What should your overhead mark-up include?
Many contractors don’t know their exact job costs, equipment costs, overhead budget or how much profit they should make. Without an understanding of your numbers, working hard in a financial vacuum keeps you busy and broke, instead of productive and profitable.
In order to bid projects successfully, you need to know what it takes to cover your annual overhead. Your overhead is a fixed amount of money covering every expense it takes for your company to stay open and do business during the year without any jobs under construction.
Job charge or overhead expense?A common problem occurs when companies don’t properly job charge field costs to their respective jobs. When you don’t set up separate job accounts for every job, you can’t go back to see if you are bidding the right unit prices for your work or learn if you made money on each job.
When you bid work, your field labor rates include employee burden costs, taxes and insurance. For example, a worker who earns $20 per hour with a 50% burden expense is bid out at $30 per hour. When all burden costs are paid as part of your overhead costs, your job cost accounting doesn’t give you a clear picture of how well your job did upon completion. The same is true with your field equipment.
Track your job costsTo make more money, you must track and keep updated accurate job costs. At the completion of each project, you must be able to review results to see if your bid was accurate and made any money. Therefore, job costs must include every expense it takes to build projects including project management, supervision, labor burden, equipment, and insurance. Without jobs under construction, you won’t spend money on these items and, therefore, these must be a part of your job costs.
Overhead must include your annual costs for management and administrative expenses; salaries and burden/fringes for the president (not profit distribution), management team, office staff, sales, estimating, and accounting; office and shop expenses, office supplies, computers, internet, and office phones; vehicles for officers and management personnel; marketing, sales and advertising; personal development, associations, and training; interest and banking; professional services, legal, CPA, and business coaching; service, closed job and warranty work; and contributions, miscellaneous, taxes and depreciation.
Overhead also must include business insurance to keep your company operating (but not liability insurance to build or run jobs); administrative employee labor burden and taxes, worker compensation insurance, health insurance, and fringes for management and office staff only who do not work on jobs under construction; field employee labor and their burden costs who are not working on the jobs under construction during slow times or downtime; and field vehicles and field equipment expenses, gas, and maintenance when they are not working on the jobs during downtime or slow times.
Overhead must not include items that are used to build projects in the field and should be included in your bid estimate and charged to job costs, including project manager, superintendent, foremen, field crews and all of the field labor burden expenses and insurance costs; all field vehicles, field equipment expenses and small tools used in the construction of projects; and liability insurance premiums based on job expenses and costs. To keep your overhead mark-up low, do not include any of these costs in your overhead costs or budget.
General conditions costs include field expenses required to manage, supervise, coordinate and run your projects. Include field costs in your general conditions project budget for every administrative cost, including project management, supervision, vehicles for project manager and superintendent, onsite temporary facilities and utilities, temporary protection, clean up, mobilization, testing, permits, meters, engineering, liability insurance, and performance bond.
About the Author
George Hedley is a best-selling author, professional speaker, and business coach. He helps entrepreneurs and business owners build profitable companies. Email firstname.lastname@example.org to request a free copy of Everything Contractors Know About Making A Profit! or signup for his e-newsletter. To hire George to speak, attend his Profit-Builder Circle academy or find out how he can help your company grow, call 800-851-8553, or visit www.hardhatpresentations.com.