- Estimator / Sales $65,000
- Non- Job Billable Project Manager $20,000
- Office Staff (Non Job Charged) $60,000
- Labor Burden For Overhead Only! $45,000
Vehicles (Non Job Charged) $18,000
Office, Rent & Utilities $36,000
Office Supplies & Equipment $20,000
Telephone, Communications & Postage $18,000
Internet, Website & Computers $12,000
Estimating & Bid Expenses $10,000
Sales, Marketing & Promotion $36,000
Office Insurance (Non Job Charged) $15,000
Interest & Banking $3,000
Professional, Legal & Accounting $12,000
Service, Closed Job & Warranty $20,000
Total Annual Overhead $500,000
Notice what is not included in your annual overhead cost: field labor, field labor worker’s compensation insurance, field labor benefits, field trucks, field equipment, gas and maintenance for field vehicles, job insurance, job supervision, and project management. These field costs should be included in your total job costs as they are not needed unless you have jobs to build.
An exception needing to be included in your overhead is the non-job billable portions of your project management, field supervision, field labor and field vehicles you pay for while they are not working on a job. For example, if you have to keep paying a superintendent during the winter months, you’ll need to add that portion of his salary to your overhead. And if you can’t bill out for your vehicles every day, you’ll need to include the downtime days in your overhead cost.
Determine your break-even
When all your construction jobs for the year bring in enough money to cover all of your direct job costs plus enough to cover your annual overhead costs, you break-even, without a profit. To make a profit, you must add your overhead costs plus a profit margin to your bids. Your overhead margin is easy to calculate. It is the total sum of your annual overhead costs divided by the sales you anticipate for the year.
Overhead Margin = Annual Overhead Expenses Annual Sales
To calculate your break-even overhead margin to use on your bids to break-even, you’ll have to estimate the annual sales you’ll be able to collect for the entire year. In Example 3 below, you have estimated three different levels of annual sales: $1 million, $2 million and $3 million. For each sales level you estimate, you’ll have a different Overhead Margin needed to add to your bids to allow you to break even.
Break-Even Analysis (Example 3)
Annual Overhead Expenses $500,000 $500,000 $500,000
Estimated Annual Sales $1,000,000 $2,000,000 $3,000,000
Overhead Margin To Break-Even 50% 25% 16.66%
Break-Even Job Bid (Example 4)
Direct Job Costs $1,000 $1,000 $1,000
Margin Conversion Rate
MCR = 1.0 - Margin% .50 .75 .8333
Job Sales Price (Cost MCR) $2,000 $1,333 $1,200
In Part 2 of this series, we will explore how to calculate your profit and develop a profitable job estimate. In the meantime, learn these important factors and calculate your annual overhead and break-even for your company.
George Hedley is the best-selling author of Get Your Business to Work!, available at his online bookstore. As an entrepreneur, popular speaker and business coach, he helps business owners build profitable companies. Email him at gh@HardHatPresentations.com to request your free copy of “Everything Contractors Know About Making A Profit!” or sign up for his free monthly e-newsletter. To hire George, attend a “Profit-Builder Circle” boot camp or be a part of an ongoing coaching and mentoring program, call 800-851-8553 or visit www.HardhatPresentations.com.