Identifying Overhead Costs
Identifying overhead requires, first of all, tracking it in your accounting records. From your accounts, you can pick up your disbursements for both fixed and variable overhead. But like direct costs, overhead includes slippery items – in particular three costs that won’t necessarily show up in your accounting records because you don’t write a check for them. They include:
- Rent for space used by your company but not paid for out of your company accounts, such as a room for an office or shop space in your home
- Cost of capital, the money you are losing by having your operating capital tied up in a bank account that is earning ½ percent instead of substantially more in a money market account or index fund
- Your salary, for running your company
Who Sells What You Want
To determine your overhead accurately, you must figure and add in these slippery items. Determining rent and cost of capital is pretty easy – ask around and you will quickly learn what is fair market rent for the space used by your company and what you could earn on the cash tied up in your operating account.
Identifying your salary for running your company (not to be confused with your pay for hands-on work, which is a direct cost of construction) is trickier. At the outset of your career as a builder, you may not be very good at company management. To draw a bead on an appropriate starting salary, ask yourself this question: “How much would I be willing to pay someone with my business and management skills to run a construction company?”
One way to set your starting salary is to estimate the number of hours per week you spend on general, administrative, and marketing tasks (including estimating and everything else that goes into running your outfit and getting jobs). Multiply the total hours times your cost for a beginning carpenter’s apprentice – for example, 20 hours per week x $11. The result, $220 per week, becomes your starting salary as chief executive of your construction company. That is pretty low pay for a CEO. But like your carpentry apprentice, you are just learning your job. Because your salary is low, you won’t have to add much to your bids to cover it. That is helpful at the outset of your career when your bids will likely need to be tight for you to get work. On the other hand, you will be establishing the habit of charging a salary for yourself in your overhead markup, an important step.
In time your CEO skills will sharpen. You will deserve raises. If you are establishing a company with a reputation for integrity and reliability, you will be able to provide for those raises in your bids and still get to work.
Portions of this content was sourced and/or published in:
- Barbara J. Jackson, Construction Management Jumpstart