Hugh Bowman

How to allow for overheads in cost plus work

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Factoring in your overheads

Today we’re going to learn about how to allow for overheads when calculating cost plus work.  Knowing how to do this will help keep your business profitable and will ensure all your hard work pays off.  As in some previous topics in this series, using an example will help to demonstrate how this is done.  So follow along and remember, you can always call me (Ph: 0409 402 474) if you have any questions.

Overheads can be defined as ongoing costs (fixed or variable or both) to operate a business but excludes the direct costs associated with creating a product or service. This could be warehouse rent, utilities (electricity & water), mobile phones, vehicles and equipment, reception for example. For larger businesses these might be divided up into separate categories such as plant and equipment, administration and leasing.

Below is a simple Profit and Loss statement for a company.

Sales $100
Cost of Sales
Labour + Materials $50
Overheads
Rent & Phone $20
Profit $30

Accountants view overheads as a percentage of sales so we need to –

$20/$100 = 20%

When it comes to factoring in the real cost of overheads we need to take into account other factors to remain profitable.  To work out that multiplier we need to divide overheads by the cost of sales and turn it into a percentage –

$20/$50 = 40%

So when you are pricing up a job using the cost plus technique, you need to add up all the labour, holidays and employment costs materials, freight and phone etc. then add on $40% of that figure to cover overheads.

So read over this a couple of times so you understand the process and feel confident to use it.  If you have and questions feel free to call me to learn more.  I get a real sense of satisfaction helping trades and technical businesses become profitable.

The next step is to calculate profit and that is coming up in the next video.

How to Calculate Real Wage Costs

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[SCROLL DOWN TO GET A FREE COPY OF MY WAGE CALCULATOR]

The real cost of wages

Knowing the real cost of wages to your business is critical for being able to put together accurate quotes that ensure profits for every job. The cost of hiring staff is expensive in Australia so you must make sure you have everything covered.

There are a number of steps that need to be followed to work out the real cost of wages and the easiest way to explain it is with an example. Below is an example from a plumbing company I’m working with.  By going through this exercise with him, he now understands the real cost of his employees to his bottom line.

Let’s run through the wages for an employee on $36/hr

Hourly Rate $36 x
Hours/Week 38 x
Weeks/Year 52 =
Wage/Year $71,136

Now let’s look at the Hours Paid for with Wages

38 hrs x 52 weeks = 1976hrs
Minus Holidays 4 weeks x 38hrs = – 152
Minus Public Holidays 11 x 7.6hrs = – 83
Minus Sick Leave 10 x 7.6hrs = – 76
Actual Hours Worked = 1665 hours

Now let’s look at the Real Cost of Wages by taking into account other expenses.

Wages $71,136
Super @ 9.5% $6,758
Payroll Tax (@ 2.4% > $650k) $1,707
Coinvest LSL (@ 2.7%) $1,921
WorkCover  (@ 1.27%) $903
Recruitment $1,000
Workcover $600
Total $84,025

Real Cost of Work/Hr = $84,025/1665 =   $50.47/hr

This is 40% more than the payslip rate.  ($50.47/$36 = 1.4)

The example above is for a single employee and is right for any other full-time employees on the same payslip rate.  You will need to work the example again for employees on different wage rates.Also, you’ll need to double check the various percentages in the example to make sure they are accurate in your state or territory.  Some percentages may even vary depending on whether your business is metropolitan or country.
So keep these calculations in mind because we’ll use them in the next video when I discuss Cost Plus work so you can learn more about profitability.

Watch this helpful video above to better understand the calculations.

Get A Free Copy Of My Wage Calculator

Fill in your details below to download a free copy of my wage calculator that you can use immediately in your business.

The In8 Life Testimonial

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I have been working with Hugh at Action Coach Geelong for several years now and Hugh’s input, knowledge and ideas have helped our business to expand rapidly and grow profits. Hugh’s push to think about the next thing and differing opinions will help your business go forward profitably. I would recommend hugh to any business owner either looking for help or not or even if you are looking at getting into business.

Dr Sam Floreani

The In8 Life.

Otway Precast Testimonial

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Precast concrete products for construction.

Hi, I’m Tim Reinen. I am the Managing Director of Otway Precast in Cola, Victoria. We manufacture precast concrete products for construction. Precast elements that are of an architectural nature, that usually revolves around some of the more ornate work around government projects and schools, and sort of that kind of work.

We do a lot more ornate stuff, that bespoke type precast that involves a multitude of finishes. A lot of our work is based in Melbourne. We are currently working with the Melbourne University, also alongside a number of companies for a lot of cemetery work, doing a lot of ornate work in mausoleums, and a multitude of projects around the area from bridging through to buildings, through to seating and landscaping works. Yeah, we have quite a vast field.

A couple of great examples of the work we do more locally would be the Geelong Library, it was a large project for us. In 2004, we completed that one alongside Kane Constructions, it comprised of stair cores, lift cores, and the eastern elevation, including a pattern where we had to go extreme lengths to make the architects and the clients happy.

Another good project locally was the Surf Coast School at Torquay where we produced structural columns, which formed a wave around the building, along with 200-odd black items.

Over the past four years, working with Hugh, we’ve had a massive increase in profits. We went 30 times better in our profit margins and we’ve had a 237% growth in our revenue.

Going forward with Hugh we’ve got some pretty big plans. We’re on the verge of investing $2.5 million into a new facility, to better our turnover and increase more staff, and things are looking quite positive going forward. Planning on sticking with Hugh into the future and using his services. As we grow, we require some more expertise and Hugh’s definitely the man to help.

Into the future with the increase in popularity behind GFRC, we are setting up a factory to create GFRC. GFRC is a cement sand-based compound bound by structural fibers. Essentially it’s a lightweight precast panel, looks and feels exactly what our concrete does, but essentially is only around about 20th of the weight, which allows for better use into a multitude of areas, where normal precast weight or crane sizes don’t allow. So this helps us to help fulfill dreams of people wanting to use concrete products where they otherwise might be restricted.

The use of GFRC in the MCG mausoleum at the Melbourne Cemetery was a quite interesting one where we had to build custom window frames and feature columns, where the use of precast wouldn’t allow for due to the design and the weight, we used the GFRC product because of the lightweight nature and the ability to install it after the building was almost complete, as opposed to having something that was being damaged throughout the construction process.

Another asset of our businesses is the crane hire, so we currently have cranes up to 55 ton, and we’re about to introduce a new 685 Effer into our mix, which will give us quite good reach, in quite tight areas.

Predominantly we service the south west with crane hire. We’ve had a lot of background in petrochemical work and also throughout just general hire. We’ve been now with 30 years of experience. We’ve got all the rigging covered and lifting covered that you might need.

You can always learn more even if you think you’re doing well.

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You can always learn more even if you think you’re doing well.

After over 11 years of running a successful Graphic / Web Design business with nine staff in two locations (Torquay and Ballarat). A major back injury and some client marketing cut backs had left my business enduring the worst financial year of its existence.  This was a new experience for me, I had become accustomed to the business growing bigger each year. Some tough decisions had to made and I realised my business was not as strong as it could be.

For instance could I step away from my business for four weeks and would it not miss a beat? No was the short answer. I needed to change how my business was run and I needed help to achieve this, in step Hugh Bowman.  After speaking to Hugh over a lunch one day I was immediately taken by his understanding of business and his interest in mine. I told him what my business was going through and he starting listing areas we could look at as a priority.

One of these areas was setting up Key Performance Indicators (KPIs) for all my designers. The idea being instead of getting a feel for how productive my designers were, we should track it more closely to ascertain how effective and productive each designer was. I spent time explaining to my staff what I had learnt from Hugh and why it was important for all of us as a team to meet our KPIs, this was met with mixed reactions, not surprisingly the more positive reactions came from my most productive staff with nothing to hide.

Six months after hiring Hugh my business was back achieving the profits I have always had, and more importantly we have achieved this with our biggest client’s marketing budget still 75% less than normal. To any business owner, here is my recommendation, you can always learn more even if you think you already know everything. Get Hugh to do a business health check on your business and see if you can make the same profit with half the work.  Mine is a work in progress but I can see the light at the end of the tunnel, where nine months ago all I could see was darkness.

PS. The Action Growth 90 day Planning sessions are awesome and the Richsales seminar was the best sales seminar I have even seen.

Rodney Brown

Managing Director – Brown Ink Design

How much do you pay yourself?

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Paying Yourself A Wage As A Business Owner?

How much you pay yourself as a business owner will have a remarkable impact on your personal and professional life. Many business owners struggle with the concept of paying themselves a wage because they think, as the owner, they should only be taking profits.

Most business owners don’t actually mind how much they are paying themselves because they are reinvesting it back into the business. However, in order to grow, it’s often essential to take on a business partner and this is where it starts to get tricky.

Imagine you take on a 50/50 financial partner but they only work half the number of hours as you or their skill level is lower than yours. In each of these two cases, it makes sense for you to be remunerated at a higher rate than your partner. But how do you decide how much is fair?

The best solution is to consider how much it would cost to hire someone to perform the same job and pay yourself that much. That way it’s fair all round. Equally, the same thinking could be applied to your new business partner too.

The best way to pay yourself is by a salary with super attached. This way, you’re accumulating all the benefits an employee is due and all is fair and above board for your partners to assess.

Another benefit of paying yourself regularly is the sense of satisfaction everyone deserves from a fair day’s pay for a fair day’s work. This gives people a sense of achievement, keeps morale up and productivity too.

So I hope that’s helped. Of course things can get a little complicated sometimes when considering PAYG, the structure of your business, balancing salary with dividends, whether or not to take stock options or bonuses and all of the tax deductions employees are due. So give me a call, and I’ll walk you through these complexities and suggest a sensible way forward.

Working in or on your business?

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Working On Your Business Is Valuable

I want to talk about how saving a job is costing you a fortune. What I mean by this is if you’re a business owner and you spend a lot of time working on the tools it means that you don’t spend the time working on your business to help grow and improve it.

As an example I work with a plumbing business with six people and the key guy loves to work on the tools. As a tradesmen you’re forever drawn to working on the tools but if that displaces much more important things like working out how to win the better projects that have better margins or training your team to take over roles that the business owner is currently doing then chances are it’s actually costing your fortune.

Your Hourly Rate Will Surprise You

This applies to every business owner that I know out there. So what to do about it? What we do is look at your hourly rate and as an example this business owner makes $200,000 profit a year which works out to be about a $120 an hour for the business owner.

That’s how much he’s earning so lets make a list of all the activities that this business owner is actually doing and assign an hourly rate to those activities. If they happen to be less than his rate of $120 per hour he should be on a mission to delegate that work or hire someone outside that business to do it.

In this case of the plumbing business they pay their staff about $30 an hour for most plumbing work so if the business owner is doing jobs that he could pay another plumber to do he is actually spending $120 an hour rather than spending $30. Whereby he should be using his time on $120 hour tasks like effective quoting, customer relations, marketing and other business growth activities.

Real business growth comes from valuing your time and doing activities that are difficult or way too expensive from other sources.

4 ways to save on overtime

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saving on overtime

Paying Overtime? 4 simple tips to save you $2,000 per week like my client.

Are you the kind of business owner that thinks just because you are busy it is worth working overtime to ‘get more work done’?  If this is true then you are probably not making any profit on that extra work and would be better off relaxing with your feet up sitting on the beach.

I recently dealt with a business that strived very hard to deliver all the projects they had taken on in an effort to keep their customers happy.  The owners felt the only option was to work longer hours and pay their staff overtime.  This scenario appeared to be a good short-term solution but was not sustainable for staff or the business long term.

The business owner realised it was time to take action as they wanted to grow the business. To solve the overtime issues they needed an additional team and vehicle, pricing changes and a new time sheet policy.

A new vehicle was purchased and the newly formed team was ready to hit the ground running. New apprentices were recruited to join the other existing teams with experienced fully qualified staff. The new pricing structure and timesheet policy was implemented. The outcome was that we saved the business $2000/week!

In this case it was all about finding a way to be more productive whilst making sure each job is profitable.  If overtime hours are common place these extra costs can hurt the profitability of a business.When working out your production schedules it is worthwhile understanding the various stakeholders with respect to overtime:

Staff

Staff may like working overtime as it means more money in their pay packet.  You also need to consider the negative effects of working extra hours on workers’ health and wellbeing, productivity and moral.

Customers

Customers are generally happy with the business working overtime as it means their job is getting finished promptly.

Business Owner

The business owner may be happy in the short term as they are keeping their customers and staff happy.  However this can soon change when end quarter or financial year figures show a decline in profit margin.

Watch this helpful video on paying overtime, it could save you thousands.

4 Tips on what you can do to save on overtime

Recruit – Recruit early.  If there has been a steady increase of sales or business activity or you know that you have a busier period coming up begin your recruiting process at least 2 months ahead of when you need them start.

On costing – When a customer has an emergency or an urgent job that needs finishing you can discuss with them the option of getting staff to stay back and paying them overtime. Explain to your customer that it will cost them more but it gives them an option and is a great way to provide timely customer service without costing you your profit.

Timesheet – Having a robust timesheet process is critical for monitoring overtime.  There are some great apps available that have a time and location stamp.  This is a great way to ensure that staff costs are allocated correctly to a job and is transparent, fair and equal.

Policy – Creating an overtime policy and procedure is really important.  You can include items such as – ‘Overtime must be pre-approved by the site Manager or Business Owner’. For example a staff member calls at 3pm explaining that the job will take another 2 hours to complete.  The Project Manager/Business Owner can then assess and consider if there is money in the job to proceed with overtime or tell staff to return to the job in normal working hours.

Do yourself a favour and take a look at how much overtime you paid over the past 12 months.  How has this truly affected your PROFIT?