# Job Cost

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#### tryinghard

##### Senior Member
I recommend:
• Material Cost
• Labor Cost (man hours x hourly wage)
• Direct Job Costs (gasoline, small tools, rentals, travel...)
• Total Cost
• Gross Profit (overhead + profit)
• Sale Price

You need to know your costs even though you are projecting them with your estimate, then you can track your costs to correct your estimates. Overhead is usually originally created from your projected sales (gross income), in other words you may say, "the market I'm going into I'm planning on \$100,000 total income sales - annually - and to do this my operating expenses (overhead) will be \$30,000 (utilities, P.C., printer, ink, advertisement, truck, tools...)." In this example \$30K/\$100K = 30% so you're business plan would include 30% overhead.

This overhead is not "mark-up" yet, because mark-up is a multiplier of your total costs not sales. To get this you need to finish your business plan - based on your market - project your material, labor & direct job costs:
\$20K material (20%), \$25K labor (25%), \$15K direct job costs (15%) totaling \$60K costs (60%). So the cost total of \$60K x .50 = \$30K (projected overhead) meaning your mark-up on all costs will be at least 50% or 1.50 multiplier. This example only equals \$90K leaving \$10K (10%) for profit or, \$40K (\$30K + \$10K) & 67% or 1.67 multiplier for gross profit (overhead + profit).

Hope this helps! Business can be a lot of fun and a good plan is worth the effort.

#### macmikeman

##### Senior Member
I recommend:
Material Cost
Labor Cost (man hours x hourly wage)
Direct Job Costs (gasoline, small tools, rentals, travel...)
Total Cost
Gross Profit (overhead + profit)
Sale Price
Contingency

#### hardworkingstiff

##### Senior Member
Overhead and %'s are a dynamic equation. Your overhead % is usually based on the type of work you are doing and the mix or ratio of materials to labor. When you prepare a budget, you can estimate your overhead fairly accurately. Rent, office payroll, trucks, insurance, etc. The actual overhead number should be pretty accurate. The trick is coming up with the % to charge for overhead recovery.

If you try to recover your overhead solely from material sales, you will be driven towards jobs that have high labor costs and low material costs. If you try to recover your overhead solely from labor sales, you will be driven towards jobs that have high material costs and low labor costs. Either scenario will leave you short on recovering all of your overhead. Overhead recovery can become a very in depth subject and there is no way I can completely discuss it here. The company I worked for prior to becoming self-employed spent many thousands of dollars training their management team on overhead recovery. It's all about understanding your business, and at the end of the year, having some \$\$\$ left over for yourself.

#### emahler

##### Senior Member
tryinghard said:
I recommend:
• Material Cost
• Labor Cost (man hours x hourly wage)
• Direct Job Costs (gasoline, small tools, rentals, travel...)
• Total Cost
• Gross Profit (overhead + profit)
• Sale Price

You need to know your costs even though you are projecting them with your estimate, then you can track your costs to correct your estimates. Overhead is usually originally created from your projected sales (gross income), in other words you may say, "the market I'm going into I'm planning on \$100,000 total income sales - annually - and to do this my operating expenses (overhead) will be \$30,000 (utilities, P.C., printer, ink, advertisement, truck, tools...)." In this example \$30K/\$100K = 30% so you're business plan would include 30% overhead.

This overhead is not "mark-up" yet, because mark-up is a multiplier of your total costs not sales. To get this you need to finish your business plan - based on your market - project your material, labor & direct job costs:
\$20K material (20%), \$25K labor (25%), \$15K direct job costs (15%) totaling \$60K costs (60%). So the cost total of \$60K x .50 = \$30K (projected overhead) meaning your mark-up on all costs will be at least 50% or 1.50 multiplier. This example only equals \$90K leaving \$10K (10%) for profit or, \$40K (\$30K + \$10K) & 67% or 1.67 multiplier for gross profit (overhead + profit).

Hope this helps! Business can be a lot of fun and a good plan is worth the effort.

the only problem with this method is that it doesn't take into account your actual costs...

with this method, you are letting your business control you...

in my opinion, a better method is to determine what your actual costs are, then figure out a way to generate enough sales to cover those costs...

i.e....with the method above, i generate my \$100,000...problem is, my actual overhead is \$35,000 and my actual labor is \$30,000 and my actual material is \$25,000, and my direct job costs are actually \$20,000....wait a second, i just paid \$10,000 for the privelage of working because my numbers weren't based on anything real, just made up based on a speculative finishing number...i know, Michael Stone preaches this method...but for most contractors it's not good...mostly because you don't know you've lost until after the game is over for the year...

if you use a more traditional method where you determine your overhead based on real numbers (i.e. \$2000/month rent, \$2000/month advertising, etc) and determine that it will cost you \$100,000 to be in business this year...then you can figure out how much you need to sell and track it throughout the year...keeps you from getting blindsided and lets you determine better how you will live, rather than living however your business lets you...

#### tryinghard

##### Senior Member
emahler said:
the only problem with this method [Post 21] is that it doesn't take into account your actual costs...with this method, you are letting your business control you...

in my opinion, a better method is to determine what your actual costs are, then figure out a way to generate enough sales to cover those costs...

How so my estimate includes "Total Cost" from Material Cost + Labor Costs + Direct Job Cost

emahler said:
i.e....with the method above, i generate my \$100,000...problem is, my actual overhead is \$35,000 and my actual labor is \$30,000 and my actual material is \$25,000, and my direct job costs are actually \$20,000....wait a second, i just paid \$10,000 for the privelage of working because my numbers weren't based on anything real, just made up based on a speculative finishing number...but for most contractors it's not good...mostly because you don't know you've lost until after the game is over for the year...
if you use a more traditional method where you determine your overhead based on real numbers (i.e. \$2000/month rent, \$2000/month advertising, etc) and determine that it will cost you \$100,000 to be in business this year...then you can figure out how much you need to sell and track it throughout the year...keeps you from getting blindsided and lets you determine better how you will live, rather than living however your business lets you...

Where do you get your overhead "real numbers" from?

So with your method you're estimating will include first your overhead then you'll develope your take-off to equal the correct sale price?

True overhead is even a projection until the end of the year in that the utilities are unknown until received, truck quantities will increase/decrease depending on the market your in, clerical staff wages change...and if your company is exploring new markets overhead will be different with different markets. Either way overhead must be projected to begin and tracked to adjust for reality.

Remember "actual costs" as you say are not overhead and "actual costs" are not known until tracking the project is complete, usually 3 months past project completion.

In contracting it is extremely important to know your costs and one must track and recap each project to know these. If your company is a sole-proprietorship everything above costs is profit and you wont have this information until tax returns.

#### tryinghard

##### Senior Member
macmikeman said:
I recommend:
Material Cost...
Contingency

I suggest avoid contingency, if you feel you may have missed material or labor in the take-off add "misc. material/misc. labor" in the take-off. This way these items values can remain in their correct categories for tracking.

#### emahler

##### Senior Member
the difference is in philosophy....you say "i'll earn \$100k, my oh budget is \$25k"

i say "my overhead is \$25k, i need to earn \$100k"

the difference comes in when oh is \$30k....you find out after the fact that your budget was short....on the otherhand, since i calculated my anticipated overhead, i know that i need to generate \$120k to keep my oh at 25 percent.....

#### Rewire

##### Senior Member
emahler said:
if you want 15% profit after costs, you need to make 15% on your 'sale price' not your 'cost'....

rewire showed you 15% markup....but what is 15% of \$115?

\$17.25,....

\$115 x 15% = \$17.25

\$115 - \$17.25 = \$97.75...which is less than your cost...

to determine profit as a percentage of your sale price, you need to use advanced math...

say you want a 15% profit...that would be converted into 0.15...

to find your selling price to earn 15% profit you use this formula....

\$100 / (1.00-0.15)= selling price

in this case, it's

\$100/0.85 = \$117.65....

\$117.65 x 15% = \$17.65

\$117.65 - \$17.65 = \$100

you now earned 15% profit...the other way you earned 13% profit..you will never hit your target, it you don't know how to aim at it...

does that make sense?
This looks more like calculating profit margin

#### emahler

##### Senior Member
Rewire said:
This looks more like calculating profit margin

that's exactly what it is....

#### Rewire

##### Senior Member
emahler said:
that's exactly what it is....
I thought something was wrong with my bid program because when I input 15% in the profit line it calculates it at 100.00 = 115.00.

#### 480sparky

##### Senior Member
Rewire said:
I thought something was wrong with my bid program because when I input 15% in the profit line it calculates it at 100.00 = 115.00.

That's Mark-Up, not Profit.

#### Rewire

##### Senior Member
480sparky said:
That's Mark-Up, not Profit.
it says profit not mark-up,but mark-up is gross profit

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#### emahler

##### Senior Member
Rewire said:
it says profit not mark-up,but mark-up is gross profit

it's a bastardized equation...it's profit in gross dollars only....as long as you know how to figure out the right margin, you are ok...but if you believe that mark-up and margin are the same thing you are in for a rude awakening at the end of the year....when you do \$1mil in sales at what you thought was 15 percent profit, only to find out you actually made 13 percent and left \$10,000's on the table

#### tryinghard

##### Senior Member
emahler said:
the difference is in philosophy....you say "i'll earn \$100k, my oh budget is \$25k"

i say "my overhead is \$25k, i need to earn \$100k"

the difference comes in when oh is \$30k....you find out after the fact that your budget was short....on the otherhand, since i calculated my anticipated overhead, i know that i need to generate \$120k to keep my oh at 25 percent.....

A successful business avoids surprises by tracking and overhead is a track-able item. An electrical contractor that does contract work must also track their gross receipts and estimates awarded and lost. How the contractor accounts and tracks often determines their success or failure even though they personally may be a great electrician.

So you could say that overhead application is a ?philosophy? but to stress my point on why it?s not I have some other examples. If you wanted to open a new shoe store you?d first notice a particular area that interests you with this business. Then some sort of a market study issues need to be addressed i.e. "is this shoe store viable to the area in question, how many shoe stores currently exist, how close are they together?"Then ? most often ? one would speculate/project the possible gross receipt income the new business could generate, you?d really start here if you involve a lender but the rest of the details will be required as well. So the business plan is most often generated from the ?most likely?/projected gross receipts. Another example is we often state our annual sales (gross receipts) when talking to each other, or lenders, we don?t state our overhead to size each other up or initiate a loan, statements like ?my company did \$2 million last year?.

Overhead is alive in that it does not remain the same for the annual picture, just like your estimating and gross receipts don?t, but a figure must be selected to start with and through tracking that figure it will change. It is safest to estimate your costs as accurate as possible then use either overhead percentage/overhead mark-up/gross profit mark-up at the end of your estimate depending on how you account, in other words use the style that matches you books accounting it will help you with report reading and evaluations with your accountant.

Overhead is your operating expenses and it?s not normal to have the same as other companies, it?s like a fuel mixture unique to your engine.

#### emahler

##### Senior Member
i don't disagree....but again, the difference in philosophy is this....i know i neew \$20k for shop rent, i know i need \$10k for vans, i know i need \$1200 for internet/phone...etc....all these overhead items add up to \$100k for the year...then i add in my variable costs (estimated utilities, fuel, etc)....then i figure out my labor (based on historical industry productions and wages ....then i determine my desired profit and realize i need to genererate \$1mil with 3 trucks and 6 employees...and if i don't, i don't hit my profit...but without any sales or employees i need \$100k just open my doors...

you are saying "i can generate \$1mil gross, here is what i can spend to do it"

i am saying "i want to make \$200k for me (in salaery and profit), this is what i have to spend and what i have to generate to earn it"

and if my market analysis tells me i can only do 1/2 the sales i need, then i have to decide whether to open my doors or not...
we are approaching the issue from opposite sides, neither is wrong and both will work if done right...

#### ElectroMagnetism

##### Member
jayrad1122 said:
As I understand when you bid on a project you have...

Material Cost + ~20% markup

+ Man Hours x (Hourly Rate + Overhead)

+ Profit

..which determines the price of the job. I was wondering if this is correct or if there are other details that are added in. Also what determines the profit you want to make on a job? Ex. For a 200 amp service change I want \$200 profit just for doing it. Or is this not what happens? I'm just trying to better understand electrical on the business side.
Read post number 17 I wrote in the link below, and maybe it will help you.

http://forums.mikeholt.com/showthread.php?t=95190&page=2

#### jayrad1122

##### Member
Read post number 17 I wrote in the link below, and maybe it will help you.

thank you for this. this has definitely helped a lot.
so figure your total expenses then add 20% profit then figure xx/hr. but what I'm not understanding is (service work needs to be billed at 6.92 time tech cost to meet budget).

#### ElectroMagnetism

##### Member
jayrad1122 said:
thank you for this. this has definitely helped a lot.
so figure your total expenses then add 20% profit then figure xx/hr. but what I'm not understanding is (service work needs to be billed at 6.92 time tech cost to meet budget).
First, I made a mistake on calculating NET. Instead of multiplying the 295K to get 10% profit, it should have been

295K / .9 = 327.7K. You divide to get your profit margin.

327.7K /1500 hours = 218.52 per/hr.

It only changes it \$2.00, but I was not thinking correctly when I made that calculation, working and writing at the same time.

On the service, just take a word document and start listing all office expenses: insurance, utilities, training, lawyer fund; truck expenses: payment, gas, oil, tires, breaks, breakdown; employee expenses: cell phone, tool program, etc. Take each department separately so you can list all expenses. Just go to your accounting software and find it.

Then just add them up to obtain a total and then “divide” by (.9) to get 10%, or (.8) to get 20% to build your profit into your billable per hour labor rate. Then divide by the industry average billable hours for service, or if you have your actual billable hours per year for several years, then average them and use yours, “conservatively”. This will give you what you need to bill per billable hour and your profit margins are already built in. Equipment, just markup separately 15-40% depending on the cost of material, whatever the market will allow.

As a service company, you are selling your time. Therefore your time should have “all” of your costs plus profit built into it.

Depending on the amount of mileage, (windshield time), you have between jobs or heavy traffic in large metros, this will control the amount of time you are able to bill on the job. Some trades are more seasonable than others and therefore are not able to bill out as many hours which drives the cost of billable per hour higher. Also, commercial is steadier work and provides work year round allowing more billable hours, along with construction when there, which drives costs down.

Service has higher costs and drives the ratio higher. When adding all of your expenses for a regular company: shop, receptionist, etc., and then dividing your billable hours into your total with the profit built in, you will be in that 6 X cost of labor area.

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#### jayrad1122

##### Member
Alright thanks, thats what I thought it was.

#### Tiger Electrical

##### Senior Member
emahler said:
the only problem with this method is that it doesn't take into account your actual costs...

with this method, you are letting your business control you...

in my opinion, a better method is to determine what your actual costs are, then figure out a way to generate enough sales to cover those costs...

i.e....with the method above, i generate my \$100,000...problem is, my actual overhead is \$35,000 and my actual labor is \$30,000 and my actual material is \$25,000, and my direct job costs are actually \$20,000....wait a second, i just paid \$10,000 for the privelage of working because my numbers weren't based on anything real, just made up based on a speculative finishing number...i know, Michael Stone preaches this method...but for most contractors it's not good...mostly because you don't know you've lost until after the game is over for the year...

if you use a more traditional method where you determine your overhead based on real numbers (i.e. \$2000/month rent, \$2000/month advertising, etc) and determine that it will cost you \$100,000 to be in business this year...then you can figure out how much you need to sell and track it throughout the year...keeps you from getting blindsided and lets you determine better how you will live, rather than living however your business lets you...

I've read Markup & Profit by Stone at least twice but I just can't use his method of bidding. Thanks for explaining the problem I have with it. I only have to get a report from my checkbook to see my overhead and I can adjust the overhead for future needs. Aside from the bidding he has a lot of gems like...don't bid a job with over \$300 in materials without getting a quote from your supplier. I seem to recall some healthy warnings about working for GCs also.

On the issue of calculating profit, sometimes it's easier to think of a job with 15% profit as \$85+\$15=\$100 job price rather than \$100+\$15=\$115 job price.

Dave

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