1st step. I had to do it after years in this business. I take that back, I never worried about when I was doing 100% insurance work b/c I always had tons of money. When I got into 'the market', I got my arse kicked. Did $50,000 additions for free or even costing me $1500.00 bucks b/c I didn't understand Stone's simple philosophies on mark up.

Educate yourself, TDG (like you are doing here...congrats). Read all the books you can and browse through these posts as much as possible. Take continuing education classes when available...anything to get a leg up on your competition and keep learning. There will be a huge correction in our business in the next couple years, so make sure you're one still posting here in 2011.
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Old 12-04-2008, 05:51 PM   #12
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
1. I know my annual overhead costs. How do I fairly incorporate them in to a proposed price
2. I know what profit is, but how much to charge on each project bid.

Can some one tell me the best way to lets say to put a price together for a home improvement project that will last two weeks for my company. There is a local permit involved.
The materials with tax will be $10,000
The labor costs total will be $ 7,000

my annual over head cost is $20,500
My profit in the passed i figured around $3,000 with no overhead included. my quote would have been $20,000

Am i far off??


How are you getting to $20,500..........
I'm not a big company either and I've spent $23,009.74 on fuel this year.
We've spent $9,719.62 on trash removal. Liability and workers comp insurance was $4,438.85. Electricity was $1,288.13 Phones (not including cell) was $1,029 You've got auto payments, auto insurance, auto repairs, internet, heating and cooling, accountantant fees, .......Crist we've spent $1,526 on postage. Are you doing any marketing? Do you use any paper or maybe some ink?..........THESE ARE ALL OVERHEAD COSTS.
If you work out of your home do you figure the mortgage overhead? I know I would. If you didn't work who would pay your mortgage. If the money comes from your business than it's overhead.
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Old 12-05-2008, 03:03 PM   #13
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
Hey thanks guys but I'm not a big company. maybe I'll just keep tab on my e and overhead my old way. I keep my materials cost to the penny, and up date via data base with my suppliers. i trade future material cost by phone with the owners or managers. my labor cost are more in my control. My overhead and profit are always changing. so i keep plugging in a number that by trail and error i have come up with. if things don't change I'm OK. if they do I'll make adjustments.
I know I'm talking to myself but i have rethought this whole business thing, with overhead and profit. and my approach to making money through a home improvement company. I might know the trade stuff more than the next guy and how to figure labor better than most, and even i can boast of many important moves and actions that only comes from la long experiences working with the right business types. But I'm stupid when it comes to overhead and profit, and how it really works to create a good price. All this time in the last 15years i guess my knowledge of my product and salesmanship has gotten me my contracts. NO MORE DOING BISSNESS BY LUCKY RABBITS FOOT! thanks to you fellow contractors i have seen the light. I'm going out tomorrow and buy Michael Stones book.
Bubba
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Old 12-05-2008, 03:05 PM   #14
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
I know I'm talking to myself but i have rethought this whole business thing, with overhead and profit. and my approach to making money through a home improvement company. I might know the trade stuff more than the next guy and how to figure labor better than most, and even i can boast of many important moves and actions that only comes from la long experiences working with the right business types. But I'm stupid when it comes to overhead and profit, and how it really works to create a good price. All this time in the last 15years i guess my knowledge of my product and salesmanship has gotten me my contracts. NO MORE DOING BISSNESS BY LUCKY RABBITS FOOT! thanks to you fellow contractors i have seen the light. I'm going out tomorrow and buy Michael Stones book.
Bubba
If you can afford it too get the mark up cd that calculates your overhead. Try to put all your numbers in there. You will be surprised what you mark up should actually be.
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Old 12-05-2008, 03:54 PM   #15
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Re: Overhead And Profit


I just spent a half hour writing a step by step procedure on how to cover everything. Then I realized, no one ever did that for me. I had to learn the hard way and read Stone's book. I recommend you read the book.

One thing we do way different than a GC does (I think GC guys just mark up bids and total that) is we burden 100% of overhead on the labor hours, calculate a base rate (which always has to be greater than the breakeven rate, which is calculated by totaling the number of guys you employ), and mark that up when estimating, just like a GC would. We don't take a bare hourly wage and come up with a markup. We calculate a base rate, and track breakeven rate against that, to make sure we're always ahead. It's a lot easer cranking out estimates and tracking project performance.
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Old 12-05-2008, 04:35 PM   #16
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Re: Overhead And Profit


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One thing we do way different than a GC does (I think GC guys just mark up bids and total that) is we burden 100% of overhead on the labor hours, calculate a base rate (which always has to be greater than the breakeven rate, which is calculated by totaling the number of guys you employ), and mark that up when estimating, just like a GC would.
I'm a GC, but I have employees, and I make the most money from labour. The mark-up on subtrades is not very significant unless it's a larger dollar job than I usually do...
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Old 12-05-2008, 05:48 PM   #17
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Re: Overhead And Profit


Quote:
Originally Posted by T. D. G. View Post
1. I know my annual overhead costs. How do I fairly incorporate them in to a proposed price
2. I know what profit is, but how much to charge on each project bid.

Can some one tell me the best way to lets say to put a price together for a home improvement project that will last two weeks for my company. There is a local permit involved.
The materials with tax will be $10,000
The labor costs total will be $ 7,000

my annual over head cost is $20,500
My profit in the passed i figured around $3,000 with no overhead included. my quote would have been $20,000

Am i far off??


way far off. For one, a job that material cost should carry a 10% buffer for material overages. Besides, materials never cost an even "000" kind of number. So already, you're guesstimating here

Same with labor. Just a 10% buffer here is $700 - and you seem to have a man hour cost in labor of $87.50 (for 80 hours of work). This buffer only allows for 8 hours of error.

Either way, now your gross profit is down to (guesstimated) $1,300.


From each job, it's good to set aside for warranty work. Of a $20,000 job, I would set aside about 5% -- an amount of $1,000. I know, I know - you're a "master-expert" - your work never fails. Still, a good thing to do is set aside for warranty work.


So now, you're down to $300 before you've even begun to DREAM about paying overhead. Your overhead costs you $10.25/hr. In a 2-week job, this is $820.

You've actually LOST $520 (and that's just going towards overhead - forget your salary) simply by taking this job. And that's if EVERYTHING goes PERFECTLY. Which it never does in construction.




Oh wait - I'm wasting my time, aren't I? One ear, out the other?


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Old 12-05-2008, 09:55 PM   #18
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Re: Overhead And Profit


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Oh wait - I'm wasting my time, aren't I? One ear, out the other?


In one pocket and out the other...
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Old 12-06-2008, 12:31 AM   #19
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Re: Overhead And Profit


One thing I dont get about stones method....

I just priced a job the other day which came to total job costs of 100,000.00. Its only a 3 week job! Material costs are ridiculous (2 very high end bathrooms).

According to my calculation my markup is multiply by 1.54... so Im supposed to add 54K to a 3 week job!!???

Maybe the answer is yes... truth be told the highest single job costs we have ever had is about 50k.

Someone please explain
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Old 12-06-2008, 07:43 AM   #20
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Re: Overhead And Profit


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Originally Posted by healthyhomes View Post
One thing I dont get about stones method....

I just priced a job the other day which came to total job costs of 100,000.00. Its only a 3 week job! Material costs are ridiculous (2 very high end bathrooms).

According to my calculation my markup is multiply by 1.54... so Im supposed to add 54K to a 3 week job!!???

Maybe the answer is yes... truth be told the highest single job costs we have ever had is about 50k.

Someone please explain
Yes. If you add up everything correctly that is exactly what you do

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