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Understanding Overhead Rates for Contractors

Inaccurate Overhead rates can cause a job to look bad, even when the labor hours and material costs are within budget. 

Overhead is the cost of keeping your business operating.  Overhead is harder to determine than labor burden because these costs are not fixed. Let’s review some typical overhead costs:

  • Office equipment – computers / software, stationary
  • Office rent
  • Office utilities
  • Office employee salaries
  • Advertisement
  • Insurance
  • Association memberships

The list of overhead items can be long depending on the size of your company so make sure all overhead items are accounted for.    You should practice reviewing your overhead costs each quarter.  

How you can identify your company Overhead using job types.   

Contractors often have a difficult time determining their overhead % because their accounting software isn’t designed to automatically breakout the costs and sales by job type.

If you do commercial projects – you’ll have a separate set of costs than another job type such as T&M.  For commercial projects you may have to pay an employee a salary to estimate the commercial projects…. their salary, on-going training, software programs and computer/hardware costs…..all of these items contribute to the company’s overhead for commercial jobs.  Conversely, time and material jobs don’t require this same set of costs.  COBRA’s job type codes offer the user a more accurate contractor accounting software as it tracks different overhead % s per job sector. 

A Case Study

A COBRA user who owns an electrical contracting business wanted to know which sectors of his business – time and material, commercial new construction and low voltage – were making/losing money.  We explained how overhead may vary by job sector and too often, contractors don’t have the automated tools to easily track this information.  Here’s what we recommended:    

First, our electrical contractor built three job type code’s in COBRA – TM, CN & LV.  This made it easy to review all jobs by job sector….the material, labor and direct costs, charges and profits.  Then he went onto the next job sector and did the same review.  The old saying, the “devil is in the details” rang true as our electrical contractor discovered a number of surprises during his investigation.  As he told us, “without COBRA’s integrated program and Job Cost reporting it would have been too time consuming and cumbersome to uncover which jobs were making us money and which ones weren’t”. 

COBRA’S Job Type codes automate the breakout of a contractors accounting as it tracks your costs and sales by Job Type.   This is the first step in establishing the correct overhead % for the business. 

Never combine your labor burdens and overhead together.   Generic Accounting programs often don’t have the built-in features to easily track labor burden and overhead.   Combining these together will only muddy up the water, preventing the contractor from understanding what jobs are truly costing the company. 

And finally…….determining which jobs require different overhead % is critical. A COBRA business professional is available to discuss this with you so can achieve the best results for your business. 

 

 

One Response to “Understanding Overhead Rates for Contractors”

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