Just one of the many reasons I prefer figuring OPPH Overhead & Profit Per Hour over the practice of figuring a weekly charge for Overhead & Profit as a fair number of contractors I know in Kyle Hunt’s Remodeler’s Community Group on Facebook instead of figuring Sales Volume per Person, Gross Profit per Person and even NetProfit per person which are valuable metrics that are lost in the ‘Weekly Charge For Overhead & Profit Method’.
My friend David Gerstel also seems to prefer a weekly charge for Overhead & Profit too according to what he wrote in a recent article for JLC entitled: A Smarter Way of Charging for Overhead and Profit (Feb 2023). While I haven’t spoken to him about it I think David is limiting his thinking to being a builder or remodeler who just handles projects that take weeks or months instead of contractors who take on smaller projects or tasks that can be done in days or sometimes even hours. I do appreciate how he gives me credit for the quote I stole from the economist John Maynard Keynes and use all the time of “The idea is to be mostly correct rather than absolutely wrong.” and I do think the ‘Weekly Charge For Overhead & Profit Method’ is okay some of the time so I can’t and wont characterize it as being “absolutely wrong”, it’s still mostly correct.
I also appreciate where David writes:
Jerrald Hayes raises another interesting case: using CDM [David’s new acronym for what I call Activity/Capacity Based Markup] for a company that has multiple divisions—design, general contracting, cabinetwork, and home repairs. Hayes, whose take on CDM is closely parallel to but not identical to my own, offers a solution at his thought-provoking website, paradigmprojects.com. My own inclination would be to separately account for overhead for the various divisions—and where overhead costs spread across several divisions, apportion it among them as accurately as practicable. Then the appropriate variation of CDM could be selected for each division. For the general contracting division, overhead could be recaptured and profit assigned on the basis of capacity and of the duration of each project. For design, and for the handyman division as well, it might be best to include overhead and profit in a charge for each hour billed. And so on.
And with that again he is mostly correct in interpreting what I think.
I am thinking back to a few years ago when the landlord for my shop space ran a fence, gate, and ironworking company and different cohorts/ groups of field employees has different levels of equipment overhead and things like insurance assigned to them so a one-size-fits-all ‘Weekly Charge For Overhead & Profit Method’ would be terribly inaccurate and it also didn’t allow for multiple projects with different crew deployments to take place concurrently and provide accurate project pricing.
For instance he had several employees that each individually drove a company truck equipped with things like a generator, a welder, and sometimes a small crane as well as other specialty tools.
And there was another set or cohort of laborers who could all pile into a company car four or five at a time and drive to a jobsite and need a set of post hole tools rakes, shovels, pry-bars, etc. so the overhead cost assigned to them was very different per person that the other set employees driving the bigger vehicles with all the powered equipment.
Back in 1985 in his book Professional Remodeling Management Walt Stoeppelwerth wrote:
Volume per Carpenter
Many companies try to keep track of the volume of business produced per carpenter on the payroll. Then they can project the volume they can manage based on the number of carpenters they have or in reverse figure their carpentry needs based on projected volume.
In most areas, the volume of business produced by one carpenter is between $50,000 and $80,000 per year a company with five carpenters on this payroll could expect him to from $275,000 to $400,000 per year. One company I know that does additions and uses the two-man subgroups expects each crew to produce $150,000 to $160,000 in volume.
[…]
Another way to calculate the carpenter/volume ratio is to assume a business volume of three or four times the cost of a carpenter plus ranges for carpenters wages, or $20,000 including fringes the company should produce between $70,000 and $80,000 for that man that year, this refers to companies that hire only Carpenters and Carpenters Helpers, if a company uses its own crews to do drywall roofing, concrete, painting, electrical, and plumbing the dollar volume per man would drop substantially
Translating that passage into numbers for 2023 by adjusting for inflation I think Walt would say today that 1 Carpenter should be able to produce between $142,000 and $227,280 per year and a five Carpenter company would generate between $781,270 and $1,136,400 (a cumulative rate of inflation of 181.4%).
I actually think a company today deploying a Lead Carpenter or Executive Carpenter system would generate per person numbers that are considerably higher.
While the current edition of my Activity/Capacity Based Markup Workbook does allow the user to assign differing levels of Variable Overhead Costs to different individuals or trade positions I think I am going to develop a revision to the workbook that also categorizes Variable Overhead Costs by company divisions or company units (and I’ll provide it free to all my current Workbook users). I also plan to develop a more robust version of the Workbook in a FileMaker Pro app that be run on a iPad using the free iOS version of FileMaker Pro for iOS devices called: Claris FileMaker Go 19.
