Overhead

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Overhead

I remember once reading an essay titled "On Being the Right Size." While the piece was about politics, not business, it raised a valid issue.

Indeed, one of the major challenges to a business operator is changing his 'style' as his business grows.

Scheduling is a real killer for a contractor. Let's say a wire pull is required. Even a rather simple one can take hours for one man - pull, feed, pull, countless trips up the ladder - and minutes for a pair. Having another pair of hands can make a huge difference.

It's common for job schedules to conflict. Have an extra guy, you can have both running at once. Or, you have coverage if someone is sick, etc.

So, we're looking at 3 or 4 tradesmen, who can work together, or apart. We now have enough calls coming in, enough paperwork, that we need someone "in the office" full time. Having a 'parts runner' is also a real plus.

We've just reached a threshold ... you need at least six - counting yourself - to begin to operate efficiently.


Now, what happens as we grow further? At some point, you start losing efficiency as internal politics takes hold. Your guys aren't working for "the customer" anymore; they're working for "the company." Factions form. Game playing starts. The boss starts losing touch with the work.

Indeed, one day the boss wakes up to find ... can you believe it? ... a layer of dust and rust on his toolbelt. How did that happen?

What was our 'minimum' number for efficiency? 6? Well, I suggest that your problems start cancelling your advantages about the time you have 20 on the payroll. At that point, you're large enough to form two 'efficient' units, and the pressures to split will mount.

Does the nature of the work matter? Sure it does. We've all been on jobs with scores of electricians working together. Yet, I think you'll find even the firms doing the 'monster' jobs tend to break themselves into teams of ten or less.
 
I think it could be that people use the wrong economic terms, when describing their advantage. "Overhead" is a recognizable term.

What would the correct term be? Net Efficiency?
 
no, overhead is the correct term as it's used when guys say "i don't have the overhead of a big shop, so i can cut his prices"

efficiency allows you to bid a job for 10 hrs and finish is 5, thereby doubling your income. But your hourly overhead dollar amount remains fixed, no matter how efficient you are.

the only overhead that varies with how efficient you are would be items like:

material (but that's typically a COGS, and not part of overhead)
fuel
labor (but again if you take a steady salary or guarantee 40 hrs, this is pretty standard)
and a bunch of misc items.

the question is on a man hour basis, does a 1 man shop really have much less or more overhead than a 20 or 50 or 100 man shop?
 
How can you say efficiency has nothing to with it? I don?t have any numbers to support a position, but I don?t believe it is a phenomena strictly respective to the size of a shop. It is truly is about maximum production for the highest return on investment. I would suspect it is easier to maximize production out of your overhead staff for a larger company, much in the same way it easier to work more efficiently by staying on one job all day vs. 4 different service calls. You?ll have more done at the all day job verses the sum of the work done at the 4 jobs.

If a smaller shop has one person who does billing, estimating, bookkeeping, and installing, (like mine-me) that person?s productivity suffers every time they have to switch hats. So having one person who strictly does billing 40 hours a week at maximum productivity, will theoretically be more efficient and yield higher productivity for the time spent.

So lets say your shop has to be 40 men to keep someone comfortably billing 40 hr per week. If that was the number, I would imagine a 30 man shop still keeping a person employed full time on billing paying the same, but maybe give them other tasks to fill any extra time at a decreased level of productivity. But if you could get that same person to bill for 50 men, now you?re reducing your % overhead. The natural stress of an increased workload may maximize productivity to a certain point, but eventually you?ll have to hire in another person to help out at let?s say at 60 men. Now you have 2 people at a decreased efficiency or 1 at maximum efficiency billing for 50-men, and 1 billing for 10 and having to switch to other filler stuff, still being productive but with a lower RTO.

I?d love to see some real numbers, but it is a very complex math problem. There are so many variables to consider and so many places to screw things up that different numbers for different sized shops may not necessarily argue that a larger shop has a lower overhead % as much as the person(s) running the companies compared have found better solutions to the various problems.
 
Jps1006 said:
So having one person who strictly does billing 40 hours a week at maximum productivity, will theoretically be more efficient and yield higher productivity for the time spent.
Click to expand...

That person, now add a safety director, a human resources coordinator, purchasing agents, salespeople, CAD opertors, warehouse staff, truck drivers, custodians, receptionists, directors of operation, VPs, etc.

I certainly do not know the business side of the trade but I do know when I walk around the office I see a lot of overhead and it surprises me it actually works.
 
iwire said:
I certainly do not know the business side of the trade but I do know when I walk around the office I see a lot of overhead and it surprises me it actually works.
Click to expand...
I'm even more surprised they let you walk around in the office. :grin:

I can tell you, anecdotally, that a small 1,2, or 3 man operation does have much lower per billable hour overhead than a 4, 5, or 6 man shop. When you get to about 25+, your overhead begins to resemble the 1, 2 or 3 man shop with regard to overhead per billable hour. It is the 5-20 man shops that have more overhead per billable hour than the very small or the larger operators, in my observation.

Unless a bunch of guys are willing to open their books here on the net, this discussion is somewhat pointless. It's guess and conjecture, with some personal experience sprinkled in. Nobody's gonna have the guts or the foolishness to post real numbers to prove it one way or the other.
 
Larger shops tend to have more support personnel, sale folks payroll, secretaries, in service companies extra field superintendents to manage the extra folks, more support vehicles, extra tools, baseball tickets, football tickets, hockey tickets. When things get slow they may be able to burden projects with manpower but this runs the job cost up.

It depends on your lifestyle; a friend of mine has extras tacked onto his company, a boat, cars for wife and sons, pays for all his repairs on vehicles from the company. My company we don?t do that, but as the company grew the money did flow, but we had extra employees generating income to overcome this, so myself (and per our accountant) after the first few years overhead has been fairly level.
 
mdshunk said:
Nobody's gonna have the guts or the foolishness to post real numbers to prove it one way or the other.
Click to expand...
With the degree of anonymity that many members have here, a few numbers could be posted without risking a backlash, I would think. Maybe I'm naive.

If random folks were willing to share that info, I might volunteer to collect it and share it in a very generic manner that the submitters could be comfortable with.

Just an offer from a peon. If anyone wants to play along, agree via PM, make no public comment about. Disagree publicly if it's stupid, which it very well could be. :)
 
Here are some of the things a small shop has trouble controlling,

Liability Insurance (Gross recpts, and assets, with a small shop, you can have an $800 policy that is like having no insurance or a $5000 policy with some protection.

Workers Comp Private Payments (Years of experience and state regs)

Workers Comp State payments (Small shops usually are rated higher)

State Unemployment (Experience rated)

State Disability Payments (Experience rated)

Service Truck Insurance (Very high if you make more then 2 stops a day)

Truck Payments (Some control, with options, Lease or Buy, might be a good idea to put some money in a replacement account)

Truck Maint. (Will vary with usage, type of business, Service or Construction)

Office & Shop (Some control, with size of business, and Lease, Own options)

Accounting (Costs will vary with every business)

Ad Costs (If you cut this too much, don't worry about the phone ringing)

Phone (Can be controlled, but you may find it hard to bargin with a phone company for a deal)

Bank Charges (Good Luck)

Power, Heat, Water, Sewer (Not much flex)

Most of these expenses, you would have a hard time trying to bargin with the suppliers.

Total up your own numbers for the above, and remember you still have your operating costs to add in, all this before any labor or profit is included, please sit in chair while looking at total!
 
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Overhead

There is a hard cost to each employee for every hour they work.
Here is a good bench mark. Your direct cost to have any employee is about 39% of their hourly wage. That said, you offer them vacation and holiday pay.
This percentage really does not change because of matching taxes, etc.
This is Labor Burden. This cost to you is only when they work.

The figure that makes the difference is your overhead which is divided amongst all the employees. You incure this cost weather an employee shows up or not. For a 10 man shop offering full benifits, you can figure about 68% of their hourly wage. If even one man does not show up, this goes up, Have more than 10 employees this percentage goes down.

107% of one's salary might seem like alot, but it's reality. You can add more men and the 39% will stay the same.
 
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