Contractor 20/20 Shares Some Great Information on Breaking Even and Profits in Your Business
Posted by Ron Collier
Many plumbing/HVAC/electric contractors use the single overhead burden calculation to determine break even of labor. They basically calculate their “true” billable time available and divide it into their overhead to get a burden to add to the raw wage of field personnel. However, this method can get you in trouble when pricing jobs. If a job is labor intensive, you tend to overbid the job because all the overhead has been assigned to labor. If a job is material intensive, you tend to underbid the job because no overhead burden is assigned to materials. I have even seen some of my workshop participants sell materials at cost, because there is no “overhead”. As you can see, the single overhead method to calculate overhead is not a true measure of what happens in a contracting firm.
The best method of pricing in the industry today is to determine your true breakeven on a job, then divide the breakeven number by (100%-Net Profit % you want on the job). Break even is best calculated today through the dual overhead method of distribution. Both MESO (Materials, Equipment, Subs, and Other Direct Costs) and Direct Field Labor have overhead costs. Using your profit and loss statements, you determine a burden for MESO and Direct Labor. Today in the industry, I find burdens on MESO to be between 18-30 cents on the dollar and for Direct Labor, between 80 cents and $1.50 on the dollar.
Use the dual overhead method in your business to calculate your true breakeven for all products you want to sell, then add the profit that you need or the market will bear. Everything you sell in a company has an overhead burden and should always be sold to capture that burden.