operating cost per hour

[Ken Kesey]

How does one go about finding their operating cost per hour?

Is it yearly overhead and divide by the number of estimated production hours of the year?

Then tack on my labor burden.

With those two numbers combined, does that leave me the number of my operating cost at an hourly basis?

[MacLawnCo]

thats pretty much it, but you have to remember that since you are using production hours (which is correct), your labor burden will not be the same as the hourly rate of pay.

I usually run around 85-90% efficiency. Meaning that for every hour on the clock, aprox 53 mins are billable. That means that to get your labor burden, you will need to take your hourly wage (dont forget workers comp) and add in an extra ~ 13% to find your true hourly labor cost. :)

[Team Gopher]

Hi Ken,

Here (http://server2.lawnsite.com/showthread.php?s=&threadid=67026)is another post that may be helpful.

[Fantasy Lawns]

Here's an old work sheet I shared with my foreman years ago .... the numbers are NOT complete as that is my buiness .... BUT they give an idea of how to creat one for your own use .... using YOUR numbers

DIRECT COST: those expenses that happen because labor was applied, equipment and vehicles were put into action, materials were used and work was done.

Direct costs are usually easy to document and predict when you know how much time a project will take and what equipment and materials will be needed.

INDIRECT COST: costs that follow with direct labor
· Payroll taxes
· Employee benefits & Insurance
· Fuel consumption
· Depreciation
· Repairs and other on-the-job costs.

Payroll taxes, benefits and insurance can be easily estimated
Indirect costs related to equipment are tougher to predict.
Fuel consumption can vary greatly & Repairs are often unexpected.

OVERHEAD COST: expenses that support the operation of a business.
· Rent for facilities, utilities, advertising, property taxes, storage, insurance on buildings, office expenses and other "behind the scenes" costs that in some cases take place simply because time went by.
· Take place even when no work was done.

Summary: Direct costs happen when work is done and labor is applied. The workers come in to work, and as soon as they turn the key in the ignition, direct costs and indirect costs follow them and stay with them all day. Overhead items of expense that support the operation.


ANALYZING JOB COSTS. Labor and indirect costs represent the bulk of expense for most contractors and dwarf true overhead costs by comparison.

Question?:

How much does TIME cost?

How much time does an event take?

What are hourly or time profit goals?

What are hourly direct costs?

What are hourly indirect costs?

What is overhead rate per hour?

Above info to formulate a bidding system.


Date: Nov XXXX
Monthly Income: $ 17,300.00

Labor Rate: Total is $ 38.50 per Hour for 3 Employees 40 Hour Work Week
· Salary: Bill Smith $ 500 Weekly
· Hourly (s): 3 Workers Cost $ 26.00 per Hour or $1040 Weekly
· Approx $9.23 per Average Gross per Hour

Hourly Billable Income è $ 108.23
Hourly Operations Cost è $ 77.40
Hourly Employee Costè $ 19.33
Hourly Profit è $ 17.22

Direct Cost: $ 38.50 per Hour / by # of Workers is per hour Cost [Based on 160 Monthly / $ 6160 ]
Name Monthly Average Cost Yearly Cost Percentage

Labor Cost 160 Hours Monthly $ 6160
Material Used Monthly - Yearly
Total $ 6160 41.6%

Indirect Cost: $ 20.90 per Hour / by # of Workers is per hour Cost [Based on 160 Monthly / $ 3350]
Name Monthly Average Cost Yearly Cost Percentage
Payroll taxes $ 1300
Fuel $ 980
Sub Contract (Fert) $ 100
Deprecation $ 300
Equipment Repairs $ 100
Equipment Supplies $ 50
Workman’s Comp $ 400 9.6% of Payroll
Employee Supplies (Uniforms, Gator, etc) $ 75
Total $ 3350 %

Overhead Cost: $ 20.75 per Hour / by # of Workers is per hour Cost [Based on 160 Monthly / $3320]
Name Monthly Average Cost Percentage
Vehicle Insurance $ 135
Rent $ 950
FPL $ 150
Water $ 20
Verizon $ 120
Bell South $ 170
Sheffield Financial $ 300
Amex $ 300
Advanta $ 300
Tax- Property, Corporate $ 37
Insurance $ 300
Loan $ 500
Total $ 3320 %



Profitability, the difference between revenues and costs, is an important concept because only profits can maintain the cash that is necessary for continuous business. -- Cost per unit indicates how much the firm had to pay for the making of one unit of the product.
Productivity is the ratio between produced output and the amount of input of a certain type that is used in the production. The productivity of labor, for example, is measured by the ratio (produced quantity) / (spent working hours). Likewise, the productivity of use of energy can be defined as (produced amount) / (used energy kWh).

Effectiveness goes a little further and measures not just the produced quantity but instead how well those products fulfill the needs of the customer. Satisfaction is sometimes defined as the amount of benefit as compared to the paid price; these definitions are, however, not universally established and it is advisable that the researcher states in the report which definitions he is using

[Randy J]

Ken,
I have an Excel worksheet I can forward to you if you'd like. Make sure to include everything, including the cost of your equipment - even if you've paid cash for it - you want to get paid for your equipment, and depreciation - you want to be paid enough to replace your equipment when it wears out. Fixed costs include phone, advertising, etc. Variable costs include gas (for your mower and for your truck), labor, maintenance, etc. Add those and divide by expected number of hours you'll work in the year, and there's your cost/hour.
If you want the worksheet, just drop me an email at rdj_1@charter.net.

[T. Matthews]

Hey RandyJ


Could you send me a copy of that worksheet. tom@tmatthews.net


Thank you,

Tom

[Ken Kesey]

Smart cookies in this bunch!

Thank you all.

[T. Matthews]

better yet try tman216920@aol.com my web site email address isn't working yet

Thank you

[Ken Kesey]

I sent it to you, T.

Thanks Randy.

[T. Matthews]

hey Randy

Try tman216920@aol.com my web site email isn't working yet

[**JW'S LAWNCARE**]

Randy
could I get a copy of that worksheet?

jwillie4308@yahoo.com

[lsylvain]

Although coming up with an hourly "rate" for your expenses is a good easy way to calculate cost it is not as accurate as other methods.

I assume you are wanting this information for bidding purposes. I suggest going down your expenses one by one and determine the "Cost Driver" (the item or activity that creates the cost directly) as best as you can. Examples: Equipment gas: Job Time, Truck gas: Miles Driven. Those are the easy ones. Now, what about your phone bill? For me I would split the phone bill up evenly for each customer weather they are $25 or $2500, just because the job takes longer doesn't mean I'll talk to them more. Insurance is another one that you can do in different ways. Maybe you want to split it by the hour, by the customer, by the day. You can find reasons for each way. For me I would split my insurance by the day because your insurance covers you not only on the job but while driving eating lunch etc so it doesn't matter if you are working or not. Then from that daily number you could allocate it to the individual job. Labor cost are easy straight time hour for hour works best for me when you figure your bid add X minutes to load/unload/Drive.

Doing this you will be able to bid better and become more competitive.

Say our expenses $30.00 per billable hour (600/week) and we are bidding on a 20 hour mowing job and we both currently bill 20hrs a week, you would estimate your cost to be $600.00 and you price accordingly. Using that number you assumed that your phone bill would double your insurance would double your gas would double, your equipment cost would double, and so on. Granted you will not lose money on the job if you get it, but what if I come in knowing that the job is really only going to cost me $300.00 to complete and bid $100.00 per cut lower than you. Yes, if you got the job you would have been earning more profit at the end of the year than me but, there is one big problem with that....I got the job.

Anyway, I hope this helps.

[Randy J]

The only counter I have to your post lsylvain is your fixed costs are just that fixed. They don't depend on how many customers you have. For instance, if you pay $1200/year for insurance, it doesn't matter if you have 1 or 100 customers, you still pay $1200. And some customers will take longer than others. So if one customer takes 8 hours for a job, and one takes 1 hour, you wouldn't want to charge them the same amount. One customer is using more of your "insurance allotment" than the other. Somehow or another, you need to reduce all your costs to an hourly figure.

[Fvstringpicker]

I am an Engineer and a CPA. ( not bragging, but for what its worth, just getting my credential out on the table) From what I've discovered from 30+ years of work in managerial accounting, the best method used to get a handle on cost behavior is the contribution margin approach. First separate your cost between fixed and variable (as opposed to direct and indirect). Variable cost change in proportion to activity. Fixed cost remain basically unchanged within a relevant range of activity. To use the contribution approach, assume the following monthly costs

Labor (mowing) $4,000
Fuel 500
Repairs 150
Insurance 250
Misc office expense 100

Total Cost 5,000

Total hrs worked 200

Gross hrly cost $25/hr

If you apply the contribution approach, you'd compute variable cost per hr
labor, fuel, repairs $4,650/200hrs = ~$23/hr. What good is this? By subtracting the variable rate from your hourly charge, it tell you how much you're contributing to fixed cost and profit (contribution margin). By dividing your contribution margin/hr into your fixed cost, it tells you your break even hours. You can easily determine how low to bid and still make money because you will know you how much that particular job is costing and how much of the hourly rate is going to the bottom line.

[The landscaper]

Randy, I tried to email you but it didnt work. Could you please send me a copy of that spreadsheet. J33Jared@rock.com