Overhead

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emahler

Senior Member
Has anyone actually done a study on overhead for 1-4 man shops compared to 20-30 man shops?

I ask because they will go after some of the same market, so there are similiarities there.

But I'd venture to guess that the larger shop probably has a lower amount of overhead per man hour than the smaller shop.

what I mean is this, take out all labor cost (including burden) and compare overhead costs on a man hour basis, my gut feeling is that the larger shop will be lower.

This is simply because the overhead is spreadout better over more man hours.

For the record, I don't know the answer. What does everyone else think?
 
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macmikeman

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Planet macmikeman
Erik, I have done both. You are right, it is much more per man hour for small outfits than large shops. First off, the payroll lady handled 30 men for about the same pay as when she did my stuff for 4 men.
 
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emahler

Senior Member
hardworkingstiff said:
A lot of it still comes down to efficiency. If you have overhead being very efficient with 4-6 men/women, and you have overhead being inefficient with 40 men/women then.......
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all efficienies being equal...what do you think?
 
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hardworkingstiff

Senior Member
Location
Wilmington, NC
hardworkingstiff said:
It won't work that way.
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What I mean by that is that the smaller you are the more different tasks must be done by one person. The larger you are the fewer tasks per person because you will need more persons for the more tasks. It really does come down to how effective a person is at their tasks.

Buying power (larger is better) is where I think things tip in the favor of larger organizations.

Keeping workers organized and on tasks generally goes in favor of the smaller organizations.
 
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emahler

Senior Member
hardworking,

but the point that I want to clarify (actually determine) is this: if I am a 100 man operation, will my overhead per man hour be more or less than it would be if I were a 5 man shop?

So let's say as a 100 man shop, my hourly overhead is $2000, that would give me a rate of $20/man hour

And as a 5 man shop, my hourly overhead is $105, that would give me a rate of $21/man hour.

So while my overhead itself is way more as a 100 man shop, as a function of man hours, it's actually less.

I just don't have the data to verify it.
 
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Bob NH

Senior Member
Location
The "Live Free or Die" State
There are a few things that tend to make small organizations more efficient:

1. Small organizations tend to have a nucleus of highly skilled people. As the organization grows, the average quality goes down.

2. Small organizations have fewer levels of management and supervision, with fewer indirect (non-chargable hours - overhead) bosses.

3. Small organizations tend to have a few good people doing the overhead tasks, and there is less need for coordination between people. The decision chain is shorter and there is less conflict. Not many people argue with themselves.

As small organizations grow, they need efficient systems to sustain the efficiency of the organization.
 
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emahler

Senior Member
on the flip side...

a smaller organization is usually less likely to have someplace to send 1/2 the shop 2-3 people when the job they were scheduled to be on that day postpones 1/2 hr before start time.

but the truth is, efficiency has absolutely nothing to do with hourly overhead cost.

you have a fixed cost, no matter the size of your shop. You have a fixed number of hours available to cover that cost. efficieny does not matter.in terms of production or downtime. it only matters if it reduces overhead.
 
mdshunk

mdshunk

Senior Member
Location
Right here.
emahler said:
it just seems that the idea that larger shops have more overhead (as a % of cost) is a myth.
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Who or where was it ever said that larger shops have more overhead %? I thought that the "economies of scale" was a generally accepted principle? http://www.investopedia.com/articles/03/012703.asp I offer that economies of scale do exist, but not everyone takes advantage of them or even recognizes them. In my estimation, there are only two ways to be a successful electrical contractor (in terms of scale). Be a small, one-two-or three man shop, or be one of the largest contractors in your local market. I see little room for the medium sized contractor, in terms of overall success. They will certainly survive, but to a much lesser realized degree.
 
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emahler

Senior Member
mdshunk said:
Who or where was it ever said that larger shops have more overhead %? I thought that the "economies of scale" was a generally accepted principle?
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heck, i couldn't possibly list all the examples from this site alone. Every single 1-3 man shop who says "i don't have the overhead of the big guys, I can do it cheaper"

that's who.
 
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petersonra

Senior Member
Location
Northern illinois
Occupation
engineer
I have worked for both small and large organizations. The real answer is that small organizations usually have a different niche than larger ones. It is rare for a small company to directly compete against a much larger one.

The larger the project, the more the efficiencies of a larger organization come into play. With a small project, you can often get by without a real foreman, because what little bit of supervision and planning needs doing is usually pretty obvious.

A larger project needs more specialized planners, supervisors, and managers to make the thing work right. Small organizations rarely have those people, so don't tend to do well on larger projects.

Larger organizations tend to not have generalists, so tend to do less well on smaller projects.
 
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emahler

Senior Member
petersonra said:
I have worked for both small and large organizations. The real answer is that small organizations usually have a different niche than larger ones. It is rare for a small company to directly compete against a much larger one.

The larger the project, the more the efficiencies of a larger organization come into play. With a small project, you can often get by without a real foreman, because what little bit of supervision and planning needs doing is usually pretty obvious.

A larger project needs more specialized planners, supervisors, and managers to make the thing work right. Small organizations rarely have those people, so don't tend to do well on larger projects.

Larger organizations tend to not have generalists, so tend to do less well on smaller projects.
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what does any of this have to do with overhead as a % of cost? or with overhead per man hour? I'm just not following...
 
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threephase

Member
Getting back to the debate on hand..........

Overhead costs (as a % of labor hours) of small vs. large shops.

Economies of Scale !!

One of the best illustrations was mentioned. If you pay a clerk fulltime to do admin. work for a 4 man shop, it's conceivable with some modification of duties she could pick up the work load for a 30 man operation. (less overhead for larger shop)

The whole debate really comes down to what percentage of your overhead is fixed and what % is variable.

Say for instance your costs (5 man shop) for Gen. Liability ins. is a value, unless your insurance increases by a multiple of 6 for a 30 man shop, you're cheaper with the larger operation. Prime example of E.O.S.

In normal circumstances, time involved with a task for a 5 man operation will rarely EVER be 6 times as lengthy whene dealing with a 30 man shop.

Now, if you're talking about the 4 man operation being run out of one's garage/storage unit, using personal trucks/vans, home offices, now that's a whole new story when comparing overhead.
 
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emahler

Senior Member
three phase, that's really my thoughts.

variable overhead is directly related to the # of employees, so that will typically be constant on a % basis.

Fixed could, and should, be lower on a larger shop in terms of dollars/man hour.

I just wonder when guys claim that they have "no overhead" or that they have "a lot less overhead" than the big guys.

In terms of absolute dollars, I'd say definitely. But it terms of dollars/man hour, I'm not so sure.
 
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macmikeman

Senior Member
Location
Planet macmikeman
I ran out of time the last posting to put this in. I used to have a crew that varied from 20-30 men working at our airport. I had a great warehouse manager then, and he also happened to be a terrific auto mechanic. My fleet of vehicles (gas and electric) and high lifts, got serviced extremely well by him during the slower periods of the day. Now as a one man outfit I have to send my van to Sears for service, and loose time on job while doing so. This is only one of the typical things I can recall. As I said the bookeeper was paid relatively the same as back when I had a small size crew as when I had a large one. Now as a one man shop, if I need to trench, I have to rent the backhoe. Before I owned them, and they were an overhead expense for 5 years, then they operated almost overhead free, except for storing, fuel, and occasional maintenence. That paid for the equipment three times over easily. Most of the larger shops around here have lots of equipment out on jobs that look to me to be older than the 5 years amortized. They are now pure proffit generators for the company. A small shop has a large overhead, even if they do not recognise it. But as said, that overhead is by far lower in real dollars, so it is not as apparent to the shop owner.
 
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