Avoid Confusion When Calculating Your Billing Rate

Avoid Confusion When Calculating Your Billing Rate

Q:
We have been in business eleven years now. We manufacture all types of custom metal products. We are making a profit every year but always find we are on the high end of bids.

Overheads costs, shop hourly rates, etc., seem to keep me confused. To calculate my shop billing rate, I take all overhead costs including salaries, hourly wages for the men on the floor times 2,080 hours a year (normal forty hours weeks), fuel, vehicle payments, electricity, administration, CPA costs, building repairs and all other costs. Then, I take this total cost and divide it by the total hours that my men produce in a year.

For example, All costs = $897,779.00 divided by 10,400 production hours per year = $86 an hour. Then I multiply $86 x .25 percent markup and come up with about $107 per hour to charge for shop rates. But these are out of the ballpark here in our state. So I only charge what I can get at $75 an hour, and we still have a hard time getting work. But at year-end, we still seem to have some profit left over.

My main question: Is there a better way to figure our shop rates, overhead and markup? There has to be a set formula for figuring all this! Your quick response would greatly be appreciated, as I have a chance to land a big yearly account but at a lower overall price. Please help—I’m confused in my business….

Walt Rivers, President

MetalCon Inc.
 
A:
How do you make a year-end profit if you charge $10 per hour less than your costs? Something doesn’t add up! If you pay your men $20 average per hour plus a burden factor of 50 percent, they cost you $30/hour. For 10,400 hours, your labor cost is $312,000, leaving $585,779 for overhead. This tells me your overhead rate is 186 percent on labor. Wow! That is double or triple what it should be! Just because your costs are what they are, doesn’t mean they aren’t too much for the amount of work you do. Does your production rate include all of your total company overhead for the year? If so, the only variable is profit markup. How did you arrive at 25 percent profit? That number seems high to me. A typical subcontractor makes between 3 to 8 percent net profit at the end of the year. Do you mark up material, equipment or subcontractors? I’ve sent you my Profit 101 book. Read it, and get back to me with your exact sales revenue, as well as costs for labor, material, equipment, subcontractors and overhead. Then, I can help you more.

 
 
Q:
I have a question that I am hoping to get some advice on. I am the general manager for a twenty-employee fire and life safety equipment company. The owner and I have a verbal agreement that I am to buy him out in the next five to ten years when he retires. He is looking to be more conservative over the next few years so as not to “ruin” his retirement, but I see a chance to develop two new departments that will take a large capital investment now. The two departments would be a sprinkler service division and a hood cleaning division. If we had these, we would be the only company in our area that offers these with the services we already provide. How can I get him to see what we can become when he is getting set to retire soon? Any help you can give me would be greatly appreciated.

Justin Davidson, General Manager, Master Fire and Safety

 
A:
Don’t wait another moment. Get your agreement in writing now or keep making your basic salary and forget about ever owning a piece of his business. The agreement must have the price, terms, timing and how you’ll compensate him when he stops working or when you want to replace him. When an owner wants to be conservative, he is done expanding the business and really wants a guaranteed check every month without taking on any more risks. Is that what you want? If you want to buy him out, figure out the amount he expects for the business now based on net income. Determine if it’s worth paying him that amount. If the number is too high, you know it’ll never work. I bet the best opportunity for you is to start your own company and compete against a dying company. Go out, get some investors and get it going while you’re still young and excited about your future. You can start with the new departments and additional services. If you need an investor, give me a call.

Construction Business Owner, July 2008