# adding overhead and profit.



## Rich D. (Oct 14, 2011)

Hello everyone. 

I'm wondering how you add your overhead and profit to your job costs.

Some people use margins, some people use mark ups and some just add the percentage onto their final number.

I need some insight on this as I'm alittle confused on the best way to approach this. 

Let's say just for Haha's my total revenue for the year in 100,000.
And Let's just say my overhead is 20,000 a year and I want a 10% profit which will be 10,000. BTW these are all made up numbers...

Let's say I have a job and the total job costs are 1000$

If I multiply 1000 x 1.30 I will get 1,300$

But... If I use a margin of 30. 
1,000 x (1-0.30) I would get 1,700$

If you use the percentage rather then the margin your leaving money on the table it seems..

2 totaly different numbers. What's right what's wrong how do you do it! 



Thanks in advance for your replies...


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## greg24k (May 19, 2007)

Usually you look what day of the month is and how many bills you have to pay, and if you have a vacation planned and that time approaches, you have to take that into consideration and bill accordingly :laughing:

Rich, there is no right way or the wrong way. You have to set a rate that works for you, to cover needed overhead, material, miscellaneous expenses and make a profit in the end. What works for others might not work for you, and using that figure or system will make you lose money and this is why you have to come up with your own prices. 

Good luck :thumbsup:


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## Chris Johnson (Apr 19, 2007)

My overhead and profit are all over the place. I use formulas to price a job based on what the market will bear. 

When pricing my O&P are already in my base pricing, when I finish the quote I look at it and make adjustments as necessary based on the scope and any unusual circumstances. It's not difficult, but is not easy either. It's a science I use that works for me. 

And don't use the term you left money on the table, poor selection of words my friend, that's a term scam artists use. You need to price a job to be successful and make some money to move forward, some jobs you will get lucky and double or better your profit, others you skim by to break even! At the end of the year you hope you made enough to survive (and being self employed that's better than working for someone) and had some profits for upgrades within your company to make it a little bigger and better.

Here is another example, I am starting a project in December, it's about 40 miles away, I live in Toronto, major city, lots of traffic. I have 2 options, 1 hour early morning travel and 2- 2 1/2 hours back at night on the freeway, or 40 to 50 minutes morning and night using the only toll highway in Canada at an estimated cost of $ 2500.00 ($40 per day) for the scheduled time of the project. I'm using the toll highway. I can't add that to my estimate, I would not have gotten the contract. I take that from my profits but maintain my sanity in reducing my drive time. I also hope the project completes faster and I don't have to go everyday which will reduce the cost even more but I am prepared to pay up to 3k if needed and I know I still come out with profit when it's all said and done.


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## greg24k (May 19, 2007)

Chris Johnson said:


> My overhead and profit are all over the place. I use formulas to price a job based on what the market will bear.
> 
> When pricing my O&P are already in my base pricing, when I finish the quote I look at it and make adjustments as necessary based on the scope and any unusual circumstances. It's not difficult, but is not easy either. It's a science I use that works for me.
> 
> ...


Chris, I don't know what the total job cost is, but losing $2,500 from your profit and still coming out with proffit, that is a big dent in the pocket... not to mention thats 63 days of traveling, so you not only losing money on traveling, you losing money on truck wear and tear. Bad business practice.


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## Chris Johnson (Apr 19, 2007)

It actually isn't as bad as it sounds, I have allowances for many things, allowances that don't get used in full which offsets the toll charges.

As for the truck wear and tear I treat that as a capital expense that every 3-4 years I am going to purchase a new vehicle, and between purchase I accept I will be replacing the tires once.

So what may appear to be an unknown or bad business practice is how I do things and how things work for me. Also keep in mind I do a trade that requires some travel, not common like framing where I should be able to work within minutes from home.

So since it is not a common trade, there is a premium available for it to cover some of these expenses. And sorry I cannot post the anticipated profit on a public site, but you'd be surprised to say the least.


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## Oconomowoc (Oct 13, 2011)

For me at least, I never use a direct % on a certain job. I logic doesn't work for me.

I just received an approval for a bid on a small home remodel (plumbing).

For remodel type work I bid in 4 hour increments or blocks. Just like service I spread my costs over a 20 day month and know how much per day it costs me to wake up in the morning and wave my magic wand.

I estimated the job at 11 blocks ( increments ). Basically it breaks down to 11 x 4, that's 44 hours. Of the 20 day month this customer will share 5 1/2 days worth of costs. 

I then multiplied 44 by my standard hourly rate and came up with a number. This number + 5 1/2 days worth of costs is my new number. Then I add materials and material markup. Bidding this way is very quick for me.

When that's done I added the 3 trip charges it took to get the job, and 2 inspection trip charges......and permit costs etc. 

That's how I do it. At the end of the day you can get to the final number a bunch of different ways.

Mike


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## Oconomowoc (Oct 13, 2011)

Chris Johnson said:


> It actually isn't as bad as it sounds, I have allowances for many things, allowances that don't get used in full which offsets the toll charges.
> 
> As for the truck wear and tear I treat that as a capital expense that every 3-4 years I am going to purchase a new vehicle, and between purchase I accept I will be replacing the tires once.
> 
> ...


I do the same thing. I require a nice new vehicle. It costs me "X" dollars a year to drive a nice new vehicle. I divide that up in 20 day months and charge my customers for a new vehicle. As long as my customers have to buy my vehicle I figure just go for the new stuff and be done with it. This gets added to my total "price of poker" cost.

Mike


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## Oconomowoc (Oct 13, 2011)

Its worth mentioning. Don't forget about your retirement fund. Your customers have to purchase that for you also. I use $2,000 a month as a base number divided by a 20 day work month. Construstion people usually end up retired broke, this prevents that. Use discipline and invest that money every month. You MUST charge customers for this!

Mike


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## Oconomowoc (Oct 13, 2011)

double post


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## Rich D. (Oct 14, 2011)

I like the idea of charging the daily price of just getting up and being a bussiness owner.

Let's say my O&P is $30,000 a year. (Not real numbers).

I plan on working 200 days this year.

30,000/200 = $150.00 a day just to be in bussiness and make my profit projected margin....

I like this way the best because as long as you work the minimum days a year you will be making your proper O&P for the year. Any extra days worked will be 100% profit... 

I like how mike uses blocks to price his labor. So if I have a repair call that I kno will take 3 hours, charge them a 4 hour block and 1/2 of my days O&P costs. And hopfully have another 4 hour block to make the rest of my O&P that day. 

Thanks everyone for your responses. I'm new to all this and love to learn these aspects of bussiness. Every little bit helps!


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## Oconomowoc (Oct 13, 2011)

Rich D. said:


> I like the idea of charging the daily price of just getting up and being a bussiness owner.
> 
> Let's say my O&P is $30,000 a year. (Not real numbers).
> 
> ...


@ Rich

Want a fun weekend project?

When you're home and watching TV at night, sit down with a laptop and a calculator. Using that formula try and figure out the difference between owning a used high mileage work truck and a new w/warranty work truck fully loaded.

Research resale value on both, maintenance costs on both, insurance, and interest on the loan. On the new one figure 3-4 years ownership and calculate average mileage you put on. Go to craigslist to check value so it's fair.

Take the difference between the two and figure out what your customer is buying you for a vehicle. It's interesting.....and fun. And you will look at your business from a whole different perspective.

Mike


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## Chris Johnson (Apr 19, 2007)

See that's what I try to tell people Mike. 

After 4 years a vehicle is going to cost for maintenance and repairs that you never had prior to that time. People seem to think we must charge a lot since we have nice new vehicles, no we charge the same, but I pay for new as opposed to a mechanic when I have breakdowns and vehicle rental charges if mine were in the shop.


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## Oconomowoc (Oct 13, 2011)

@ Chris

Yeah, I've done the math a thousand times. I've also had TOP business owners tell me the same thing. BUY NEW.

If a person does the math the difference is nothing. Even if it's slightly more the customer pays for it. If I didn't own a plumbing business I would drive Porsche to work. I am in business, my customers demand I drive a fully stocked van. They have to pay for it, not me. I make them buy me a new one............

Watch, we will have 40 comments by people saying the opposite.:laughing:

Mike


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## J L (Nov 16, 2009)

I'd say how you price depends on the type of company you have. Are you performing all of the labor? Do you have a helper? Do you have a full time crew? Do you have management expenses and/or salesman to pay?

For me, I'm our salesman / project manager, and I have a crew that performs all carpentry work, and we sub out the rest. 

I've found a daily rate doesn't work for me. We only have one crew, but we have multiple jobs running at any given time.

I use mark up on the COGS (cost of goods sold)- similar to what you show in your example. I base my numbers on my expected yearly sales, expected overhead, and expected profit. From there I can figure out my mark up rate, and that's what every job gets.

Whether you use markup or margins, it doesn't matter. Pick one and stick with it. Don't go back and forth as you will confuse yourself. And the reason that I say it doesn't matter is that a 50% markup is different from a 50% margin, so you're comparing apples to oranges. 

Now let's look at your example. You have $100,000 in total sales with $20,000 in overhead and $10,000 for profit. That leaves COGS of $70,000. You have to add a margin or markup onto the $70,000 to reach $100,000. $100,000 / $70,000 = 1.42857. That is your mark up percentage. Verify using the reverse formula. $70,000 x 1.42857 = $99,999.99. 

If you want to use margin, then $30,000 / $100,000 = .3. Dividing the COGS by the margin formula (1 - .3) gives you $70,000 / (1 - .3) = $100,000. 

Now you can see that the margin and markup numbers are not interchangeable. I've seen contractors get themselves into trouble because they use markup when they should be using margin. They figure out that $30,000 / $100,000 is .3 so then they get a job that costs $1000 and multiply it by 1.3. Wrong. He will always wonder why it seems like he's never making any money. It's because he isn't.

Good luck :thumbsup:


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## Oconomowoc (Oct 13, 2011)

RemodelGA said:


> I'd say how you price depends on the type of company you have. Are you performing all of the labor? Do you have a helper? Do you have a full time crew? Do you have management expenses and/or salesman to pay?
> 
> For me, I'm our salesman / project manager, and I have a crew that performs all carpentry work, and we sub out the rest.
> 
> ...


YES. You are right. That formula is best used for us guys who are self employed with no employees.

If I was in your shoes I would do exactly what you did in the example.:thumbsup:

I should of made that more clear. 

Mike


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## J L (Nov 16, 2009)

I should also add that it depends on the size projects that you do. We're geared towards larger projects (projects that take longer than a week). So when we bid half day jobs, I have to use a higher markup rate because even though it's only a half day, it's taken me away from a larger job for a full day.


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## Rich D. (Oct 14, 2011)

@ remodelGA thanks for that post that's exactly what has been mind boggling me.


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## Rich D. (Oct 14, 2011)

RemodelGA said:


> I'd say how you price depends on the type of company you have. Are you performing all of the labor? Do you have a helper? Do you have a full time crew? Do you have management expenses and/or salesman to pay?
> 
> For me, I'm our salesman / project manager, and I have a crew that performs all carpentry work, and we sub out the rest.
> 
> ...


:clap:
Thank you!:thumbup:


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## VinylHanger (Jul 14, 2011)

RemodelGA said:


> I use mark up on the COGS (cost of goods sold)- similar to what you show in your example. I base my numbers on my expected yearly sales, expected overhead, and expected profit. From there I can figure out my mark up rate, and that's what every job gets.
> 
> Whether you use markup or margins, it doesn't matter. Pick one and stick with it. Don't go back and forth as you will confuse yourself. And the reason that I say it doesn't matter is that a 50% markup is different from a 50% margin, so you're comparing apples to oranges.
> 
> ...


I am so glad you posted this. I have been using markup on my materials and should be using margin. Most of the materials I sell are 300 dollars or less and then I add labor on top. On small items markup doesn't give you enough profit. I have been wondering why I seem to be making less money then I should be. I just haven't had time to figure it out. Now I remember the reason we used margin at my last shop.


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## THINKPAINTING (Feb 24, 2007)

Ive been to many seminars on this subject over the years, Irv Chasen, Monroe Porter, Len Fife and many others. In this day in age there's so much help out there to make sure you know your numbers.

A good read here about OH

http://www.awci.org/cd/pdfs/7612_d.pdf


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## oktex56 (Dec 30, 2011)

*Thanks again*



RemodelGA said:


> When I bid a job I take all of the specific job costs, add my overhead markup (percentage) and then add a profit percentage.
> 
> For specific job costs, quickbooks classifies these as COGS - cost of goods sold. These will include labor, materials, subcontractors, permitting, engineering, delivery charges, hotels and food for out of town work, travel expenses if it's a job out of your normal driving area, etc. Don't forget to add in for contingency costs on the job.
> 
> ...


Thanks again RemodelGa,

I have work to do.

Need to get my figures together on past years by breakdown and crunch some numbers.

I sincerely appreciate you taking the time to explain it.

Steve:thumbsup:


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## mrcharles (Sep 27, 2011)

Chris Johnson said:


> See that's what I try to tell people Mike.
> 
> After 4 years a vehicle is going to cost for maintenance and repairs that you never had prior to that time. People seem to think we must charge a lot since we have nice new vehicles, no we charge the same, but I pay for new as opposed to a mechanic when I have breakdowns and vehicle rental charges if mine were in the shop.



I was driving a 2001 truck until three months ago that I bought for cash a couple years ago. I put tires on it, brakes, alternator, battery, 4x4 hub, exhaust, ball joints, and maybe something else..... 

worked out to $144 a month spread over the two years I owned it. Granted I fixed a few of the items myself. 

I love my shiny newer lariat, but the payment is 350 a month, which is substantially more than the $144. I do love the truck though.


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## hdavis (Feb 14, 2012)

mrcharles said:


> I was driving a 2001 truck until three months ago that I bought for cash a couple years ago. I put tires on it, brakes, alternator, battery, 4x4 hub, exhaust, ball joints, and maybe something else.....
> 
> worked out to $144 a month spread over the two years I owned it. Granted I fixed a few of the items myself.
> 
> I love my shiny newer lariat, but the payment is 350 a month, which is substantially more than the $144. I do love the truck though.


I see this all the time. I've been running a 1998 truck purchased 5 years ago at auction. 2 brake jobs, normal tune ups and oil changes. When it comes to tools, they have to pay for themselves compared to other options. One of the worst subs I ever saw used all fairly new DeWalt, and he was always broke. 

The operating costs and depreciation of your equipment puts a floor on what you need to charge, as well as the lowest $ volume you can do and still make decent money. If I could get away with not having a truck at all, I would.


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## black95gt (Nov 25, 2012)

As a new business owner, I am working on figuring my overhead costs. I have my fixed costs down and my variable costs estimated.

I have a lot of equipment and tools that are paid for, but at some point will need to be replaced. How should a guy incorporate costs to replace these items. Some items might need replacing after a year, some might last 10 years, and some may never be replaced and some may be replaced after a couple of years to get a decent trade in or resale value to avoid a huge purchase (skid loaders, ect.). Next, should i figure a part of my home mortgage into my OH, and if so, how much of that mortgage payment should i figure? I work out of my home, but use a bedroom for my office and some garage space. 

So now that i have my OH figured out to fictitiously lets say $30,000 per year. Do i charge a profit into my OH.....fictitiously say 10%? So now my OH is $33,000 per year?

I mostly do new construction which jobs will last anywhere from 3-6 months. If my true OH costs only come out to be lets say 2% of the actual costs to build, do I do the honorable thing and charge that true 2% cost in the bid or do i bump that to say 5 or 10% and reap extra profits under my OH line item?

On my smaller jobs that last a few hours up to a week, I plan to capture my OH costs and profit by adding it into my hourly billing rates, to avoid scaring off the customers. The bigger jobs, I will add this as a line item.

Thoughts?


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## Jaws (Dec 20, 2010)

RemodelGA said:


> So I say again


I dont do my bids the way you do. 9% isnt going to work for me either, but Im not at 50% either, though I am not saying thats a bad mark up. 

I include PM in my bids before mark up, as well as development and design, office management is included in overhead line item. So the mark up on the top is for gross profit. Salary is paid for by the line items , whether banging nails, PM, or development. 

Dont know your operating costs but mine are high, WC on the crew, GL, association dues, chamber dues, office overhead, insurance and maintenance on 6 vehicles, fuel, shop.... 

This means I need to gross a lot more than 300k to make that happen. If I was doing 300k I would change my model. Smaller ops often are very profitable and a very good way to operate. I know a remodeler who is a 2 man show who probably brings home quite a bit more than I do. 300k would be me and one or two carpenters and me doing the books. 

I also know several builders who make a very good living at cost plus 10%, salary and overhead. They probably gross 3-4 mil though.


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## J L (Nov 16, 2009)

Jaws said:


> I dont do my bids the way you do. 9% isnt going to work for me either, but Im not at 50% either, though I am not saying thats a bad mark up.
> 
> I include PM in my bids before mark up, as well as development and design, office management is included in overhead line item. So the mark up on the top is for gross profit. Salary is paid for by the line items , whether banging nails, PM, or development.
> 
> ...



If I'm not mistaken, your jobs are large enough where you can dedicate a PM to the job through completion, as opposed to having a PM run 3-4 jobs at the same time, correct? If that's the case, a line item for a PM charge makes sense. :thumbsup: And by removing the PM's salary from the overhead, that will drop the percentage drastically. Just one more reason not to use someone else's markup percentage, as you don't know exactly how they're pricing their jobs.

And I hear you on the 10% - you've got to be turning some big numbers to survive/thrive on that markup. Most remodelers aren't in that position, unless they've line itemed out their major overhead costs as part of the project costs (like your PM).

FWIW, since I've downsized, Q1 is looking like I should finish out with a 30% net profit


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## Jaws (Dec 20, 2010)

RemodelGA said:


> If I'm not mistaken, your jobs are large enough where you can dedicate a PM to the job through completion, as opposed to having a PM run 3-4 jobs at the same time, correct? If that's the case, a line item for a PM charge makes sense. :thumbsup: And by removing the PM's salary from the overhead, that will drop the percentage drastically. Just one more reason not to use someone else's markup percentage, as you don't know exactly how they're pricing their jobs.
> 
> And I hear you on the 10% - you've got to be turning some big numbers to survive/thrive on that markup. Most remodelers aren't in that position, unless they've line itemed out their major overhead costs as part of the project costs (like your PM).
> 
> FWIW, since I've downsized, Q1 is looking like I should finish out with a 30% net profit


Right now 4 projects under 20k a piece, one thats at 80. My brother is onsite on the bigger one (kitchen remodel and very small dining room bump out onto a porch) pretty much always, unless he is in the shop building the cabinets like now. Then he goes to the site, lines the subs out, goes to the shop and builds cabinets, then go back at the end of the day. 

The other lead floats between the other jobs. 

We use Tim Fallers lead carpenter system, or our version of it. I dont like the PM (developer) model for remodels or even new homes if you arent doing 5 or so. 

So no, no dedicated PM other than me, and I am self performing 2 of the smaller jobs, these projects wont support a spectator. We adapt to the schedule, when we are busy I am doing PM and development, when we are slower I put my bags on to pay my salary. 

Besides the PM being a line item ( some calculate using a percentage, off projected revenue, I calculate the time spent doing PM for doing each job) , we also have a development line item, a design line item, office management line item. There are two people whos salary is paid for by these line items. One does office management, one does sales, design, development and some PM. Mine is carried by a mix of it all except design. Sales, development, PM, carpentry, ect... 

Model isnt perfect for sure, but works for us, we will continue to tweak it. We did not net 10% after all was said and done last year or the year before. 

Congrats on 30%:thumbsup:

Yall staying busy?


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## overanalyze (Dec 28, 2010)

RemodelGA said:


> If I'm not mistaken, your jobs are large enough where you can dedicate a PM to the job through completion, as opposed to having a PM run 3-4 jobs at the same time, correct? If that's the case, a line item for a PM charge makes sense. :thumbsup: And by removing the PM's salary from the overhead, that will drop the percentage drastically. Just one more reason not to use someone else's markup percentage, as you don't know exactly how they're pricing their jobs.
> 
> And I hear you on the 10% - you've got to be turning some big numbers to survive/thrive on that markup. Most remodelers aren't in that position, unless they've line itemed out their major overhead costs as part of the project costs (like your PM).
> 
> FWIW, since I've downsized, Q1 is looking like I should finish out with a 30% net profit


Do you pay yourself a salary or is the net your cut?


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## J L (Nov 16, 2009)

Salary. Just enough to support the wife and I. 

So jaws, you guys have a line item for a pm but don't actually have a pm? Kidding. On jobs where I sub everything I have a pm line item which covers my pay and then our mark up covers overhead and profit. 

Right now I've got work for sure through May. Could be longer if the job I'm on decides to move forward with phase 2 and or phase 3. Just depends on their budget.


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## Jaws (Dec 20, 2010)

RemodelGA said:


> Salary. Just enough to support the wife and I.
> 
> So jaws, you guys have a line item for a pm but don't actually have a pm? Kidding. On jobs where I sub everything I have a pm line item which covers my pay and then our mark up covers overhead and profit.
> 
> Right now I've got work for sure through May. Could be longer if the job I'm on decides to move forward with phase 2 and or phase 3. Just depends on their budget.


Pm/carpenter/ditch digger/job site cleaner uper/material fetcher, ect...:laughing: I thought that was how it was supposed to go :laughing:

Early may for me at the latest. Meeting a guy about an addition and gut remodel tuesday, website lead of all things. Those almost never work out for us,especially on larger jobs. Just client or colleague referals.


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## Jaws (Dec 20, 2010)

When I say PM I mean project management, not manager btw. 

Scopes, estimates, bids is development, there is money in the bid for it.


Schedule, ordering fixtures, doors, windows, flooring, material ect...., releasing the material packages, dealing with subs and employees, quality assurance, checking the job is PM.

Actually wearing the bags is paid for by that milestone (foundation, framing, cornice, trim, ect...)

Everything else, material delivery, job site maintenance, ect.. is under crew labor line item.

It is rare for us not to have atlesst one large job going though, first time in years.


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## overanalyze (Dec 28, 2010)

Reading other guys overhead setup is interesting. We don't have the office employees, but we don't have any employees. My partner and I do it all. We spent a lot of time early on setting up data entry methods that work for us. We spend 2-3 hours a week on the computer messing with bookkeeping. We have a great accountant that does all our reporting and quarterly filing. Our estimating is where I wish we were more efficient at, but we get it done. We use subs when we are slammed or on our new builds, but then self perform when it slows down. I can eek by on very little money if need be. 

For the last three weeks we have been estimating like mad. Nothing huge, small addition, small cottage remodel, tile showers, etc. If we close 25% we will be good until June sometime. I am actually getting concerned because we have so many quotes out, they will all say go at once...never fails...feast or famine!

If I net 7-10% for the year we are good, but we pay ourselves a salary, fuel, cell phone, etc. My biggest goal is to pay off the truck loan and forklift this year. If we do that, we are back to no debt except for the building lease. We have a small investment company that owns that and then leases it to the construction company.


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## EthanB (Sep 28, 2011)

While it is very important for having a system of billing for OH and profit, I don't think the exact system is as important as some people think. What really matters at the end is that your system allows you to deliver competitive bids and arrive at the desired net profit. Net profit matters, a lot. How you get there, not as much.

If you're just starting out then some projections are in order as well as sitting down at regular intervals and calculate your profit to make sure the system is working as intended. For established businesses you can go back to past years and run old bids using your new system to see how profitability would have come out. 

Personally, I run a flat, day rate for OH and a percentage for profit that varies depending on the line item. On more complicated projects or ones that will require more design work or HO hand-holding then I'll add an additional flat charge for management.


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