HOw do you calculate your overhead into your estimates?

Discussion in 'Lawn Mowing' started by MJK, Sep 24, 2006.

  1. MJK

    MJK LawnSite Senior Member
    Posts: 356

    I posted this in the Landscape part, but that because i have to parts to my company, build and maintain. My question is when you figure out your overhead, how do you put that into your price for work?
     
  2. lsylvain

    lsylvain LawnSite Senior Member
    Posts: 777

    You don't reallly put the cost of your overhead into the price you charge your customers. Yes, you need to know what your overhead is when determining the revenues you need to generate to earn a profit. There is no right way to determine how much of your overhead to allocate to a specific job. I would say that the easiest for some people is to calculate how much your total overhead for the year will be and divide it by how many hours you estimate that you will bill durring the year. Another way to do it is if all of your jobs are roughly the about the same you can simply divide your total overhead by the number of jobs you estimate you will do for the year.

    If you really want to get complicated go through all of your expenses and first determine if it is a Fixed Cost or a Variable cost. (A fixed cost doesn't change with how much work you do, ie phone bill, rent, insurance. A variable cost will change and is related to how much work you do.) Then you also have Direct vs Indirect Variable Costs. (A direct cost is something that is used Directly in a job, Mulch for example, and indirect costs are things that are not directly related to the job, Fuel for your truck for example is used on several jobs.

    After you have all of your expenses separated out go through each one and ask yourself why you have this expense, what causes it. And then ask yourself how you can mesure it. Truck fuel for example, is caused by driving from job to job the furthur the job the more fuel you will use, so how far away the job is, is what drives the cost of your truck fuel. (cost driver) Another example would be your phone bill. I would say that you would allocate your phone bill evenly to all of your customers since they all have the same access, so I would use the number of customers as a cost driver, unless you want to be a lawyer and time every phone call. lol

    Afer you have a Cost Driver for all of your expenses. Then you just need to figure up how much each expense cost per unit of Cost Driver. Truck fuel for example. Lets just say you spent $100.00 in fuel serviceing one weeks worth of clients. The distances are 1,2,3,4,5,6,7,8,9,10 just assume of you 10 clients. So your total miles to use for the calculation is 55. Granted you may have driven further than that getting gas etc, but we don't care about that extra because the only driving we can specifically relate to the jobs are these 55 miles. So it cost us $100 to drive 55miles, $1.82 per mile. So in this case we would allocate our gas to the jobs by multipling the distance to the job times $1.82, so a job that is 10 miles away you would allocated 18.20 in fuels cost.

    You can make this as complex or as simply as you want and what ever makes sense to you is the way to do it.

    Thank you for attenting your crash course is Cost Accounting 101. lol

    hope this helps
     
  3. bullethead

    bullethead LawnSite Senior Member
    from Texas
    Posts: 273

    I don't know if its the best way, but I first determine total (construction and maintenance) man hours I expect to bill for the year, then divide my budgeted overhead by these hours to get an hourly overhead application rate. I then monitor actual vs budgeted overhead on a monthly basis to see if I need to revise my oh application rate.
     

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