Calculating Overhead, Estimating for the
In this article of the estimating series, we will be calculating discussing overhead and some aspects of estimating as a management function.
by Len Hijuelos
of the estimating series, we will be discussing overhead and som e aspects of estimating as a management function.
While not trying to minimize a rather complex subject, overhead is simply not that difficult to understand or to deal with. Most simply put, overhead reflects the contractor’s cost of doing business.
It is generally divided into two categories, fixed and variable.
Fixed overhead consists of those costs that are ongoing and not necessarily related to the volume of the work the contractor does. Some examples of fixed overhead are:
- Advertising and business promotion
- Accounting and legal fees
- Auto and truck expense
- Insurance, taxes and licenses
- Building and utilities
- Dues and subscriptions
- Office supplies
- Travel expenses
- Bad debts
Variable overhead costs are those that are directly related to labor costs and therefore, by extension, to volume of work. Examples of variable overhead are:
- Insurances and payroll taxes
- Tools and equipment
- Auto and truck — job related
These examples are probably fairly representative of a small- to medium-sized operation. There could be more or less “cost items” depending on the size of the business and the accounting structure.
Accepted practice among painting contractors is that overhead is most directly related to labor and therefore should be expressed or applied as a percentage of labor. However, many contractors are of the opinion that since almost every activity of the business involves some cost, then only the variable overhead costs should be applied to labor, and the fixed should be applied to the total of all costs (refer to exhibits 3 and 4 of article 6).
According to various pricing guides, it is suggested that 60 to 65 percent of labor is an average overhead figure for painting contractors — this figure seems to be widely used. In fact, that percentage can vary anywhere from say 40 to 125 percent of labor, dependent on a number of factors. Contrary to popular opinion, size of the operation is not a major factor; in fact, most smaller-sized operations carry a higher overhead percentage than do larger operations. It would appear that there are quite a few contractors out there who really do not know what their overhead is: They use 60 or 65 percent, because that is what is in the books. It is only smart and good business to know what your own overhead figure is. Your accountant can do this for you rather quickly, or you can do it yourself — the math simply involves a comparison of fixed and variable costs with total direct labor costs:
2001 Direct Job Labor Costs
(from payroll records): $87,000
2001 Fixed and Variable costs: $44,955
$44,955 divided by $87,000 = .517 or 52 percent
52 percent, then, would be the overhead figure to be applied to your labor costs.
Labor and overhead costs may be defined and applied differently by different contractors or accountants, and this usually explains why there may be variations in the overhead figure used:
Example — Contractor A has an overhead figure of 52 percent, while Contractor B has 64 percent; yet both of the operations are very similar. The difference is where each contractor chooses to allocate some costs. Contractor A might choose to allocate all of his supervision costs to jobs, while Contractor B might choose to allocate this same cost to overhead. Other costs can be looked at similarly, and these differences are what cause the 12 percent difference between the two figures. Both applications are valid, and as long as each one understands what he is doing, then both are correct in their approach. The important point is that all costs associated with the operation of the business must be covered somewhere, either in direct job costs or in overhead.
In the first article of the series, we referred to the fact that estimating should be approached as a part of management function. What this means is that a structured format should be developed that will govern the estimating and bidding policies of your company. In effect, there should be some thought process into making a decision as to whether or not to bid a job. Just because a particular job happens to come on the market, or we are solicited by some general contractors to bid a job, doesn’t mean it’s worth spending the time and money to put together a bid.
Some of the factors that we might consider and might influence our thinking in making a decision to bid or not to bid are:
- The type of job or project — does it fit our operation?
- The schedule
- How will the project impact the company?
b) bonding or insurance
e) equipment or other resources
Once the decision is made to bid a job, some thought should be given as to how to price the job, considering factors such as:
- What type of productivity may be expected?
- Is this the type of project with which we feel comfortable?
- The architect’s reputation, primarily with color selections.
- The owner’s reputation.
- Who are the general contractors?
a) What kind of supervision will they provide?
b) Can they maintain a schedule?
c) Payment policies
These concepts might seem somewhat far-fetched, but in fact, they are based on the realities of running and maintaining a successful business.
To conclude these articles, a final exam, so to speak, has been included. There is a rather simple floor plan of a small administration building, exterior elevations, and a schedule of finishes (Exhibits A, B and C). All you are required to do is make a “Take-Off” (example at right). All the information you need has been provided in the exhibits. All of the dimensions are given. Although you may have to look for a few, do not do any scaling or measuring. There are two exterior elevations shown, numbers 1 and 2, elevation 3 is identical to 1, and 4 is identical to 2. There is a note referring to handrails at elevation 1, ignore it.