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Calculating Office Overhead

For the Building and


Trade Contractor

By S.S. Saucerman

Lately Ive been doing a lot of speaking meaning, How do I know Im getting
and teaching for the building construction enough profit?
industry, and one of the most common
questions I get at schools, trade shows, and Of course, thats a loaded question and,
in e-mails is this: How do I figure my prof- depending on particulars, my answer may
it percentage! Or, including the hidden vary But my answer is always based on the
Your profit should provide funds
model to devise your own office over-

for growing your company. head document. Its a simple example,


the numbers are fictitious, and you will
almost certainly find yourself adjusting
and/or expanding the sheet to fit your
same premise: Your profit should be number is a bit more nebulous and unique situation. Its simply meant to
enough to cover the cost of doing business often depends on your life and profes- provide a jumping off point for the
as well as provide additional funds for sional goals. Its also a number that may office overhead calculation process and
growing your company. be best reached with the invaluable assis- offer an idea of what information will be
tance of a financial planner and/or your needed for data.
For our purposes, well define the cost banker. We can, however, delve into the
of doing business as the amount of rev- formercalculating your office over- Some input for the sheet can be found
enue you need to cover all office and headright now. and/or researched through past compa-
field overhead not accounted for in job ny records and entered as (comparative-
costs. This number is relatively straight- Calculating Office Overload ly) hard numbers. Other entered costs
forward to discern, assuming you keep may be projected in nature and will
good records, own a computer, and are Lets break the process down. The figure require further research, the assistance of
willing to put in the effort. The addi- on page 66 shows a basic Overhead Cal- professionals, or perhaps online sources.
tional funds for growing your company culations sheet, one you can use as a And thats OK, assuming the sources are
reputable. The only golden rule when
projecting numbers is to do your home-
How much companies that still grapple with this
question (I talk to them all the time!).
work and be realistic with forecasts. This Basically it goes like this: If your local
is no time to fool yourself. The results
you generate, if accurate and realistic,
profit is market will allow you to recoup the cost
of grey items (those items that could
will aid you in your revenue goals and fall into either job cost or office over-
ultimately assist you in deciding how
much profit is enough.
enough head) within your normal job costing,
by all means work those items into job
cost and thereby lower your office over-
Youll notice on some line items, Ive head total.
entered the word job cost. This is sim-
ply to remind you to be cognizant of include it as an office overhead cost is The Profit Percentage
those items that you may be able to strictly personal and is based somewhat
account for in actual job costs, whether on how much of that cost can be Once youve calculated your office over-
it be the whole cost or a percentage. worked into your job cost while still head and reached your years totals, take
Items such as vehicle fuel/maintenance remaining competitive. This decision, of that percentage (as a product of your
and small tool expense often fall into course, isnt as easy as it sounds, and gross revenue, assuming youve made the
these categories. The decision on often comes only after years of opera- proper tax adjustments on your sheet)
whether to make an item a job cost or to tion. Indeed, there are well-established and add it to the percentage youve pre-
viously calculated for growth. Lets say struction business. In short, you know For our purposes, lets say we adjusted
we came up with a growth percentage of not every job is going to go smoothly. our number up to 12 percent. This is the
2.8 percent. For the year 2001, add 2.8 We have our ups and our downs, and percentage that you should be averaging
percent to the 5.79 percent shown at the some jobs will be profitable while others throughout the year. The key word here
bottom of our sheet. This gives you 8.59 wont. This is no time to view the world is average. Some jobs (smaller jobs, nor-
percent or, rounded off, 8.6 percent. with rose-colored glasses. You may in- mally) will garner much higher percent-
deed choose to add (and its completely ages while others (often larger) will sub-
Next, youll want to also make (what I a personal choice based on your experi- sist on smaller percentages (but heftier
call) a real life adjustment to the new ences and market) another 1 percent to revenue). The point is, by the end of the
percentage. This adjustment is to cover 5 percent to cover the unknown. business year, 12 percent would be your
the almost certain volatility of the con- minimum average percentage. At least
You may choose to I hope this helps. Of course this is a simple example because
theres only so much we can cover in one article. The intent is
to get you steered in the proper direction. For further assistance,
add 1 to 5 percent to you need go no further than your own accountant, banker and
company records. Also, there is a wealth of information avail-
able online, including sample overhead cost calculations, busi-
cover the unknown. ness tips and forum groups to get you going. Good luck!

About the Author


S.S. Saucerman recently retired as a full-time commercial con-
now you have a benchmark on which to base profit percentage struction estimator/project manager for a Midwest general con-
decisions. tractor after 26 years in the building construction industry to
pursue writing, speaking and industry consulting full-time.
A better visual picture might be this: Take the 12 percent and Since 1976, his career includes building material sales/estimat-
multiply it by your total gross volume (in our example, $6 mil- ing, architectural drafting, home building/design, commercial
lion); youll get a result of $720,000. This is your target dollar construction estimating and project management. He also
value for the year, the amount left after all office overhead and taught part-time in the Building Construction Technology pro-
job costs have been accounted. You need to make $720,000 to gram at Rock Valley College in Rockford, Ill., for 11 years.
cover the cost of operations plus setting aside money for growth.

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