Does the overhead change with larger jobs?

[carpenter]

My company does mostly smaller jobs such as window replacements or vinyl residing or build a deck, etc. A large job for us would be to do all three on the same project.

We just calculated our overhead percentage for last year and monthly for this year to date. Thanks to Sonny for the motivation. On a normal job I can see where the overhead percentage remains relatively constant, but on larger jobs I would think that the percentage would actually lower incrementally as the dollar amounts remain more or less constant. We might buy a few more packs of paper or ink catridges, but the office doesn't go into overtime because of one job. Office salaries are the lion's share of the overhead for our business.

My question is, when we bid a larger than normal job can I expect the overhead percentage to lower predictably? If so, how can I reasonably forecast how much?

My reason for asking is that we are putting together a bid now for a door replacement project on an apartment complex that would dwarf most other jobs we do. The job is within our scope to perform and we have enough manpower to do it. I would like to bid accurately so we turn a profit, not so low that it hurts, not so high we are out of the game.

Thanks in advance for the advice. You guys are great, not to mention entertaining when char broiling a DIY'er.

[Bob Kovacs]

Re: Does the overhead change with larger jobs?

I doubt it. I'm assuming you're applying your overhead as a percentage markup to your costs, since if you were allocating it to labor, the question wouldn't come up.

Think of it this way- if you have a 3-man crew, and that crew finishes 6 "small" jobs a month, you're allocating your overhead across 6 jobs. If that 3-man crew spends the next three months dedicated only to one job, your rent, insurance, etc, don't change because of it- you need to recoup three months worth of overhead on that job, just as you would spread three months of OH over 18 "small" jobs.

Especially for small companies with only one crew, it makes sense to either allocate OH to labor rates, or to recover it based on the time being spent on a job. Basing it on sales volume is risky, since you can't be sure what the actual dollar value of the jobs will be over the course of time. You "can" be sure that you only have a finite number of days (and manhours) in a year, so that's a more predictable quantity to calculate overhead against.

In either event, your overhead won't change just because you change job sizes- it may change if you add crews, etc., but not job size.

Bob

[carpenter]

Re: Does the overhead change with larger jobs?

Thanks Bob,

We calculated our overhead historically as a percentage of total sales. What I got from your reply was it may be better to calculate it as a percentage of billed labor. Is that correct?

My concern with this current bid is that I may be using an artificial number and pricing us out of the game. Our last years figures worked out to 29% of sales overall. We noticed that this year on a month to month basis, it swings from 21% to 44% for the 1st 6 mos., ave. about 32%. If we were to get this contract we would have to hire 2 more men to cover our current production load. It just seems to me that based on the way I calclated overhead, the percentage should come down with the added sales.

All that aside, I am suprised to learn how important this little piece is. My partner is our working supervisor. At the end of the day he can sit in his truck with a pocket calculator and weigh the day. I have been in this business many years and have learned to be a reputable tradesman, have learned how to win and retain customers. It's not enough. Now I must learn to operate a profitable business. Thanks for your help.

[Dancing Dan]

Re: Does the overhead change with larger jobs?

The only thing I'd add is that if you spend a lot of time checking out, bidding, and prepping these smaller jobs (and are absorbing all those costs as OH), and if this bigger job would mean no selling or estimating for a while, then yes, your OH would be lower for that period. Obviously, the fixed pieces (insurance, rent, vehicle, etc) wouldn't change.

[Sonny Lykos]

Re: Does the overhead change with larger jobs?

Carpenter, as I was reading your post, I thought to myself" 'He's doing what I used to do , decades ago." I was right as I continued reading. You're looking for excuses to lower your price.

But I used to do it differently. I'd look at the price I came up wit hand said to myself: "Geeze. I can't give them that price."

So I'd go over the estimate sheet and look at an item I had down for say 5 hours, and changed it telling myself I could do it in 4 - (actually took 6). So a job I originally estimated at say 60 hours, I was smart enough to get it down to 50 and lost my arse in the process. Don't do it!

It is what it is.

No one ever sold me a new Cadillac for $20K cause that's what they thought I'd pay for it. If I want it, it's still $45k. Now I only sell Cadillacs and run away from those who can only afford a Ford.

Don't do that to yourself - play games with the numbers. It's the fastest way to go broke. See this 3? It's impossible to change it to a 2. Get that in your mind. Next time you try to, hit your fingers with a a hammer. Be tempted again? Get out the hammer. Eventually, you wil not need the hammer any more.

[M Raidy]

Re: Does the overhead change with larger jobs?

"Don't do that to yourself - play games with the numbers. It's the fastest way to go broke. See this 3? It's impossible to change it to a 2. Get that in your mind. Next time you try to, hit your fingers with a a hammer. Be tempted again? Get out the hammer. Eventually, you wil not need the hammer any more."

sometimes things make the most sense when you keep it simple.

I always would find a reason to change the numbers down, then started working 7 days/week to keep up and make enough money. I've been subbing ever since, making someone else rich..

I'm now switching jobs to learn managing addition work while trying side jobbing again so i'll be reading all the advice like this for months/years to come

[Charles Mahaffey]

Re: Does the overhead change with larger jobs?

This is an analysis I did for commercial drywall construction. The steps involved might not fit what you are doing...but it might start the wheels turning.

Each job, regardless of the size will have a number of steps involved from the beginning to the end of the project. What I want you to see is the impact that the small job has on the direct overhead cost.

These steps and associated costs for a small project are identified and outlined below.

1) Have an estimator (or someone) pick up the plans $ 50.00
2) Visit the jobsite to verify existing conditions 200.00
3) Takeoff and estimate the job 175.00
4) Write the proposal 25.00
5) Setup budget for job 25.00
6) Prepare (and place) material order 25.00
7) Deliver toolbox and scaffold (driver time and vehicle cost) 200.00
8) Superintendent visits the job in progress (assume 2 visits) 200.00
9) Pick up toolbox and scaffold to return to warehouse (end of the job) 200.00
10) Prepare and send out the invoice 50.00
Total 1,150.00

Now, there are other (indirect) overhead costs that will also need to be applied; payroll preparation, cost accounting, general accounting, office lease, utilities, phone and depreciation are some of the other items that would makeup the overhead cost of your company.

A budget for a $20,000.00 drywall job might look something like this:

Labor (including cleanup) $7,000
Labor Burden (T & I) 2,100
Material (including sales tax) 8,142
Cost 17,242
16 % markup 2,758
Contract Amount $20,000

With an approximate (direct) overhead cost of $1,150.00, the above 10 steps are almost 6% of the contract amount.

Let’s look at a $100,000.00 drywall project. We will use the 10 steps (as above) to identify the direct overhead cost, but this job will have a longer duration, maybe six weeks, where the small job would go 1½ to 2 weeks.

1) Have someone pick up the plans $ 50.00
2) Verify existing conditions of the job 200.00
3) Takeoff and estimate the project 275.00
4) Write proposal 25.00
5) Setup budget for job 50.00
6) Prepare (and place) material order 50.00
7) Deliver toolbox and scaffold 300.00
8) Superintendent visits the job in progress (assume 1 per week for 6 wks.) 600.00
9) Pick up toolbox and scaffolds to return to warehouse (end of job) 300.00
10) Prepare and send out 2 invoices 100.00
Total $1,950.00

A budget for a $100,000.00 drywall job might look like this:

Labor (including cleanup) $35,000
Labor Burden (T & I) 10,500
Material (including sales tax) 40,707
Cost 86,207
16% markup 13,793
Contract Amount $100,000

With an approximate (direct) overhead cost of $1,950.00, the above 10 steps are almost 2% of this contract amount.

A job that is even larger will take on some added cost of project management that the previous examples did not require. For this example, we will use $1,000,000.00 as a contract amount.

1) Pickup the plans from the contractor $ 50.00
2) Takeoff and estimate the project 900.00
3) Write the proposal 25.00
4) Setup budget for job 150.00
5) Take field measurements (check out accessibility for deliveries) 250.00
6) Prepare (and place) material order 150.00
7) Deliver toolboxes and scaffolds (assume job is several floors) 400.00
8) Supt. visits the job in progress (assume 2 per week for 25 wks) 5,000.00
9) Project Manager (assume 1 full day per week for 25 weeks) 6,000.00
10) Pickup toolboxes and scaffolds to return to warehouse (end of job) 400.00
11) Prepare and send out 6 invoices (more detailed for larger job) 450.00
Total $13,775.00

On a one million-dollar project the direct overhead cost as shown is $13,775.00 and is equal to just over 1% of this contract amount.

The budget for a one million-dollar project might look like this:

Labor (including cleanup) $ 350,000
Labor Burden (T & I) 105,000
Material (including sales tax) 407,000
Cost 862,000
16% markup 138,000
Contract Amount $1,000,000


From these three illustrations, you can see that the (direct) overhead for the small job is much greater (by percentage) than the larger job. As the size of the job decreases, the percentage you use in your estimate for markup must go up.

[Bob Kovacs]

Re: Does the overhead change with larger jobs?

"From these three illustrations, you can see that the (direct) overhead for the small job is much greater (by percentage) than the larger job. As the size of the job decreases, the percentage you use in your estimate for markup must go up."

Or, as I've suggested in the past, and many didn't seem to follow the logic, you allocate all costs associated directly with the project "to" the project as part of the direct work. All of our estimates include a "General Conditions Study", which includes costs for estimating, cleanup, supervision, and any other costs that are directly attributable to the project. This allows us to keep "overhead" consistent (and lower), and it can therefore be applied as a percentage on the direct work at a constant rate.

As you've shown, if you don't do that, a constant markup can really screw you up if you base your percentage on an assumed total volume for the year. Even if you hit the volume target exactly, there's a difference in the amount of costs you generate if you hit your target with ten jobs at $100,000 each vs. two jobs at $500,000 each.

Bob

[Dave@CCD]

Re: Does the overhead change with larger jobs?

First rule of real estate.... location, location, location

First rule in how to NOT lose money... Sonny, Sonny, Sonny

I can't remember where I read this recently but someone did a study and found that typically OH actually goes UP with a larger job.

Just my two cents

DaveS

[Charles Mahaffey]

Re: Does the overhead change with larger jobs?

It depends on what you put into the category of overhead.

For example, some people will apply wc/liability insurance to job cost and others will apply it to overhead.

[carpenter]

Re: Does the overhead change with larger jobs?

Thanks for the replies. In this case the point is now moot as the contract has been awarded. However it is still a critical question. To help myself understand better, I bought Mike Stone's book, Markup & Profit. I have read the first two chapters to date and raised our houly rate by 10% as suggested. It can't hurt worse than anything else I've done over the years.

The results of the bids, change 200 steel entry doors using fibergalss prehungs to spec., low bid was about $98,000, 2nd was about $114,000 while ours was $144,000. I got two quotes for materials, approx. $75,000 and $94,400. Our overhead averages 30% and I went for a 10% profit. I hope that the low bidder gets a better buy than I.

I stayed with our calculated overhead because of the advice I received before the deadline. (and even though the waffle is long gone off my 22oz hammer, it still hurts like hell when properly applied) I am fine with the outcome because we are still very busy and wanted the job more than needed it. I'm still not clear on the proper method(s) for applying the figures though.

I added the cost of materials, labor, supervision and anything else I could nail to the job as a job related cost. I did not add anything for the cost of figuring the estimate or visiting the site etc. because we bid a lot of work we don't get and have no other way to recoup that expense other than overhead. So, my bid was job cost + 30% overhead + 10% profit.

Have I come close yet?

Thanks again for the replies.

[timfinn70]

Re: Does the overhead change with larger jobs?

I have worked 20+ years as a commercial construction PM where I also did the estimating on the projects I ran. Overhead and Profit are often misunderstoon and frequently those "costs" that are considered "overhead" are really job costs. My definition of an overhead cost is a cost that is not specific to a job. True your the costs of the bookkepper to do payroll are ultimately in part driven by the job, but you would have a pyroll and/or accounts payable functions as a result of being in business. Office phones, estimating costs and the like at the "main office" are for me OVERHEAD. ANYTHING that is done directly because of a job are job costs. Delivering scaffold to a jobsite, doing a takeoff that is part of a pending CO, field time, field use of cell phones and the like are job costs and can be lumped into a "Jobsite Management Costs" .

When you are all done on your estimate of the Job Costs and have added the Overhead per cent(determined by last year's overhead costs divided by last year's job costs); then step back to figure your Profit per cent. If the job's a strech, poor drawings, complex ect, then the margin should be "higher" than your "normal" margin. If the job's a no brainer, work is slow, you know how you fit in with the competition ect, then this is wher you can CONSIDER taking a Risk without reverting to the hammer exercise. Remember: Risk is inversely proportionate to your gain.

[Ode...]

Re: Does the overhead change with larger jobs?

Mr. Carpenter,
Self confidence will go a loong way here. Please learn sales and if you dare, marketing!
Sonny, They are going to kill me on this post, so please help them!
Ode...
for the newbys

[Sonny Lykos]

Re: Does the overhead change with larger jobs?

How have you been, Odus?

One problem with some contractors is that they include expenses in OH that should be a job's cost. Supervision comes to mind. Cell phone cost is another one on large jobs.
Same for vehical expense, including gas. If I had a crew of 1 or 4 on a job for several weeks, some "normal" OH could be charged to that particular job.

I learned decades ago what Stoeppleworth (sp?) was right when he said that as sales increase, so does OH, and the scary part is when you hit $500K in sales. When we hit close to $1M before I sold the business to the boys, our OH was right at 34%, just as Stoeppleworth predicted. But we also had about 14 guys in the field.

Tom, on the other hand, subs everything out - nearly everything, and doing multiple millions of sales, he’s at roughly 15% - 18% in OH - half the OH or running your own crews. He’s also running a net profit of around 15% “including” his own salary as an OH cost factor.

I never really worried about OH that much, because I knew that even if I tried to save a little here and there, it would only be about a 1-3% savings. So I always concentrated on selling, branding and marketing, where the real monies are to be made. My point is that if anyone here can sell a job at $8000 or $80,000, he can surely sell those two same jobs at $8560 (a 7% increase) and $84,000 (a 5% increase).

Do not “buy” jobs. “Sell” them.

BTW, there are three different types of fiberglass doors. Did you explain the differences to the client,,or were they spec’d as far as finger jointed edges, clear solid wood, or composite edges? Was it expected to have the lumberyard do a “setup” for each door. By that I mean, cut the hinge mortises per existing hinge locations and pre drill the lock set hole(s)? My lumberyard charges me $15 for that setup.