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Overhead Revisited

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

  1. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Messages: 1,712

    Equipment is never paid for. Even after the monthly intallments end your are still paying for equipment. Why? Because after the installments end the equipment usually has significant life and value left. As you continue to use it it declines further in value. Therefore you are still paying for the equipment. man hour by man hour. So you better always charge the same amount per hour the whole time you use your equipment.

    FREE FRIDAYS FOLLY! Lets say you think you've recovered your equipment expenses Mon-Thu, but use them on Fri. Lets say your doing this with your used to be $30,000 now $20,000 dollar truck. Well after doing this for 4 years you've really used it for 5 years in a 4 year period and only recovered 80% of the $15,000 in equity loss, (your depreciated it fully in the first 5 yr). You've recovered $12,000 but burned up $15,000 and your 3 grand short. The 5 grand it's worth and the 3 grand you should have had would be a nice downpayment for the new one you can't afford.
  2. turfman99

    turfman99 LawnSite Member
    Messages: 212

    HBF brings up a coupel of good points.

    Fixed expense is another term for overhead. variable expense is another term for direct costs. Direct costs or direct labor are common terms in the construciton and landscape business. The others may apply to another type of business that is not so labor oriented.

    The free Friday folly is just that and a very good example.

    The way we determine a companies cost in our system is this

    Direct Labor which is all field and production labor.

    Indirect Labor which is all labor burden.

    Subtract that from gross revenues or sales and you have gross margin.

    You now have the money to pay your overhead expenses. Your overhead expenses includes anybody that works in the office and all the expenses that are there even if you don't work. Vehicle and equipment payments??? Depreciation expense that still goes on ??Debt service?? credit lines ?? Seems like overhead to me.

    If you have anything left you now have net profit. What are we selling in this business ?? Labor hours with added value. Therefore all expenses must be recoverd off labor because thats what were selling right ?? We prefer to recover and account for vehicle and equipment expense in overhead because it is a lot easier to track and cost out, versus going after it in direct labor hours.

    So take HBFs way of doing it and take mine and divide all expenses by the amount of hours you have to work and hire and guess what ?? You will get a cost per hour that will be very close to each other. Assign a profit factor and you have it. Vary form those hours and you numbers will vary. Work less hours than you project when establishing you company hourly billable rate and you will lose net profit expotentially. Work more and you will see a n increase in net profit if you have based your overhead projections correctly.

    YOU HAVE OVERHEAD. That is an undisputable fact. Understand your numbers and how they affect your business and you will make more money. Track hours, watch hours and the money will follow the time.
  3. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Messages: 1,712

    The key to figuring all of this is to have your chart of accounts properly organized and proper payroll records.

    Simply put there are only a few general accounts. Sales, production equipment expenses, production labor expenses, job material expenses, subcontractor expenses and overhead expenses. Period!!! Of course to get the proper info to make business decisions and pay taxes there are many more sub accounts under these general accounts.

    For payroll, it's basically production hours and non production hours. Production is all the job, travel, get materials, sharpen blades, grease, load etc. Non-production is rainy days doing put off repairs, busy work so they get a paycheck, sick, vacation etc.

    Now you can take your production hours and divide them into your overhead and you don't have to factor anything. The overhead is spread over what ever billable working hours you bought.

    Equipment can be done several different ways and the ways can be combined. I usually divide my production hours into my total equipment cost to get costs per man hour. On some large infrequently used pieces like a front end loader or trencher/backhoe I charge a daily rate for them at the rate a rental lot would charge.

    Labor costs can be done like this. Take all of your production labor expenses, like wages, wcomp, unemp, help wanted advertising, unifroms, liability ins, umbrella pkg, Fica Futa, helath ins, etc and subtract your gross payroll (total the guys earned) from it. The reminder is your "labor burden". Divide your production hours, including overtime production hours into this to get your labor burden per man hour. Of course crew wage changes an make up along with heavy overtime can change this but it is a starting point.

    Now prices are easy to formulate. Avg crew wage plus labor burden plus overhead per man hour = total labor costs.

    A job price will consist of total labor cost per man hour, plus equipment costs per man hour plus any marterials and sub contractors plus a profit.

    Now this is a bit simplistic but it is generally how it goes. Keep in mind, proper chart of accounts, proper payroll records and proper production time knowledge. It all hinges around labor hours. If you screw up there. you have problems.
  4. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Messages: 1,712

    If there is one thing you and I have to hammer into the heads is that everyone including solo operators has overhead and it is bigger than they think. If they added up all the usual costs that I do and added in X$/hr for themselves for bookkeeping, estimates etc they'd see that their OH is not far behind the big guys they think really have high OH.

    And the paid for equipment thing is #2 on my gripe list.

    And not accounting for all the real labor costs and just using wages is #3.

    And just talking about on the job time is #4.

    And #4 is number 1 and so are 2 and 3.

    For some reason this one really fired me up today. Yeah, like no one noticed to wack o in NJ, right?

    See ya.

    OBRYANMAINT LawnSite Senior Member
    Messages: 555

    these are some of the most interesting topics

    i am on info overload and love it!

    where can i get more info on COMPASS system?

    hbfoxjr where did you learn all this? school or just on the job

    how would one go about a similar scenario with snow removal when production hours vary greatly and can be difficult to estimate?

    virtually all expenses are overhead
  6. Matthew Morgan

    Matthew Morgan LawnSite Member
    Messages: 45

    When you are figuring in all your "costs" however they may fall, don't forget about this.

    Bake in some $$ per hour for income tax. If you are profitable, you will pay Uncle Sam. do you want that to come soley from your wallet?

    Also cinsider this. Do you want to be making equipment payments forever? While you are figuring for the equipment you are paying for, you need to bake in some $$ for the next round of equipment. If not, you will be borrowing money for equipment forever. Not sating that borrowing is all bad, but at some point in time, it would be nice to write a check for that next mower and not have to go on a "bread and water" diet to do it.

    Just food for thought!

  7. turfman99

    turfman99 LawnSite Member
    Messages: 212


    Just going to have to look for it, I won't promote my business on Chuck's board, by agreement with him with out advertising right now.


    If you want to add on money for income tax, that's fine, just don't show it as such in any of your line items in your accounting / budgeting process. The IRS frowns on it greatly and it really is going to distort your labor rate and competitivness in your market. If you make profit, just pay the taxes on it and budget for it. Your going to pay more taxes if you add in for taxes.... If you are profitable, then pay the taxes on it.

    If thats a problem with the profit, call me up and I will give you my address and you can send me a check for the profits you don't want to pay taxex and I can creat some type of expense catogory for you, har, har, har....

    I am not going to beat the depreciation horse anymore. If you want to buy the equipmentand start depreciating the value the next day that's fine. I will continute to lease everything except the small hand 2 cycle type equipment, and I will pay for the asset as I use it up and make money with it, rather than carry the burden of a depreciating value on my finanical statement and then still have to replace the machine at the end of its usefull life span.

    You are ALWAYS going to have equipment costs in this business as long as you use equipment to add value to your prodcut LABOR HOURS. It is never going away, it is never going down because you own it, not going to happen.

    Better to just pay for the asset as you use it and let some one else carry the depreciation problem. Thats why there is leasing avaliable, because some company somewhere wants the depreciation value for their financial statements.
  8. HBFOXJr

    HBFOXJr LawnSite Bronze Member
    Messages: 1,712

    Refer to other posts of mine for what I've learned from 2 other consultants. I've used my methods learned from these guys since 1986 and found them to be very consistent and predictable. Also gives you the power and knowledge to manage problem years and problem jobs. It makes expansion and contraction very easy too.
  9. After all that and know one added the $2. per an hour for FUEL.
  10. Matthew Morgan

    Matthew Morgan LawnSite Member
    Messages: 45

    I thought that might get your attention!

    I don't take a line item for my income tax burden, and you can't bake an exact figure into your prices, but I just mentioned it because, I look at as another expense. I know it is not, but it is money going "out", so I try to treat it as such.

    If you can bear to charge a few dollars more and get away with it, put some back. Uncle Sam is watching!

    You are right about equipment though. My point was this: interst is not your friend. If you can get to the point where you can buy some equipment outright instead of financing, then in most cases you will be money ahead. In times like we are currently in though, money is cheap when you borrow. If you are able to make more money with your cash than you will pay in interest when you borrow, then by all means borrow.

    I think it all boils down to everyones operation is different. You just need to weigh the facts for your operation and do what will help you the most.

    Remember to cover your costs and don't sell yourself short. Charge every penny the market will bear and then add a few cents if you can get them!

    :blob4: Matthew:blob3:

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