Cost per Hour Computation

Discussion in 'Business Operations' started by ReddensLawnCare, Apr 30, 2012.

  1. ReddensLawnCare

    ReddensLawnCare LawnSite Bronze Member
    Posts: 1,652

    Hey guys, I need your help.
    Here is my issue. I currently know my costs to operate per hour based upon all expenses associated with my business. I know how many hours I worked last year, and have a rough guess of how many I will work this year. As LCO's if we use the number of hours a general business man works in a year our numbers will be way off, so we have to gauge how many we will work based upon number of tasks and time per task. Here is where I am running into a problem. I have always worked by myself, or with one person here and there to get some jobs done when I get behind. I am graduating from UNCC next week and will be working on landing some larger accounts in which an assistant would be very helpful. Right now, I have no idea how many accounts I will get or how many hours I can expect to work the new employee as it all depends on how much work comes in.

    Say I have 50k in cost per year, and I estimate I will work 1800 hours in one season/year. My Cost per hour is 27.7 bucks per hour. So I bill out a price of lets say 50 an hour. Well, if I have another employee, my costs will increase, but not as fast as much as my hours in theory. So my new cost per year are 85k and hours worked are 3600 so my new costs per hour is 23.6. The number should continue to decrease until you reach encounter the law of diminishing returns correct?

    I want to bid jobs according to what my costs will be at the end of the contract, rather than the begging because I dont want to loose money at the end of the year. Please, if it is obvious, just state it and dont be to hard on me.*trucewhiteflag*
     
  2. ReddensLawnCare

    ReddensLawnCare LawnSite Bronze Member
    Posts: 1,652

    110 views and nothing. Somebody has to have an answer for me
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  3. ReddensLawnCare

    ReddensLawnCare LawnSite Bronze Member
    Posts: 1,652

    Bump
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  4. Fvstringpicker

    Fvstringpicker LawnSite Fanatic
    Posts: 7,597

    Not real sure what you are asking. Your best analysis is going to come from dividing your cost into fixed (FC) and variable (VC). The formula than becomes S - VC = FC + P where S = Sales and P = profit. ( or your break even point is S -VC = FC ) If your VC is 40% of sales for example, you can surmise that 60%, or $0.60 of every dollar sales is going toward covering fixed cost and profit. So when you bid a job, say for $1,000, you will know that $400 is covering your VC and $600 is the contribution toward all fixed cost and profit.
     
  5. ReddensLawnCare

    ReddensLawnCare LawnSite Bronze Member
    Posts: 1,652

    That actually helps a lot! Thanks
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  6. Efficiency

    Efficiency LawnSite Bronze Member
    from zone 6
    Posts: 1,544

    This statement is very wrong. If you are selling an ever increasing amount of hours, you fixed costs will continue to be diluted (assuming O/H remains constant) resulting in a lower cost per hour. If you bid a contract at what your hours (rate) will be at the end of the term, you will likely be loosing money at the beginning.

    Heres some hard earned advise: deal with the reality you have now. Dont ever bid with hourly rates that *should* materialize in the future. If they dont, youre screwed. Use your current numbers and if you sell more work, thats to your betterment. We always budget our hours sold very moderately and every year beat that budget - but that might not happen one year. Caution is the best plan.
     
  7. ReddensLawnCare

    ReddensLawnCare LawnSite Bronze Member
    Posts: 1,652

    That is also extremely helpful thank you very much. I guess I was just thinking of that the wrong way. Another thought I don't expect overhead to stay constant I expect overhead to increase as well
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