The title says it all. Overhead is the number one cause of small business failure, especially in the construction industry. The reason that so many companies allow it to be is the real question. The good news is that if you have made it this far, you are determined to overcome this anchor like burden on your small business.
The stripped down technical definition in the construction industry is any expense that you can not charge directly to a job. Overhead changes industry to industry, but it boils down to the expenses that a business has that can not be specifically associated with one transaction. This includes office rent, utilities, advertising, smartphone, and a mind-boggling list of items that typically go unnoticed.
So how do we prevent overhead from leading our business to a tragic, slow death? Learn it, know it, monitor it, and CHARGE for it!
The task of keeping control of your overhead is not hard, but if you are like most contractors, you focus on the job expenses way more than the phone bill. Material overruns and under estimated labor can kill profit, but so can replacing the truck you drove to get there.
Most contractors are shocked to learn that overhead can represent 5% – 10% of there gross sales. When first introduced to the idea of calculating overhead, they can be even higher. When we started tracking overhead in our construction company, we were running around 17%! That is a massive number that is taken out of the bottom line.
Get your overhead percentage calculated, then instantly begin writing it down on your job expense sheet in the form of a percentage. If you have a $100,000 project, and your overhead is 10%, write in a $10,000 expense. Now when you calculate profit, you will have an accurate representation of profit. This will be an eye-opening experience if you have never accounted for overhead. By adding it as a job by job expense line, you can begin to estimate better, and know that there will be money to pay those expenses next month.
The next step is to trim the overhead number down to its lowest possible percentage. This can be done a couple ways. We can either cut expenses, or we can change our thinking to a more direct cost approach. Cutting expenses is exactly what it sounds like, the other can be a bit trickier.
Here is an example of how we turned a large overhead expense to a direct job expense. We purchased a new jobsite tool trailer that cost $8000. Instead of chalking it up to overhead, we used the expected lifespan to create a direct billable amount.
With license, maintenance, and the cost of purchase, we figured the trailer would cost us $2000 per year, for each of the five years. Using an expected lifespan of 5 years, and estimating it was going to be on site 35 weeks a year, we got a jobsite direct cost of $58 per week. We now right down a direct job expense for this trailer at the rate of $58 per week. This also helps if we do a time and materials project and the trailer is utilized. We have a billable amount that can be justified and passed right to the customer.
So, what is overhead? It can lead to a tragic death for your company, or if properly monitored, can become a terrific tool for estimating, and billing. Don’t let the overhead parasite eat up your profits.
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