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I am not a fan of breaking out and displaying your company’s overhead and profit in estimates and proposals. Back in August of 2021 I told this little story to illustrate one of the reasons why…

I am not a fan of breaking out and displaying your company’s overhead and profit in estimates and proposals. Back in August of 2021 I told this little story to illustrate one of the reasons why…

I used to purchase a lot of company tools at The Tool Nut since they were just a 15 minute drive from where I lived in Katonah NY. Now I live in Avon CT and the next town over the ridge from me is West Hartford and they have Costal Tool also only 15 minutes away. I’m looking for good portable job site table saw. What is an acceptable amount of Overhead and Profit for them to charge me on tool purchases? Does anyone happen to recall how much Overhead and Profit The Tool Nut charges?

On another note a friend of mine is taking her dog to the vet to get and estimate for knee surgery and was asking me for advice. What should I tell her are typical numbers you would see in a veterinary estimate for Overhead and Profit?

Likewise I have decided I want to get dental implants instead of dentures to replace my ground down and beat up old teeth. When I get an estimate what should I look for in terms of their Overhead and Profit?

All this makes me think as builders and remodelers what can we learn from these other industries about how they communicate and display their Overhead and Profit?

(…hint: they don’t)

Why Don’t Other Companies in Other Industries Breakout Overhead & Profit In Their Proposals Estimates & Quotes?

Primarily I think the reason is it serves no useful or constructive purpose to the potential buyer in their evaluation process of is this product or service worth XXX amount of dollars to me? 99% of us don’t ever say I am not buying this becuase I think they are charging me too much for Overhead & Profit.

By breaking out Overhead & Profit figures we are introducing something most people just really don’t think about day to day.What is to correct or appropiate number for Overhead & Profit for a Emergency Veteninary Hospital? Is it the same as the Overhead and Profit for the Pizza restuaraunt? What about the housewares store? We don’t know so why introduce something that then needs explaining rationalization and justification?

I am reminded of some thing I once heard from another contractor where he said:

“I recently had a dentist demand to see our invoices from our suppliers and trade partners (He was not on a cost plus contract)

 

I told him I’d show him those if he’d do some dental work for me and show me his vendor’s invoices and payroll information for his staff.

 

He didn’t ask again.”

So Why Unlike Other Industries Do Some Building & Remodeling Contractors Breakout Overhead & Profit?

I would suggest that displaying Overhead & Profit to our clients is an artifact of our Neanderthal pasts as builders and remodelers when we first started using spreadsheet software to add up our costs and then at the bottom of the sheet we would add a percentage for Overhead and again add a percentage for profit because we didn’t know how to write the formulas in Excel that would apply those percentage on a line item level.

In the example below you see the typical Estimate Form that a contractor might get from New England Business Forms (NEBs) or in this case Deluxe Business Forms that a contractor could fill out on a clip board with their Direct Job Cost data and then add their desired Fixed Overhead & Net Profit numbers to the sum of the proposed project’s Direct Job Costs.

As personal computers came on to the scene starting in the mid to late 1970s and we started to use digital spreadsheet program like VisiCalc, Lotus 1-2-3, and then MS Excel we ended up with the same forms only digitized and never really thought about “why are we doing it this way?”.

NEB Paper Estimate Worksheet

So I would suggest that displaying Overhead & Profit to our clients is an artifact of our Neanderthal pasts as builders and remodelers when we first started using spreadsheet software to add up our costs and then at the bottom of the sheet we would add a percentage for Overhead and again add a percentage for profit because we didn’t know how to write the formulas in Excel that would apply those percentage on a line item level.

There were a few contractors who recognized this problem and built their spreadsheets using formulas that would take the individual estimate line Items and apply the desired Markups on the Line Item Level so that Prices (what the customer would pay) were displayed rather than their raw production Costs (aka Cost Elements).

What NEVER EVER HAPPENED was that one upon a time everyone was displaying fully marked up Retail Street PRICES when one day someone said I have a better idea. Let’s display Raw Base Costs along with what were charging for our Overhead and Profit.

If breaking out and displaying Overhead and Profit is such a great idea why aren’t other industries doing it?

So What’s The Problem With Breaking Out and Displaying Overhead & Profit?

In a recent discussion on this a commenter said:

“Adding a line item for overhead and profit (and design and project management) just provides a better breakdown for clients and makes the total cost more digestible.”

And I thought how does adding line for Overhead & Profit make it more digestible?

Lets say I have an $80,000 project with 80 Estimate Line Items. The average Estimate Line Item is $625.00 but there are some Estimate Line Items that COST  as low as $103.12 and the highest Estimate Line Item COSTS  $3,625.00 or 4.52% of the Total Project PRICE.

Now all of a sudden you have a Line Item for Overhead that is a whopping $20,000 which is 25% of the Total Project PRICE and then there is a line Item for Profit of $10,000 which is 12.5% of the Total Project PRICE. Those line items for Overhead & Profit are then the most expensive line items in the project with Overhead costing 3 times as much as the most expensive Direct Job Cost line Item!

How does a prospective client not choke on those two huge line items?

And the problem get worse as the project scope increases. Lets say you project is a $160,000 project instead of just $80.000? The low average high Estimate Line Items are still roughly in the same dollar ranges ($103.12 low to $3,625 high) but you now have to rationalize and explain a $40,000 Overhead figure along with $20,000 for Profit! 

The Psychology of Marketing specialist Nick Kolenda has written about this in and article Customers Evaluate Prices Through Comparisons. There is a ton of research work on this and we have proably all heard about the Framing Effect (Price Framing Literature: Past, Present, and Future; Tripathi & Pandey 2017) .

This is a terrible frame for a potential customer to have to deal with that the salesperson then has to work around. The potentail customer may think the widgets at  $3,625 are great and really worth it but they’ll then ask is the $40,000 for Overhead such a great value? Is it worth $40,000?

What happens when you DONT break out Overhead & Profit?

What happens when you DONT break out Overhead & Profit you then display each Estimate Line Item as a Marked Up PRICE so the low cost item of $103.12 displays as a $165 Retail Street PRICE or just %0.21 of the Total Project PRICE. The high cost item of $3,625 displays as $5,800 or %7.25 of the Total Project PRICE etc. and there are no separate line items for Overhead & Profit, they are built into every estimate line item price.

And with respect too choking on the huge estimate line items for Overhead and Profit while I don’t think there is anyway to breakup the Profit number into more edible digestible pieces in the spirit of this transparency thing you  hear about you can always breakout the numbers that make up your overhead such as:

  • this much for Office Rent
  • this much for Office Equipment
  • this much for Office Salaries
  • this much for the Owners Salary
  • this much for  Insurance
  • this much for Capital Equipment
  • this much for Vehicles
  • this much Tooling
  • this much for the IT Stack
  • this much for the Storage Yard Rent
  • this much for Business Taxes
  • and etc etc.

And there is nothing secretive about applying Overhead & Profit on the line item level and I would argue that taking the $2175 in Overhead & Profit that are being driven by the Line Item that costs $3,625 and hiding it inside the whopping Overhead & Profit figures is deceptive.

Let say as the prospective client I then say “Ya know I really don’t want the XYZ Widget at a cost $3,625, Lets drop them from the project. How much does that reduce the Overhead & Profit figures?”

…Or maybe as a prospective client I then say “Ya know I really had no idea the XYZ Widgets were so inexpensive. Lets do 30 more of them. How much does that increase the Overhead & Profit figures?”

And if a contractor so chooses they can also display both the COSTS and the marked up PRICES on a line item basis. My software certainly allows that option.

 

Use Retail Pricing at Every Line

As I have written before:

—“In my businesses, we will give breakdowns of costs to our prospective clients but we never breakout our Overhead and Profit and display it as these big huge hunks of cash we’ve added to our Project Costs.

Defensive Estimating Protecting Your Profits by William AsdalWe’ve always done as William Asdal recommends in his excellent book Defensive Estimating: Protecting Your Profit….we “Use Retail Pricing at Every Line“.

Breaking out overhead & profit doesn’t help clients make the decisions they need to make in planning their projects. It only confuses and obfuscates the issues.

When you go into an Apple store you don’t get a breakdown of the materials, labor, overhead and profit that Apple calculates into the price of their products. You look at the machine and decide one way or another whether that 21.5-inch iMac with Retina 4K display is worth $1299.

When I look to outfit a vehicle with storage boxes and a lumber rack I don’t get a quote that details the provider’s Costs for those items plus a breakout of what they are charging me for their Overhead and Profit. They give me Retail Pricing at Every Line for the features I want so I can make an easy decision about what my final truck outfitting project will cost.”—

While I think it probably happened in my decades of doing this I struggle to think of incident of where I was asked what my markup was because I use RETAIL PRICING. Breaking out Overhead & Profit is an antique artifact of the industry’s past.

The Good News Is Most Contractors Today Say No To Breaking Out And Showing Overhead And Profit In Estimates Proposals And Quotes

i have conducted several polls from time to time over the years to find where contractors generally stand on this and for the most part most contractor don’t breakout Overhead & Profit in their estimates.

This particular poll below was take in thhe now defunct JLC Forums all the way back in February of 2005. (link)

Should you show your Overhead & Profit in your estimates? JLC Poll

Some of the comments from back then were:

I can’t see breaking it out for the simple reason you then need to explain why it is what it is. The buyer wants you to have insurance, yet they think your previous customers already paid for it, which is why you have it and the other guy doesn’t. This of course is just one of those costs which make up the OH or P number. The more you break out, the more trouble it is when they decide to remove selected items from the total bid expecting you to also adjust your OH&P. Now, if its a $25000 item, you may adjust; if its a $2500 item I’m not.

This poll was from the Private Facebook Group Building Knowledge in July of 2022 and the No Don’t Break It Out positin dominated with 85% saying no to the idea.

Building Knowledge Poll: Should you show your Overhead & Profit in your estimates?

I do have a friend and rather prominent well know collegue (in fact a couple of them) who advocate and even teach displaying of Overhead & Profit in a program they teach although he (they) have never been able to explain to me why we as builders and remodelers should display our Overhead & Profit when there are no other industries I can think of where that is done. 

Another Set Of Reasons Why You Should Not Breakout You Overhead And Profit…

One of those things I want to include is some further reasoning for why I think Activity Based Pricing should be applied on an hourly level and not on a weekly level or company level. Back in the early 2000s I wrote a blog article entitled: Pricing for ‘Perceived Value’ and using that as an example project here is my reasoning.

When we did that project there were three levels of skilled work involved. There was basic finish carpentry being performed by us throuhout the house e.g. the installation of trim hanging doors etc. There was also higher level of finish carpentry being performed in the fabrication of the level but curved sections of railing which required shop euipment like two bandsaws. And then there was yet another Elite Level of Finish Carpentry being performed with the hand fabricaction and installation of the Wreath Turn Sections of the railing.

I don’t remember the exact numbers but let’s say our Standard Finish Carpenters back then (year 2000) worked with a billing rate of $55 per hour. They had their standard tools that everyone in the company was required to have. The High Level Finish Carpenters will being paid the same base rate worked with a higher billing rate of lets say $70 per hour because they were using shop based tools to fabricate the curved railing sections like our Scheer Handrail Router and a couple of bandsaws etc. And then there was my billing rate of $85 which was reflected a higher base pay rate but the same markup rate for shop tooling that the High Level Finish Carpenters. Plus if I recall correctly we also had what we called a PA or Production Assistant who was a smart young kid who generally filled the role of a Helper when he could but really ran all the supply related errands for the project. He was probably billed at maybe be $45 per hour.

If the Capacity Based Markups being applied to the basic employee costs back then looked like this:

  • Production Assistant — 1.95
  • Standard Finish Carpenter — 1.95
  • High Level Finish Carpenter (shop) — 2.12
  • Elite Level of Finish Carpentry — 2.25

Then there is no way you can get accurate pricing applying a markup to the sum of the basic cost total. What would the markup be? Shoudl the number be the low markup of 1.95 or the high one of 2.25. Or shoudl it be the average of the different markups? That doesn’t work becuase the carpenter with 2.25 markup attached to his work was only there for about 19% of all the labor hours the project took. Or should it be a weighted average based on the percentage of the total labor hours each trade lelve performed? That’s way to complicated and involves too much guesswork.

A company is better off figuring out the labor hours for each task and then applying the appropriate markup to each task on a line item basis. Just apply the specific markups to the labor on a Estimate Line Item basis and display the computed the Retail Prices for the line items.

I remember back in 2013 reading Michael Anschel’s Remodeling Magazine article Profit in the Modern World years ago and was encouraged when I read:

Throw out the 1.67 markup and replace it with six categories for markup:

  1. Material management
  2. Material procurement
  3. Subcontractor management
  4. Labor management
  5. General administration
  6. Contractor’s profit

Make your markup have meaning.

I disagreed with the categories but I thought at the time he was thinking in the right direction. My thinking is categories with differing markups are more about company divisions with different Overhead Costs. e.g the Design Division or Department has a different set of Overhead Costs than the General Carpentry Division or Department, The design has big screen computer and design software etc while the General Carpentry Division had pickup trucks with racks full of ladders and staging equipment portable tools like table saws and compound miter saws etc. The Excavation Division (provided that kind of work is in-house) would have another set of Overhead Costs specific to them and so on.

In retrospect now since Michael advocates the displaying of Overhead & Profit as their own line items I am not at all sure about what he meant.

And the truth be told the markup for the work I did on fabricating that  Wreath Turn Sections of the railing turned out to be more like 5.64 given the completely arbitrary value pricing I applied for the wreath turns based on their value so you should compute the Retail Prices and not display the raw costs at all to the potential client. They don’t need to know what you are adding on for Overhead & Profit to make a decision as to whether or not the items (the wreath turns) are worth the Price.

The only way you can add that extra value 5.64 markup is on a estimate line item basis for those two fabrications.

And another way to think about it is this…your company does excavation. You have one guy whose equipment consists of a shovel and another guy who equipment consists of an excavator. Should you use the same average markup rate for those two very different employees? The Variable Overhead costs they carry for their different task positions is very very different.

If You Feel You Must Display Your Overhead & Profit I Think There I A Better Way

I performed a small simple customization to my own 360Difference Filemaker based software for displaying Overhead & Profit on a Line Item basis if for some reason a client questions and asks for you for it.

You click on the Estimate Line Item Information button and under the Price Cost Breakdown in the popup window that appears you see how Overhead & Profit was applied on that particular line item.

A 360 Difference Estimating Line Items screenshot

Another Blog Article I Wrote On Displaying Overhead & Profit Numbers

A Look At The ProRemodeler “The Big Reveal” Article

A Look At The ProRemodeler “The Big Reveal” Article

What Do You Think? Vote In My Survey Monkey Poll On This Topic.

Create your own user feedback survey

Are You Looking For Training on Estimating and/or Markup & Pricing. I Have Online Seminar Programs For Both.

The CapacityActivity Based Costing & Pricing Seminar:

And I have a similar type online On Demand program for Estimating I will be detailing soon.

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J. Jerrald Hayes
Primus Inter Pares at Paradigm Projects, Ltd.
I am an architectural woodworker and general contractor turned IT, Business and Project Management consultant, software developer wannabe senior division triathlete and ski racer, Yankee fan and founder of ParadigmProjects.com, 360 Difference Mac4Construction.com,iOS4Construction.com and now TheBuildingAndRemodelingWiki.com too.
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