The first thing is, we ask those present to bid a job. We give them all of the costs of materials, equipment, subcontractors, etc. We also give them the number of hours, both in the shop and outside, which will be required. What we don’t give them is the hourly rate, the overhead factor, or the profit to include. We then tally the results but don’t show them yet. The spread in the bids is typically such that the highest bid is more than two times the lowest. The reason I say this exercise should be given to all employees is because I have made presentations to company owners and given them the same basic information we give the apprentices, and their bid spreads from high to low are virtually the same as those of the apprentices. By the way, that is a little scary.

The next steps are the most important. We go through every item that a contractor must pay for each hourly employee. We start with basic wage and vacation, then we add all of the benefits the contractor pays for: health insurance, pensions and/or 401(k) accounts, and anything beyond that. Then we get into other costs that we pay for based on the employee’s hours. The first is FICA (Social Security). They know we take out something from their checks, but very few realize we have to match it with another 7.65 percent. Then we get into Workers’ Compensation and Unemployment Insurance. With these two, we emphasize that contractors have different rates based on their experience. When we sum all of these up, we have already gotten their attention. Since they don’t see all of these additional costs, they don’t realize they exist.

The next eye-opener is overhead. We use a hypothetical contractor and list all of the items that are typically considered to be overhead costs. Our definition of overhead is any cost that cannot be directly attributed to a specific job. We add them up and divide by the estimated number of hours our shop and field people will work during a year. When we divide the hours into the total overhead number, I assure you, there are always a number of amazed faces. We do the same thing for shop overhead. For our most recent class, regular overhead was around $40.00 per hour, with shop overhead being an additional $12.00 per shop hour.

We next return to the numbers from our hypothetical job and work up what the total costs would be before profit. We let the class decide the amount of profit they wish to make, reminding them that the more profit, the less likely they will be to get the job. We then reveal their bids compared to what the bid should have been to make the profit percentage they desired. In most classes, about 50 percent of the bids are lower than actual costs. We follow that with a lesson on why so many contractors fail. That lesson will be for a future column.

I encourage you to prepare and put on a presentation showing these items to your people. You will be amazed at how little they know about the real costs of running your business.

Publication date: 5/20/2019

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