What Can We Learn From This Chart?

Jerrald Hayes

I was looking over the financials for one of the contractors I work with and was plotting a graph of his Labor Costs, Material Costs, SubContracting Costs, Overhead Costs and Net Profit for this past year and I thought there was something very important that could be seen in the chart.

What can we learn from looking at this this chart?

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Jerrald Hayes About ParadigmProjects.com

AutumnWood Inc.

Subs and materials vary month to month.... but profit should stay the same ? And subs react to the material costs ?

Not sure ?

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michigan deck builders| oakland county michigan deck builders | macomb county michigan deck builders | michigan deck contractor |

silvertree

That we should have different colored sharpies?

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rbsremodeling

There is not a day that goes by that I am amazed at your genius

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Bodger

The chart comes up so small when I open it, it looks like a loosely woven doily.

WTF is this thing?

rbsremodeling

Jerrald I will bite


The labor costs and overhead costs are pretty much the same from month to month. Volume produced each month varies radically month to month along with the other numbers

Using Volume based pricing my profit and overhead volume, would suck, if my numbers looked like this chart

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Jerrald Hayes

AutumnWood that is pretty close to what I am getting at with publishing the chart. You're about halfway there.

Ironically this chart is for a four carpenter general all around carpentry contractor but spring summer and fall they have an excellent deck business that really picks up for them. The subcontracting they do is mostly for deck and outdoor lighting and little bit of plumbing for hot tubs and moving hose bibs.

Looking at the yellow Material Cost line I think we can say it seasonally variable. It pretty much is just a hump or one wave.

On the other hand the the magenta SubConting line is what I describe as "predictibly unpredictably variable" meaning that he can predict that his SubContracting requirements and SubContracting sales are going to be "unpredictably variable."

Finally though what I think is so important to see is that the blue Labor Cost line and the red Overhead Cost line run roughly parallel to each other.

I don't know if you were here for this other discussion I got in on here regarding overhead and profit but in it I made the argument for using a Capacity Based Markup like David Gerstel describes in Chapter 5 Estimating and Bidding; pgs 167 through 168 of his book Running a Successful Construction Company instead of a Volume Based Markup like Michael Stone writes about in his book Markup & Profit.

My reasoning is that since a Volume Based Markup ties your overhead recovery and profitability to the Cost Of Goods Sold (COGS), in other it's tied to the sum of Labor, Materials, and SubContracting cost it therefore tied to something that is both variable and unpredictable whereas on the other hand a Capacity Based Markup ties your overhead recovery and profitability only to your Labor Cost and since they both trend along the same parallel line month to month that assures a contractor that his overhead and profitability are stable and consistent.

The next part of the question is looking ahead to 2009 given the economic climate we are in if this contractor can keep his project pipeline full and keeps his employees busy he might have to make projects more affordable to his prospective clients by offering less expensive material choices and those prospective clients might forego the frills like the deck lighting and hot tubs.

Under those conditions what happens to a Capacity Based Markup Contractor vs. a Volume Based Markup Contractor in 2009 if lets say Labor Sales remain the same, but Materials sales drop 40% and SubContracting drops 50%?

By the way I have a spreadsheet workbook I did up in both Numbers 09 for Macintosh iWork 09 users and Excel for Mac & Windows users who use Excel that has the numbers in it that you can look at and play with if you PM me with your email address and ask me for it.

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Jerrald Hayes About ParadigmProjects.com

Jerrald Hayes

RBS that pretty much exactly it. But what do a contractors numbers or lines on a chart have to look like to make a Volume Based Markup work and deliver consistent results?

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Jerrald Hayes About ParadigmProjects.com

pcplumber

It looks like everything is just an average with the exception of the material. Why the large decline and fall for material costs?

Max Nomad

To speculate on the spike for materials:

• wholesale/retail outlets may gradually raise their prices with anticipation of the seasonal slowdown.
• gas prices (shipping) may play a factor and material prices rise in response to these increased shipping costs.
• prices rise to cover loses incurred in Q1, Q2 and maybe even Q3. Might tie into the other two factors.

Just a few thoughts on the possibilities...

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Jerrald Hayes

and

Hello PC and Max to tell you the truth I think the hump (I would NOT describe it as a spike) in materials is actually perfectly irrelevant and not even worth speculating on. It doesn't really affect this company's profitability at all since they use a Capacity Based Markup to develop a Loaded Labor Rate which recovers all their Overhead Costs and generates a Net Profit on that Labor. They then markup any SubContracting and Material Sales they get for a Net Profit only since their overhead has already been taken care of by their Loaded Labor Rate.

That said while it is irrelevant I happen to know why their Materials Sales crest in the summer months and trough in the winter and it is because their project mix changes seasonally. As I alluded to earlier in the summer months the Material Sales are driven by their deck business and in the winter time they start to move inside perform projects that are more on the line of maintenance, interior painting, handyman, and even some subcontracting (I happen to know to first hand that two of the jobs they did late January and February of last year were labor only interior finish subcontracts to a Kitchen & Bath studio where the K&B studio supplied all the materials) so they are either not supplying materials or the materials costs of those projects is low compared to what they have with decks.

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Jerrald Hayes About ParadigmProjects.com