Defining your Overhead

[Beth n Rod 1,278]

Hello Everyone.

Thought I would put up some relevant articles for those who are trying to figure out how to price their bids/quotes.

Many people on TGS and other bulletin boards have asked the question; How do I figure out my price?
The responses have been varied but the most common have correctly been to find out what YOUR costs are and price

yourself in respect to them.

 

Other contractors prices may seem like a good gauge or a way of being competitive but their pricing structure may be wrong or

not inclusive of the many necessary costs of doing business and as a result we see those companies disappear in a short time

because they weren't properly covering their costs and ran the business literally into the ground and went broke.

 

So when it comes to competitive pricing, one must consider there will be many aspects of a competitors price that they

won't be aware of and as a result, it becomes a shot in the dark when applying their pricing to yours.

 

But how does one determine their own pricing?

 

Overhead is the first part of it.

 

It all starts with the constant costs or recurring costs of doing business. These costs are the underlying basis of what

has to be paid to operate a business and are seen in the forms of:

-phone bills, internet service and possibly cloud based services with a monthly fee

-utilities (electric, water, etc)

-insurance(s) (Business, workmans comp, vehicle, liability, health and equipment etc)

-Space/building rent/lease and maintenance fees

-Administrative staff

-Equipment rental/payment and repairs

-Licensing

and in some localities, taxes.

These are the most common and come with a regular billing cycle and as such can be quantified into monthly averages or

increments which can be factored into a unique cost percentage that becomes part of the overhead equation.

Some of these are direct costs while others which occur as a result of operational requisite become indirect costs.

 

One way and typically the easiest way to derive an overhead cost is to gain an average. Taking all these costs and any others

your business may incur into consideration, add them all up together.

Divide them either by the number of months if they occur quarterly, semi annually etc and then divide by the number of days in

that period relative to their billing.

This gives you a daily cost.

Take all others which occur on a monthly basis and divide by the number of days in a month if they are billed in that manner.

This gives another daily cost.

Add these costs together and get a cumulative cost for all. This is what you need to make per day to cover these expenses.

 

Let's break that down into some examples.

 

Monthly costs;

rent/maintenance fees-$3000.00

utilites-$450.00 (avg)

phone-internet-cloud based subscriptions-$1000.00

Insurances (combined for this example) $5000.00

Administrative/staff-$20,000.00

State/local taxes (average for this example) $1500.00

Equipment/vehicle payment/repairs-$1500.00

Total Monthly payments:$32450.00

 

Divide that by 30 days (365/12=30.41666) =$1081.00

This is the amount of money you need to bring everyday to cover your operational costs.

 

Now, you can look into other costs that will be added into your overhead figure and broken down

to equate to a price you can use towards bidding/quoting a job.

 

Employee wages for the work as a start. Do you have any measure of productivity to apply towards gaining an hourly price?

For example, how long does it take to wash X sqft of ____________?

You can use a couple of ways to determine that but most people who have been in the business know how long it takes

to wash anything they bid. They time it or they use the results in the time taken in previous jobs similar to it to create an average

by the hour or sqft. or even sqft/hour and that will be based upon the equipment being used or not used, the number of employees

on that job and include set up and break down times.

 

Some will even factor a travel time based upon a service area they designate and anything that falls outside of that area, an extra cost will

be added in the form of a percentage of labor/fuel and any other expenses such as tolls and metering fees if they need to attach to a hydrant.

 

Many companies make the mistake of solely pricing by time and materials in which time is the wages of the employee's on the job and not necessarily

those of the owners and administrative staff (if any) creating a negative pricing structure which leads to a company working into debt.

This is why knowing all your costs up front helps to keep your company profitable and helping to create a price that not only covers all

your expenses but also contributes to profits and incidental cost coverage without which can hurt of cripple a company.

 

I will provide a small example of a pricing model, but realize this is but an illustration for the basis of helping you to determine how to go about

creating your companies unique pricing guide. Only you know what those costs are because you are the one that has set them up, and your 

responsibility for paying them on time and regularly depends upon accounting for them in all bids and prices you give.

 

Earlier, we arrived at a price of $1081.00/day the business needs.

Let's assume you have enough business under your belt to have a record of previous jobs which are recorded for start and end times,

the number of employee's on those jobs and the expenses that went into completing them.

 

1. Travel time: 20 minutes city driving/15 mile radius

2. Time of the job: 4 hours

3. Employees active: 2

4. Wage of each employee: $14/hr and $16/hr

5. Fuel for the power washer at $2.59/gal and the power washer runs for 5 hours on a 7 gallon tank

6. Plus diesel fuel for the burner at $2.99/gal and it's duration is dependent upon temperature required X time in use.

7. Avg at same 5 hours of gas used and heated to 150*=6 gallons/5 hours=1.2/gal/hour

8. Vehicle fuel at $2.59/gal and your mpg is 15X15 miles=1 gallon of gas used to transport vehicle and employee's.

9.Set up time=15 minutes

10. Break down time=15 minutes

11. Chemicals used @ $3.00/gallon X 1 gallon and downstreamed

 

1 -> wages for travel (butt time) 14/hour/60=.23/minute X 20 minutes=4.66 + 16/hour/60=.26/minute X 20 minutes = 5.33 which equals $9.99

2, 3 and 4 -> job time; 14 X 4 =56, 16 X 4 =64 which equals $120.00

5-> 7/5=1.4gal/hour X 4hours = 5.6 gallons X $2.59 = $14.50 in gasoline fuel used

6, 7 -> 1.2/gal/hr X 4/hrs = 4.8 gallons X $2.99 = $14.35 in diesel used

8 -> $2.59 for vehicle fuel

9 and 10 ->.23 X 15/minutes = $3.45 + .26 X 15/minutes = $3.90 which equals $7.35 X 2 (break down time added here) = $14.70

11 -> $3.00 chems.

 

Total-$179.13 direct job cost (time/materials etc)

Average this for a regular day at 8 hours equates to $358.26

Add in the overhead figure-$1081.00+$358.26=$1439.26

For simplicity sake, divide by 8=$179.90/hour

Break that down by sqft if you like by dividing that number in the total sqft covered.

Let's put a figure out there of 3500/sqft / 4  hours = 875 sqft/hr that 2 employee's can cover in a 4 hour period

875/4=218.75sqft/hr

218.75/2 employee's = 109.37 sqft/hour

 

Now, we have broken this down to the hour and sqft.

Do we know how much we need to charge per/sqft to cover a days expenses?

3500sqft x 2 = 7000sqft a crew can cover in a day.

$1439.26 is our direct cost including overhead.

7000/$1439.26=.20/sqft

 

BUT!!! that doesn't cover any margin we need to make also known as profit.

What is the percentage you wish to make to help your company grow? 10%, 15%, 20%?

Take your total expenses and multiply it times the percentage you need to make. Remember though, this

can affect serveral things. One is your competitiveness in pricing. The other is your revenue tax bracket. An accountant

would be best served to advise you on this subject.

 

Below, I have provided some links to the topic for the benefit of supporting documentation and reference in case something

is not clear here. Remember also, that in a service business, many examples provided in the links will be based upon selling a

product. I have tailored the examples here to apply towards a service business like our industry has and it is from that basis that

I hope to have covered as many bases as possible.

 

Feel free to ask questions, make suggestions, post examples and any other relevant information or ideas. After all, this is where

people come to learn.

 

 

http://smallbusiness.theprivatebank.com/how-to-avoid-three-common-profit-mistakes/
http://www.wikihow.com/Calculate-Overhead
 

Rod

 

 

 

 

 

 

[mike movila 78]

Rod very good and informative article

[Beth n Rod 1,278]

Thanks Mike,

It's the first of several which address the topic of bidding and pricing.
 

Rod

[Guy B 70]

Great Post Rod!