I will also be curious, especially since the masonry blade question. How do you justify the higher cost of your SCMS, compared to having a $200 saw that doesn't slide?

It would also be interesting to see how we justify a purchase or upgrade of tools....for instance, I still use a late '50's vintage Case backhoe....I can see no justification for upgrading, but I bet my accountant will say dump it, buy another one, or pay more taxes. I have a late model Bobcat, but we use it on nearly every job...the backhoe may sit for months.

 

You should have a tool budget in place for the year, and what ever percentage that makes up, you would put into your overhead. I would recomend Markup & Profit form Micheal Stone. The book really helped me understand what my correct markup should be. Good luck

Jeremy

 

the answer is quite simple.

how long should that saw last? lets say 1 yr.

in that one year period, as a one man operation, you will have 1000-1500 billable hours. Lets go with 1000, cause the math is easier.

the saw is $600, but figure the replacement saw for $800 (inflation)

$800/1000 = $0.80/hr spread out over all customers to cover the replacement of that saw in 1 yr.

larger equipment (backhoes, etc) we will do one of two things - bill an hourly rate (if it's commercial service) or bill a daily rate.

Say for example, our bucket truck. Our daily rate is 1/2 of our monthly fixed cost for that truck. If we pay $800 for everything (including insurance) our daily rate is $400. Use it 2 times in a month, and it covers itself.

Older equipment that is paid off, get's billed the same way.

For the record, job specific items (special drill bits, saw blades, etc) should be billed directly to that job, in total or spread out over the year like the cost of the saw.

For example - you need 50 diamond blades on average for a year. 5 * $500 (easier math) = $2500. $2500/1000=$2.50/hr

So add $2.50 +$0.80= $3.30 to you billable hourly rate to cover your saw and blades for the year. Then don't worry about billing them seperate to the customer.

 

I know I'll get some negative feedback from this, however I'll take the risk in order to improve and learn something in an area that keeps me somewhat confused.
I am attempting to learn a better way of calculating overhead cost.



At tax time I take my deductions minus materials that are billed directly to a job then divide that by the number of hours I worked. I do this every year and keep an eye on it to see if it changeing much. It doesn't for me. This number I add to every hour that makes up my bid. this covers tools, insurance, license, advertisement, and akll the other little and large items that are part of your business. My number in 06 was $23/hour. If anyone sees a flaw in this system please let me know.

Jim Bunton

 

What exactly are you calling "BILLABLE HOURS"?.

Are not all working hours billable? Hmmm.

I know you were using 1000 as an example.
By my calculations, correct me please, If we work 52 weeks, 40 hours per week, that would be 2080 working hours. Now if we divide the cost of the saw, $600.00 into that, our basic overhead cost for that saw would come to $3.46 per hour, If we were to work less hours as a whole for the year then that would increase the overhead cost of this saw, right? Now in reality, I should get 3 to 5 years out of this saw. So, should I divide the total of $600.00 paid for the saw by hours for 3 years which would come to about $1.15 per hour for this saw? Then do likewise for the remainder of the tools @ a calculated guess of each tools life expectantcy?

 

Are not all working hours billable? Hmmm.

Time spent driving to and from work, ordering building materials, preparing bids and bills, putting together promotional material (talking with website designers for example) are generally considered non-billable hours.

You gave the example of owning a tool that may not be used on every job, so it's added into overhead,

applying a percentage of tool and equipment investment to job cost.

Likewise it makes sense to drop all your sales & marketing (time and money expenses) into overhead and set your bill rate accordingly. If you bill the paying customers for time spent preparing a bid, how do you account for the time spent bidding jobs you don't get?

Then there are the questions of how to get paid for the time spent preparing invoices, ordering building materials, etc.

 

So with that being noted. If I have 3 people, including myself. I divide the $600.00 into 5100 Man Hrs, comes to less than 12 cents per hour.

See why I'm confused?

 

One more thing if you were to figure that way, that would be right, you are charging enough to depreciate it over one year, but the saw itself may only be being used 100 hours total operating time in the year so it's actual operating cost is $6 per hour of operation (plus any blades, and repairs it may need).

 

In the past, I've added anywhere from 20 to 45% to my estimates for overhead, problem is, it is just a ghost number with no meaning, it may need to be more or it may need to be less. I would like a more accurate way of calculating this. I mean, I've been basically a blind man on this one and it is time to get this right. I want to be as fair as possible to my clients without cheating myself.

 

I don't see how anyone can take all of their small equipment and make hourly overhead costs per piece of equipment, seems like a time consuming mess to me. You have to use the whole pie to come up with overhead. Now The way I figure overhead is based on yearly projections from your business plan. If you are were to use your last years numbers you might come way off of your needed mark if you are planning for an increase in business this year.

On another note, I would personally recommend taking all tools that cost under $500 and writing them off each year, only run tools more expensive than that on an extended depreciation schedule.

Let's say you have a truck and a trailer full of tools and you operate out of your garage with 2 employees.

Take all of your costs and figure them out (using estimated round numbers to make calculations easy)

Phone bills (business line, cell phone, etc) --- 2,000
Vehicle Repairs and maintenence --- 3,000
Fuel Expense --- 6,000
Advertising --- 6,000
Licenses Permits, Legal Fees --- 3,000
Small Tools and Equipment --- 20,000
Large Equipment Depreciation --- 10,000
Shop Rent (pay yourself something) --- 3,000
Vehicle Depreciation --- 4,000
Liability Insurance --- 8,000
Retirement Accounts --- 6,000
Workers Comp --- 9,000
Health Insurance --- 8,000
Your Salary --- 65,000

(you should have more also, this is just an example)

Total $153,000

Billable hours per year = 1500 x 2.5 = 3750

(if you are able to bill yourself out more than half of the time after doing all other management activities, good for you.

153,000/3,750 = 40.80/hr to overhead


Now take the going pay rate for a decent carpenter (22.00/ hr here)

and you will get 40.80 + 22.00 = $62.80

Do not forget to add the 10 percent you want the company to make in profit and you will have your final figure of $69.08 which will be your billing rate per hour. Now this might sound high for a small garage run operation, but I just threw all these numbers out of thin air, I have not operated a business of this size in years, but this is really how one must go about figuring out what to charge, only using their own "real numbers"

 

Seeing it broken down like that makes it sure seem simple to operate a construction business. I'm gonna take this lesson and run with it. And to whoever mentioned the Markup & Profit book, thanks, I just bought it!

 

OK, You all have been very helpful. I think I can work this up now. If I get stuck I will ask more. Thanks.

 

It makes sense to me and thanks for your advice. Figuring out your yearly sales volume seems waaaay more difficult than figuring out how many hours you'll be working in one year. I'm thinking it's better to figure out an hourly rate based on a 40 hour work week, than figuring on earning a lump sum for the year. If I base my overhead on a 40 hour work week, then turnaround and work say 60 hours a week, before the end of the year I'll have paid off all my overhead and the rest is gravy.

Correct?

Obviously, I am simplifying this.

 

. If I base my overhead on a 40 hour work week, then turnaround and work say 60 hours a week, before the end of the year I'll have paid off all my overhead and the rest is gravy.

Correct?

Obviously, I am simplifying this.

Yes, you are correct, but there's one flaw- don't start by assuming 40 billable hours a week, unless you plan to actually put in 60-80 hours in your business every week. If you look at a typical day, between material runs, estimates, phonecalls, accounting, etc., you're easily reducing your billable hours, unless you're putting in 12 hour days. I'd suggest spreading your overhead over between 1600 and 1800 hours, which will allow for some of the items above, rain days, slow times, etc.

Bob

 

Take your historical tool budget and add about 10-15% to it. This will give you a good starting point for this years tool budget. Add in for any planned purchases, like a new backhoe for Joasis, and use that number.

The 10-15% is for unforeseen needs, such as a new type of saw or drill that you don't already own and might need for a particular job.

Don't scrimp on the budget. You can't work with crappy tools.