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Overhead Revisited

Discussion in 'Business Operations' started by Evan, Dec 20, 2001.

  1. Evan

    Evan LawnSite Member
    Messages: 6

    Guys and Girls,

    I have started to double check and recheck our overhead and based on a pure hourly rate this is how I figure it. Tell me if this sounds right:

    1 employee at: 13.50/per hour
    Truck payment is: 500.00 per month
    Mower payments:600.00 per month
    Blower payment: (not really but as a replacement cost): 50.00 permonth
    Trimmer: (replacement cost) 50.00 per month

    Now break everything down by hour using this formula:
    Monthly payment * months / total hours in a week for use = hourly rate

    So truck:
    500 * 12 / 2000 (total hours for a year's work - two weeks) = $3.00 an hour.

    BUT since we only cut roughly half of that 2000 hours it would be $6.00 an hour, but still have to pay for the equipment year round

    Rest of the formulas:
    Truck $6.00/hour
    Employee $13.50/hour
    Trimmer: $0.60/hour
    Mowers: $7.20/hour

    Ok obviously I didn't add a few other costs like: gas, insurance, the cost of blades, and a general maintenance all broken down to an hourly rate.

    But at these given answers I absolutely positively without a doubt cannot cut anyone's grass for less than 27.90 an hour correct? (Well plus the other costs added in)

    Now what if I have three guys going out to cut?
    That jumps it to $54.90 if they also make 13.50 an hour.


  2. SprinklerGuy

    SprinklerGuy LawnSite Bronze Member
    Messages: 1,778

    Don't forget the 15-20% cost for work. comp and your share of the FICA!

    Also, don't forget drive time into your actual time you can work at houses. My guess is that your price must go up to reflect that?
  3. turfman99

    turfman99 LawnSite Member
    Messages: 212


    Your numbers are real close, but I want to add one thing. Your 2000 hour recovery hours on the equipment and vehicles is correct. But you do not want to factor that stuff in at half production because you distort your hourly rate. Your $ 3 per hour figure on the truck is close, probably closer to $ 4 . These costs are there all the time and you need to base them off the amount of hours you will actually work.

    You set the actual number of hours you will work or expect to work, divide your costs by the total number, add the profit you desire and then you have your hourly rate charge.

    What Tony is saying about the SUPPORT time is also important. When you are on a job working, that is site work or production work. There is additional time during the day that requires activities that support that amount of time you spent on that job producing that work.

    You need to track your production times versus support times so that you know what your labor efficency rate is. An example is if in an 8 hour day you spend 6.5 hours mowing, etc on a site and you spend 1.5 hours in drive time, at the dump, sharpening blades, then you have spent 80% of your time in production and 20% in support activities and functions.

    Therefore you could set up a process where you take the actual number of hours you will spend on produciton activities you have another 1.5 hours in support labor that needs to be charged to that account to recover 100% of your hours worked or paid to employees.

    Any other way distorts your margins and net profits greatly and makes predicting your income hard to do.

    Your headed the right way, keep it up.
  4. bruces

    bruces LawnSite Senior Member
    Messages: 648

    The truck and mower payment numbers may or may not reflect real "overhead".

    What I mean is that if you are paying for the truck over 3 years and are paying $500 per month but will use the truck for 5 years, your overhead for the truck won't be zero for the last 2 years.

    Same with the mowers. On the equipment, a better measure of overerhead cost would be total cost of truck or mowers divided by estimated useful hours over life of equipment.

    If your payment terms and the life of the equipment is close to the same, then your theory is ok as far as equipment costs go.

    Obviously, you need to add in operating costs, etc. on the equipment and payroll taxes, work comp, benefits if any for your employees to get to a good overhead rate.

    You should probably also look at fixed vs. variable overhead.

    Fixed would be truck and equipment costs (costs of acquiring, not operating), shop rent, other things that go on whether you are generating income or not.

    Variable would be labor, fuel, supplies, and other things that are directly related to the amount of work done.

    Once you have that breakdown, you can determine if you are better off doing a job or not doing a job.

    If your revenue from a job covers your variable overhead rate, then any revenue over that will contribute to the company's fixed overhead.

    In other words, if you can bill $35 per hour on a job and your variable overhead rate is $25 per hour, you are contributing $10 per hour toward your fixed overhead. If you don't have any other work at the time, you are ahead to do this work even though the rate isn't as high as you would like.

    Additionally, the more hours worked, the lower your fixed overhead rate becomes (until the point that you have to add more equipment).

    As far as having a higher overhead rate with 3 employees, yes, the rate jumps in total, but the per hour rate should stay the same.

    In your example, with one person, anything over the $13.50 (after increased for payroll taxes, wc, fringes, and operating costs) contributes to your fixed overhead, and as a result, the company's bottom line.
  5. brentsawyer

    brentsawyer LawnSite Senior Member
    Messages: 663

    YOu think you got but I think way different. Here is why.

    Lets buy a $30.000 truck and after five years it is still worth 2/3 or $20,000. Your payment here could be more than $900/mo for $0 down on a 3 year loan or a little over $500/mo for a 72 mo/ loan. For these two examples and using them the way you are, your vehicle costs would vary by 80%, not very accurate. My point is that you need to stick with vehicle and equipment depreciation.

    By using depreciation, you don't factor in your payment, just loss on the value of the vehicle and the added intersest. This would give you a $10,000 loss in 36 months or $277/mo. Now divide this by your hour/year and you get $1.66/hr for 2000 hrs, $2.22 for 1500 hrs. or $3.33 for 1000 hrs. Huge difference, but the right answer because this is what it costs you to have the vehicle. Now add your insurance, gas, etc... The same is true with your mower and everything else, retry these and see the difference.
  6. bruces

    bruces LawnSite Senior Member
    Messages: 648

    Good point Brent, you definitely have to take in to account salvage value on trucks & possibly on equipment if you can determine what that might be.

    That is why monthly payments are usually cheaper on a lease, you are only paying for the value of the equipment you use up.
  7. Evan

    Evan LawnSite Member
    Messages: 6


    I'll do some more calculations tonight based on what everyone said and report back with what I got but in the mean time comment on this stuff:

    Depreciation values: I understand what you are saying with the depreciation, however, I didn't want to go that route in equating overhead because: When it's the middle of winter you have no income yet you still have the bills. We roughly cut 6 months of the year, so the other 6 months there might not be any income. So we need to cover the entire years payments with only 6 months worth of income.

    Does it get any simpler than:
    Income - overhead = profit?

    If my truck costs me $500/ month and I have say one lawn that pays me $100 per month it doesn't matter if the truck is going to last even 100 years, because the bank will repo it in 90 days of no payments. This is the point I'm trying to make.

    Taxes- True those would also get broken down using the formula.

    Turfman and SprinklerGuy,
    But by breaking it down this way allows me to not have to figure none production time and/or drive time. Because these numbers are based on an hourly based average. So if my guys do maintenance on Friday it's already been paid for Mon - Thursday.

    I agree this does distort my hourly rate greatly because if I base everything off 6 months worth of work (1000 hours) then if we do work in say, December, my truck has already been paid for the 6 months we worked this then would be profit. However, work in December isn't a guaranteed thing.


    "What I mean is that if you are paying for the truck over 3 years and are paying $500 per month but will use the truck for 5 years, your overhead for the truck won't be zero for the last 2 years. "
    Yes, the overhead for the truck will be zero (except for maintenance costs) because the truck was paid off the first 3 years.

    Your calculating the loss of value not covering the actual payment. Using your numbers I get this--
    You charge $1.66 an hour for your truck based on how many hours in a year you would use that truck say 2000 you only make $3320 a year for your truck BUT your payments for the truck are $500 times 12 = $6000 the difference being you had to pay out of your pocket $2680.

    If you want to base it on the life span of the equipment then your hourly overhead rate will go down, but then in affect you are paying for the piece of equipment throughout it's life and literally never have it paid off until after you have already budgeted. Example if a truck costs me $500/month for 5 years thats $30,000. But if you say the truck lasts 10 years then you have cut your overhead rate for that truck in half but have doulbed the lifespan of the "loan." You would then say only starting making a profit off the truck in it's 11th year and beyond.


  8. turfman99

    turfman99 LawnSite Member
    Messages: 212

    You really making it complicated for yourself, Evan in basing everything off 6 months production and 12 months expenses.

    Your expenses will go on every month as related to the business. I do not know how your structure on paying yourself and overheads are, so I won't make assumptions here.

    If your employees work Mon-Thursday, then you are assuming your over head is recovered and it's all profit. If you have billed everyone of those hours. If your employees have worked 40 hours in those 4 days, your assuming your overhead is recovered and it's all profit. It's not, in fact it may be reducing your net profits significantly.

    You still have to pay overtime on those 8 hours worked on Friday. Take your employees wages with overtime and subtract that from your margin from the previous 4 days. Then try and figure out how to recover the hidden costs that won't show up for a while, like liability insurance, workmens comp and other payroll based costs, that will be assesed at the overtime rates for overtime pay. You do not gain any advantages unless you reduce your direct labor expenses and payroll related overhead costs in that 5 day of produciton. See how that impacts the actual per hour net profits and margn for those 4 days after subtracting the increased costs, less revenue of course. You would have to be billing at least 1.5 times your normal company hourly billable rate, to just recover the increased costs for those overtime hours, let alone the hidden costs.

    I could lay out a scenario for this process, but it is part of our operating system in COMPASS and is propritary in nature, but it is being used by a lot of companies running that management system. It does work and contains part of what you were talking about in theory.

    It's all about how many hours you work and buy from employees and how many of those hours you bill out to clients. Your cost structure has to be spread out over the avaliable hours, regardless if they are worked in 6 months or 12 months.

    If you choose to buy and depreciate the vehicles and equipment, you will probably see significantly less net profits than if you lease the operating equipment. I have seen this scenario in many different companies,a nd the ones that lease , retain more earnings. The vehicle cost needs to remain the same in your budget for establishing hourly rates, regardless if you buy or lease. It is always going to be there, its a matter of how much it is and how that affects your company hourly billable rate. The depreciation factor tkes more off the financial statement than letting someone else tke the depreciaiton and you just make a payment, that is cash flow and off balance sheet.
  9. Evan

    Evan LawnSite Member
    Messages: 6

    In it's simplest form say this:

    No other overhead than employees pay.

    3 employees at 13.50 per hour.

    I need to charge a minimum of $40.50 per hour to pay my guys, right?

    So if I charge $50 for a lawn that takes us an hour to cut I only made $8.50.

    Another example,

    If I have no overhead except the payment for a single mower:

    $300 per month/ 4 weeks = $75 per week = $15 per day if I cut 5 lawns that each take me all day and only charge $15 per lawn then I made no money.
  10. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Messages: 1,712

    We can't have a valuable discussion and learning process here unless we all speak the same language. The language should not be one we define, but one that is generally accepted in the world of business and finance.

    I've been told by some paid, professional consultants that there are 2 kinds of expenses. They are fixed and variable, but maybe I/we are wrong. I've been told that the fixed expenses are also called overhead.

    Fixed or overhead expenses are the costs of running the business whether you work 1 hr or 2000 hours. Things like telephone, computer system, tax preparation, bookkeeping, lawyer, advertising, postage, facilities rent or depreciation,office help, cell phone, other communications, interest on operating loan, bad debt, association dues, professional licenses, education classes, advertising and so on. Your going to keep these costs if your going to stay in business. They total amount of dollars will not change too much, whether 2,3 or 4 of you work. What will change is the amount of dollars per man hour you need to figure into your pricing to cover this one item, overhead. Example might be $8/hr for 2 men working and $4.80 per hour with 4 men working.

    Why not 1/2 thwe overhead $ above? Your going to use more cell phones and time, more postage, more invoices, more stationary, more disposables of everything.

    Variable expenses like production equipment (on the job equip) are not overhead items to me. They are a direct, job related, production expense. If I didn't have a job to perform for someone, I wouldn't have to buy more or keep this type of equipment expense. Equipment is not much different than buying the manpower or materials to produce a job for a customer. The depreciation and maintenance for the equipment also goes right there in variable expenses as well.

    My personal truck that I drive for estimates and supervison is an overhead expense. My crews trucks that they drive to the job is a

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