Cost Accounting-
How much do we need to charge to
make a profit when we send out a
crew?
Hourly Rates
• Do you know your hourly rate?
– If so…
• Do you publish your rate?
– If so…
• Can you explain your hourly rate to a
customer?
– Or…
• Would it be better to give total price for
service?
Hourly Rate or Price per Job?
• When the customer needs a solid number
• When you have inspected the job and offer a bid
• When other people will influence the buying
decision (Accounting, Upper Management,
etc.)
• When paying employees a percentage of total
–Price per job
Hourly Rate or Price per Job?
• Customer requests additional work while the
crew is on the job
• Crew must travel to an unseen job and
complete the work
• Crew is on a multi-day run, and potential new
customer approaches crew leader to get a
price to clean their hood.
– Hourly rate should be considered.
Hourly Rate
• When bidding a job,
– Unique materials required
– Hours required per team
– Added safety margin.
WE MUST KNOW WHAT AN HOUR
IS WORTH NO MATTER HOW WE
BREAK IT DOWN
$
How do we spend our customer’s
money?
• Equipment
• Labor
• Overhead
• Profit
Separate Issue
Parts sold for profit:
While this is a great way to adjust your
profitability, simplicity and brevity requires
separation.
This presentation deals with labor only.
. Equipment Replacement Costs
1. All companies have some type of equipment.
EQUIPMENT
2. Someday each and every piece of equipment will
wear out and need to be replaced.
Labor
3. Cost of replacing equipment is a very REAL cost
Overhead of doing business and a very LARGE cost of doing
business just like labor and overhead.
Profit Question: How will you pay for it?
You can choose to ignore it!
(for a little while)
Calculation of equipment replacement
costs
Purchased a nearly new service truck in 2006 for $22,000 and it is
estimated to last another three (3) years.
Cost of a new truck 3 years from
now = $ 24,000
Calculation:
Number of years till replacement = 3 years
Cost of equipment three years from today = $24,000
Annual Equipment Replacement Cost
= $24,000 / 3 years
= $ 8,000 / year
Equipment
Equipment Replacement Costs
Equipment Years Till Estimated New Average Annual
2003 Ford F-250 1 $ 13,000 $ 13,000
2003 Ford E-550 4 36,000 9,000
2008 Ford F350 4 24,000 6,000
(3)2006 Prs. Wshr. 2 12,000 6,000
Business Plan:
Additional Van 2 38,000 19,000
New Computers 3 4,500 1,500
Total Annual Equipment Replacement Cost = $54,500 (A)
Equipment
How much per hour does our
equipment cost?
Annual cost of equipment replacement
__________________________________
Annual amount of billable hours
• What are billable hours?
• How many billable hours in a year?
Equipment
Field Labor - (Define Terms)
Field Labor:
These are the employees who are actually doing the work
Billable Time:
Time on the job that can be billed to the customer
Non-Billable Time:
These are the hours that the company pays FIELD LABOR for but CANNOT
charge directly to the customer (shop time, vacation pay, travel time, vehicle
maintenance, etc.)
Non-Billable Time is Not
Equipment Necessarily Non-Productive Time
What is the Service Industry Average?
•70% Billable
•30% Non-Billable
Equipment
How Do Equipment Replacement
Costs Relate to Dollars/Hours
Charged The Customer?
Example:
We have three teams of techs in a Northern climate who are able to
charge an average of 22.8 hours a week to the customer.
• Total hours charged to the customer for the year:
= 3 teams x 22.8 hours/week x 52 weeks
= 3556 billable hours/year
• Total equipment replacement costs for the year:
= $ 54,500
Equipment
How Do Equipment Replacement
Costs Relate to Dollars/Hours
Charged The Customer?
Example: (continued)
Equivalent hourly rate:
=$54,500/3556hours
= $ 15.33 / hour
Equipment
How do we spend our customer’s
money?
Per year Per hour
Equipment $54,500 $15.33
• Labor
• Overhead
• Profit
.
Actual Labor Costs
1. All companies must pay their employees When they are
EQUIPMENT working.
2. No matter efficient, non-billable time is a part of each
employee’s compensation.
Labor
3. Cost of non-billable time is a very REAL cost
of doing business and a very LARGE cost of doing
Overhead
business just like equipment replacement and overhead.
Question: How will you pay for it?
Profit You can choose to ignore it!
(for a little while)
Model Employee
Assume the “model” employee has a minimum of
one hour a day that is non-billable:
= 1 hour / day x 47 working weeks
= 235 hours per year (11.3%)
Labor
Model Employee’s
Non-Billable Time
Think About:
Model employee’s non-billable time: •Callbacks
3.8% --------------------- Vacation •Company Meetings
3.5% --------------------- Holidays •No-Show Calls
1.9% --------------------- Sick Pay •“Make Work” Jobs Around
11.3% -------------------- ONE hour a day the Office
20.5% Non-Billable Time •Vehicle maintenance
•Equipment maintenance
Labor
Calculation Of Field Labor Rate
Look at NEXT year realistically:
1. Biggest error most companies make is over
estimating the number of billable hours that are
charged to the customer.
2. Be Conservative - underestimate
Labor
Team # Rate/Hr Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Hrs Total $
Tim/Don 43 120 140 160 160 160 160 160 160 160 160 150 120 1810 77830
Mike/Bruce 36 100 120 140 160 160 150 150 160 160 160 130 100 1690 60840
Ken/Cyrus 35 90 90 140 160 160 140 140 150 160 160 100 90 1580 55300
0 0
0 0
Total Hrs Pd 310 350 440 480 480 450 450 470 480 480 380 310 5080 193970
Est. Non-Billable Hrs 1524 58186
Est. Billable Hrs
(chg'd) 3556 135,768
Total Payroll before taxes= Cost of Non-billable time: =Avg. hourly rate x
$193,970
Avg. Hourly rate=Gross Wages/Gross hours
non-billable hours = $58,186
(This represents 30% of our payroll before taxes)
=$38.18/hour before taxes
Labor
Worksheet for Field Labor
Team # Rate/Hr Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Hrs Total $
0 0
0 0
0 0
0 0
0 0
Total Hrs Pd 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Est. Non-Billable Hrs (30%) 0
Est. Billable Hrs (chg'd) 0
Below numbers are pre-tax, and pre benefit projected totals.
Total Payroll Total cost of Non-Billable Total cost of Billable Hours
$ _________ Hours $_________(30%) $____________ (70%)
Average Hourly Rate (Gross Wages/Gross Hours) = $_____________/hour
Company Matching Tax Rate
• FICA………………………………. Add 7.65%
• FUTA………………………………Add 0.8%
• Unemployment ……………..Add 2%
• Worker’s Comp. ……………..Add 7%
(Unemployment /Work comp. rates vary greatly between companies to get an
accurate multiplier you must use your numbers)
Sole Proprietors may not need to pay FUTA/Work Comp., or unemployment
but likely will need to double your FICA to 15.3%
Labor
Actual Field Labor
A. Billable Hours (from previous chart) 3556
B. Next Year Labor Total $ 193,970
C. Taxes & Work Comp Multiplier x 17.45%
(your numbers will vary)
D. Additional Labor Expense = $33,847
E. Adjusted Labor expense (B + D)= $227,817
F. Hourly Rate(E /A )=$ 64.07 per /hr
(adjusted labor$) (Billable Hours)
(For tracking purposes calculate cost of non-billable hours by multiplying figure
from previous chart by C above. = $ 68,340)
Labor
Actual Field Labor Worksheet
A. Billable Hours (from previous chart) ______
B. Next Year Labor Total $______________
C. Taxes & Work Comp Multiplier X____.__ %*
D. Additional Labor Expense = $_________
E. Adjusted Labor expense (B + D)= $_________
F. Hourly Rate(E /A )=$ ___.__ per /hr
(adjusted labor$) (Billable Hours)
(For tracking purposes calculate cost of non-billable hours by multiplying figure from
previous chart by C above. = $ _________)
*Accuracy requires that you use accurate figures that apply directly to your company
Ways To Reduce Non-Billable
Time
• Physically track billable
and non-billable time
• Pay a percent of job or
pay on book hours
• Set up bonus system
• ProfitMaxx software
(part of Service
Manger’s University)
• GPS systems
Labor
Labor Costs
• Total adjusted field labor costs $227,817
• Total billable hours 3556
$227,817 / 3556 hours=$64.07
How do we spend our customer’s
money?
Per year Per hour
• Equipment $54,500 $15.33
Labor $227,817 $64.07
• Overhead
• Profit
Overhead
Overhead = Cost of doing business
Fixed Overhead
Variable Overhead
Why is it important to know what your
overhead costs are?
1. It is impossible to set an accurate hourly rate
2. If you want to negotiate on a job, how much can
you lower your price and still cover costs?
Overhead
What Do We Know About
Estimating?
• Estimate field labor hours (sales) ?
conservatively.
• Estimate overhead expenses on
the high side.
This is where we will pull together
all of the costs of doing business!
Overhead
Fixed Overhead
Annual Dollars
Administrative Salaries/Benefits:
Owner’s Salary --------------------------------- $ 65,000
Secretary/Clerical ----------------------------- 12,000
Dispatcher/Sales___________________ 18,000
Advertising --------------------------------------- 8,000
Health Insurance ------------------------------- 5,400
All Liability ---------------------------------------- 11,000
Life Insurance ----------------------------------- 1,000
Other Insurance -------------------------------- 4,000
Overhead
Fixed Overhead (continued)
Annual Dollars
Taxes/Contributions:
Inventory Tax ----------------------------------- ______
Property Tax ----------------------------------- 1,400
Contributions ---------------------------------- 3,000
Retirement:
Owner’s Retirement -------------------------- 4,200
Employee Plans ------------------------------- 1,200
Overhead
Fixed Overhead (continued)
Annual Dollars
Building/Utilities:
Utilities ------------------------------------------- 3,600
Rent ---------------------------------------------- 12,000
Building Repairs ------------------------------- 2,000
Dues/Subscriptions:
Trade Association Dues --------------------- 1,000
Subscriptions ----------------------------------- 240
Overhead
Fixed Overhead
Annual Dollars
Office Expenses:
Telephone -------------------------------------- $ 4,500
Office Supplies --------------------------------- 1,500
Postage ----------------------------------------- 800
Bad Debt ---------------------------------------- 5,000
Credit Card Expense -------------------------
Professional Fees:
Accounting --------------------------------------- 4,000
Legal ---------------------------------------------- ______
Consulting --------------------------------------- ______
Overhead
Fixed Overhead (continued)
Annual Dollars
Travel/Entertainment:
Conferences ----------------------------------- $ 6,000
Meals --------------------------------------------- 2,000
Travel – General ------------------------------ 3,000
Loans/Leases:
Loan #1 ----------------------------------------- 6,000
Loan #2 ----------------------------------------- 6,900
Loan #3 ----------------------------------------- 10,000
Lease #1 ----------------------------------------- 1,500
Fixed Overhead total-------------------------- $ 188,240
Overhead
FIXED OVERHEAD EXPENSES ANNUAL COST
Owner's Salary
Secretary/Clerical
Dispatcher/Sales
Advertising
Health Insurance
All Liability Insurance
Life Insurance
Other Insurance
All Other Admin/Ins Expenses
Inventory Tax
Property Tax
All Other Taxes
Charitable Contributions
Owner's Retirement
Employee Plans
All Other Contributions
Utilities
Rent
Building Repairs
Trade Assoc. Dues
Subscriptions
Telephone
Office Supplies
Postage/Freight
Bad Debt
Credit Card Expenses
Accounting
Legal
Consulting
Conferences
Meals
Travel-General
Loans #1
Loan#2
Lease #1
Total Fixed Overhead 0
Variable Overhead
Annual Dollars
Small Tools and Equipment:
Small Tools Used On Job ------------------ 1,200
Supplies Used On Job ---------------------- 8,000
Fuel ---------------------------------------------- 48,000
Vehicle maintenance ------------------------ 5,000
Total -------------------------------------------- $62,200
Overhead
Variable Overhead
Small Tools and Equipment: Annual Dollars
Small Tools Used On Job ------------------ 1,200
Supplies Used On Job ---------------------- 8,000
Fuel ---------------------------------------------- 48,000
Vehicle maintenance ------------------------ 5,000
Total -------------------------------------------- $62,200
Overhead
Variable Overhead
Small Tools and Equipment: Annual Cost
Small Tools Used On Job ------------------ $_______
Supplies Used On Job ---------------------- $_______
Fuel ---------------------------------------------- $_______
Vehicle maintenance ------------------------ $_______
Absolutely Every Cost Not Yet Added In $_______
Total -------------------------------------------- $_________
*Any cost of doing business not added to calculation by this point will give you a false hourly rate, directly
and negatively affecting your profit!! (If you’re not sure about an anticipated additional cost, ADD IT IN!)
Overhead
Overhead Total
• Fixed Overhead Total $188,240
• Variable Overhead Total $ 62,200
• Combined Overhead Total $250,440
Any expenses not yet taken into account must be added in by NOW or
finished answer will be incomplete, and you will not be charging enough
$/hour
Overhead
Fixed Overhead
• Fixed Overhead Total $_______
• Variable Overhead Total $ ______
• Combined Overhead Total $_______
Any expenses not yet taken into account must be added in by NOW or
finished answer will be incomplete, and you will not be charging enough
$/hour
Overhead
Hourly Cost of Overhead
• Total projected annual overhead $250,440
• Total projected annual billable hours 3556
$250,440/3556 = $70.43
Hourly Cost of Overhead
A. Total projected annual overhead $______
B. Total projected annual billable hours______
A/B = $Hourly cost of overhead
How do we spend our customer’s
money?
Per year Per hour
• Equipment $54,500 $15.33
• Labor $227,817 $64.07
Overhead $250,440 $70.43
• Profit
Breakeven Rate
Per year Per hour
• Equipment $54,500 $15.33
• Labor $227,817 $64.07
• Overhead $250,440 $70.43
$149.83
This is the COST to our company for each billable hour of service provided
Profit
What Is Your Company’s Goal for
Net Profit?
“Net Profit” is
Profit after all materials, labor and overhead costs are
paid.
Normal Range - 5% to 15%
“Profit is
important!”
Profit
Company for Sale?
Industry Profit Percentages
Industry Average:
3% - 5%
Well run company
New construction: 1% - 4%
Retro-fit: 7% - 10%
Service: 15% - 20%
Let’s go for 15%
Profit
Getting Past Our Breakeven Rate
Per year Per hour
• Equipment $54,500 $15.33
• Labor $227,817 $64.07
• Overhead $250,440 $70.43
$149.83
To accurately compile the necessary figure for a 15% net profit margin,
we divide our breakeven rate by the reciprocal of the desired net profit
percentage.
Profit
From Breakeven to Profit
If our Billable hours in the field cost us $149.83/hr. and we want a 15% net
profit we follow below formula
Hourly Rate:
= Breakeven Rate / Reciprocal for Companies desired net profit
Divide $149.83
By .85
=$176.27 / billable hour per
Profit
team
Getting Past Our Breakeven Rate
Per year Per hour
• Equipment $54,500 $15.33
• Labor $227,817 $64.07
• Overhead $250,440 $70.43
Profit $94,020 $26.44
Hourly rate reflecting a 15% net profit= $176.27
per Billable Hour
Where does the Net Profit Go?
• Large share will go to taxes
• Remainder can be used for
– Growing the business
– Improvement of Employee benefit package
– Capital Improvements within the company
– Just maybe there will be enough for some
bonuses to be paid to owners, managers, and
employees.
DISCLAIMER
This Presentation was taken from information largely provided by Tom Grandy
of Grandy and Associates. It’s content is intended to expose interested small
business owners to a method of finding true costs of doing business. There
are complete programs available to accurately find and update true costs and
profits through Grandy and Associates, and printed flyers are available.
Kevin Pearson of Grime Stoppers Inc. is not presently affiliated with Grandy
and Associates, as a paid agent or spokesman, the information provided by Mr.
Grandy was done so as a kindness to Grime Stoppers Inc., and is intended
solely for this individual presentation to the International Kitchen Exhaust
Cleaning Association.
While we hope that you’ve found this information to be useful, any and all
methods used from this presentation are done so at the sole discretion of the
individual person using this information. Neither Grandy and Associates nor
Kevin Pearson / Grime Stoppers Inc. are liable for application of the contents
of this presentation. Use of common sense is among the greatest of
protections against stupid mistakes. Please use your head.
If you’re serious about
making a profit, please
keep in mind that this
has only been a glimpse
of what’s needed to
accurately reach that
goal. Please consider
Grandy and Associates
Program:
“Product and
Service Pricing
for a Profit”
(800) 432-7963