Estimating Software Question

[Eli1211]

I recently purchased an estimating software, so starting to get familiar with it. Prior to the software, I have marked up my material for a 35% margin (54%) and then multiplied my labor cost by 2, to ensure 50% gross profit on my labor (after applying a 40% labor burden). The software I am using now gives me the ability to add overhead and profit to materials, labor, direct job expenses, etc.. I can divide my total overhead for the month by my total labor cost x 100 to express that as a percent, I would use that number then as my overhead cost for labor? And then add on whatever profit I would like to realize on my labor? I don't see a need to add overhead percentage to material or many of the other categories, a markup for profit for sure, but not overhead (may be clueless on something here). Looking for someone familiar with using estimating software to share how they approach this. The system I will learn, there is training and support for that. I am struggling with making sense out of the overhead and profit inputs into the system. Any advise would be helpful or good books on the subject, thanks in advance.

 

[dnbob]

The estimating software I use is similar to what you describe. Our office manager calculated a "labor overhead" hourly cost that we add on to the hourly rate of the employees in 3 cost categories based on license ratio's(Supervision, Journeyman, Apprentice). The labor overhead number is employee costs, building costs, fuel, insurance - pretty much all business costs outside of material & subcontractors, and then add on a profit percentage. This overhead figure is divided by the estimated man hours per year. (Overtime changes things a bit). On material, we only have a profit mark up, but no added overhead. Any direct job costs were listed out on the direct job cost tab, such as permit fees, expendable tools, etc. Direct job costs just had a material profit percentage added to them. We run around 50,000 man hours per year, so I think the numbers are a little more steady year over year than a 2 or 3 man shop for example.

The last company I worked for found what their "labor overhead" was, with vacations, holidays, health insurance, salaried employees, etc and added that as a percentage to the labor. "Company overhead", such as building payment, liability insurance, trucks, fuel, tools, etc was figured a a percentage and added to the material and then applied a profit percentage. The burden percentages changed somewhat year over year, as the cost of business increased.

 

[cdslotz]

The last company I worked for found what their "labor overhead" was, with vacations, holidays, health insurance, salaried employees, etc and added that as a percentage to the labor. "Company overhead", such as building payment, liability insurance, trucks, fuel, tools, etc was figured a a percentage and added to the material and then applied a profit percentage. The burden percentages changed somewhat year over year, as the cost of business increased.

THIS^^^ Labor burden is applied to direct labor costs as described, which makes that total labor COST
Overhead AND profit is applied to your overall COST

 

[Jack Hollesen]

When I was contracting, we used Accubid.

We always bid projects to find our direct costs such as labor (both productive and non-productive), materials (quoted and database), and general expenses.

Our labor rates changed bi-annually or sometimes quarterly from my accounting department. We used a blended labor rate, which was a rate of our typical crew with burden included (1 working foreman and 3 apprentices). Some projects we used a different blended rate, such as prevailing wage, higher skill sets needed, 1 to 1 ratios, etc. Our blended rate for most of 2022 was $36.16 per hour which included a 38.52% burden. Our burden included schooling, IEC membership costs, clothing, vehicle and gas expenses, bonuses, PTO, etc. We had about 75,000 field labor hours per year on average.

We had a company overhead (OH) rate which changed yearly (sometimes more) as well and in 2022 it was 8.64%. The profit is what we played around with depending on size/need which would range from 4.5% (or lower if we needed to "buy" a job) to sometimes as high as 30%.

So essentially we always bid the direct job costs and then tacked on OH and profit after the direct costs have been determined as a percentage. I always took the OH percentage and minused that from 100 and divided the estimated costs by that number. So, say my estimator has figured all in costs of $100,000.00. If my OH was 9%, I would take $100,000.00 and divide that by .91 to come up to a direct and indirect (OH) cost of $109,890.10. Do the same with your profit and that would be your proposal number to the client. The $9,890.10 of this number would cover our company OH expenses, the $100,000.00 would cover the direct job expenses, and anything over this would be profit for the company.

The combination of company overhead and profit we referred to as gross margin percentage or GMP. We used our company income statements to derive these numbers and it worked quite well with everything below the line or the "cost of revenue" accounts on the income statement as our GMP we needed to maintain as these numbers were quite accurate.

I don't know if our methods were fairly common practice or not, but it worked for us.

 

[Eli1211]

I appreciate the feedback. Seems like there is no one size fits all method, just need to find something that works well, consistently, for me based on my numbers. I appreciate the examples given, they give me something to go off of. Thank you.