WHY IS THIS NOT BEING TAUGHT IN ELEMENTARY, MIDDLE AND HIGH SCHOOL. AMAZING. IF KIDS NEW THIS BEFORE THEY GRADUATE THERE WOULD BE BILLIONAIRE ENTREPENEURS AT ASTOUNDING NUMBERS. MY HAT OFF TO YOU SIR!!!
Maybe because it's called "cost Accounting" and that is taught in an accounting course - not high school or middle school. There are other ways how this could be done as well.
I live in ct . I own a home improvement business and have no problem getting jobs. I created a checklist because of this video. I keep track of my jobs (invoices) but everything else makes my head spin. So thank you for simplifying it. 👍🏼
Ive just started being self employed as a domestic electrician and I was concerned about under and over pricing, this is by far the most valuable explanation I've seen so far when it comes to estimates...I live in the UK.!
Great Video clip! Forgive me for the intrusion, I am interested in your opinion. Have you heard about - Rozardner Successful Handyman Reality (search on google)? It is a good one of a kind guide for how to start a handyman business without the normal expense. Ive heard some awesome things about it and my mate after a lifetime of fighting got astronomical success with it.
Lovely Video! Apologies for the intrusion, I would love your initial thoughts. Have you considered - Rozardner Successful Handyman Reality (search on google)? It is an awesome one of a kind guide for how to start a handyman business without the normal expense. Ive heard some great things about it and my buddy at very last got cool success with it.
That was a brilliant way to explain in a straightforward and objective, how calculating hourly rates for a contractor or small business. That will be useful for many contractors that don't know even to have how to contextualise such relevant information like that. Excellent, Congratulations Ian!!!
Thanks for the video content! Apologies for butting in, I would love your initial thoughts. Have you researched - Rozardner Successful Handyman Reality (Sure I saw it on Google)? It is a good exclusive guide for how to start a handyman business minus the normal expense. Ive heard some great things about it and my m8 after a lifetime of fighting got amazing success with it.
This is also a good way for the client to see if the fee being charged by the contractor is reasonable. My rule of thumb is to estimate the direct hourly wage rate a particular tradesman gets for doing the job (e.g. $20/hr.) and multiply that by a factor of 3 which would take into account indirect expenses, overhead and profit. Add material costs and you are in the ballpark. $20/hr x 3 = $60 x16 hours = $960 + 285 = $1,245. This would account for any downtime that would not be chargeable included travel time, vacation, sick, marketing time, etc.
We basically use this same method in our HVAC business. Knowing your overhead is the toughest part but once you have that we use the divisor method to calculate our sell price. Thx for the video!
HVACmillionaire I didn't see any discussion about billable hours in this video example. How do billable hours factor into your pricing with your business? And also, shouldn't owners salary be part of overhead and not direct expenses?? And I also didn't see any mention of material markup, accounting for call backs, etc...
I enjoyed this so much, 3 years ago I made an excel spreadsheet that automated the process you describe in this video. I just re-visited this video today and wanted to give it another thumbs up.
@@robertstellan6017 sure. I did modify it just for me and my business. I had a little this and subtracted a little of that. Kind of like a cook in the kitchen but it works pretty good and of course you can modify it. How do you want me to get it to you?
Man, first of, AMAZING explanation. I really appreciate that you took some time out of your life and dedicate it to a whole 400,000 number of people. Thank you, and why ins't this taught in companies, or schools? WOW!!
Great video. 56% is correct. One more overhead expense to consider is unapplied labor. Time spent at the supply house, shop etc. Calculate as a percentage of a typical 40 hour week and add to overhead.
As a building/remodeling contractor, I've never; in 30 years in business, EVER gave an hourly rate...if they ask, I tell them my multiplier builds that in...Of course; it's like playing poker-you throw out a bet, and see if they call or fold. ..We walk a fine line with pricing. because NO TWO JOBS ARE ALIKE. Also; you screw yourself if you get a "daily rate" because; the one day you leave early; the customer will say; "hey, that wasn't a full day" ... Plus; if you spend more time on the project than THEY think you should; you'll be accused of milking the clock...Know your numbers and make a price. You'll make some mistakes and you'll make some scores...C'est la vie!
Holy crap , that’s spot on . I stupidly said to a bloke I was doing a installation of an ac and said what my hourly rate would be on average although I told him the total price would be ,, well the day came and I decided to put an extra effort in and finish early . The job was finished and done well but he paid me $400 less saying I finished too early , I said you agreed to a fixed price but that didn’t matter to him because I stupidly said what my hourly price was around about , however I said what if I took twice as long would he pay me double .... that didn’t faze him as he didn’t care only that I went quick , moral to story never say your hourly rate .
@@glenndejong6817 Well, you learned a cheap lesson...:)...That's all part of owning a company; I bet you won't do that again...:)...I don't get mad; I get even; Sorry next couple of customers...:(.... Good health and freedom to you and yours...
I find it works best if I say an hourly rate, because decorating in old houses there is no chance of my idea of filling and sanding prep matching the customers expectations, if its a price job they are more likely to point out any defects and say 'you could have filled that ding' etc, there is no chance of getting woodwork in period properties perfect
I see you have made a friend before this video in Thomas. I have a successful electric company. I think you will find yourself growing further if you respond to some of these young men who have valued your information and have questions. God bless Ian
Indirect expenses vary by location (insurance, licensing, bonding), nature of work (new, renovation, repair), and who you work for (gov't, general contractor, owner builder, or private party). You can keep it simple, not knowing exactly what you've earned until years end. Or hire a professional accountant who can keep you on track. The best thing is to educate yourself so you are less easy to take advantage of. Find a good lawyer also.
Good video. One correction though. 15% on 47.81 is calculated by multiplying 47.81 by 1.15 (not by dividing it by 0.85). This will give you a rate of $54 and some change (not $56 as is calculated in the video).
No, a 15% profit margin is calculated exactly how he did it. You're suggesting a 15% markup, which is different. Close but different. It's really a big difference across a year of invoices. 15% profit margin says that 15% of my total invoice before tax is profit. If you instead markup 15% over costs, your profit margin is less than 15%. On $100.00 of costs the difference is $2.64. On annual sales of $50,000 that is $1,320. Most companies cannot succeed on a 15% margin. Their equipment will be in decline and employees will seek work for a better equipped employer. Self employed people will limit work opportunities due to the diminished quality of their equipment. Back to the point he makes. The $1,320 would help a paint contractor to invest in a backup sprayer that would enable him/her to keep commitments without disruptions from sprayer problems. Or many other ways to improve service. Profit margin is different from markup. Cheers (In accounting classes this difference was stressed.)
Good video but leaves out a one important part. You can't just "charge" what you think your worth and expect to get a business going right away. People on here are commenting that they would never pay $900 for painting 3 rooms. Well that's kind of true, but it also completely depends on your MARKET. Painting in Chicago will cost more than painting in Kansas. You need to know what your competition is charging and include that in your formula to affect your rate if you ever want any business.
Yea, that's what we in business call 'Market Forces'. The amount your local market will bear. Then you need to analyze your bargaining power. How many other competitors are in your market and barriers or costs for initial startup and market entry, This is all summarized in Porter's Five Forces. czcams.com/video/_IaBZmB09RE/video.html
I use a super simple formula: A. Labor = Hourly wage x 2 (I.E. $25/hr = $50/hr) B. Materials = Hard cost of materials x "X %" markup (I.E. 15 - 50%) Sub-Total = A + B 20 years of successful contracting - K.I.S.S.
@@ranger2316 It is all accounted for in the margins above. The Labour = 100% markup. That results in an approximate profit margin of 25-50% depending on your variable overhead costs (50-75% of markup). Therefore an employee (/yourself) who gets paid $50/hr as a wage must get billed out at $100/hr in order to produce a $12.50 - $25/hr profit. If you bill less than $75/hr you are losing money because overhead accounts for at least 50% of labour markup. Materials get marked up a rate commensurate with your “handling fees”, which is the overhead costs associated with handling materials (mostly liability and administration). 10% is usually enough but I like to make a profit on materials as well so I usually mark up 15 - 35%
Excellent video I’m now a subscriber I’m starting a small welding business in Canada and have been worried about how to charge hourly rate Only thing I don’t understand is the 56% overhead is that 56% of the hourly rate. Thank you
Great basic information to get people thinking numbers and $$. Caution for new to construction business owners - direct cost! Begin with (cost +). Until you can accurately estimate, I highly recommend not basing your rate to include direct cost. Also not mentioned in this video is utilization. Rather than saying: "I want to make $20 per hour!", ask: "how much per week do I want to make?" Now if you want to make $800 per week as indicated in this video, rarely do you work 40 production hours per week, its closer to 30 or 75%. That works out to $26.67 per hour! Customers tend to know how much time you spend onsite. If you try billing out 40 hours but only there 30, good chance you are only getting paid $600 not the $800 expected. You will spend an additional 30-40 yours per week on paperwork, quotes, supply runs, material you forgot or short, tools etc. If you haven't contracted before, STOP thinking like an EMPLOYEE. Adding a couple bucks to your employee wage and running out doing quotes is recipe for failure. This video shows how quickly additional expenses add up. Best of luck to anyone venturing out for the first time, construction is brutally rewarding!
Patch, plaster, sand and paint. Ceilings,walls,trim,baseboards, and closets. New electrical covers and we clean the windows before and after we paint. Doors, louver closet by folds, and sometimes radiators. ...and people still think painters will work for bear money.
What Rob-In -Philly said. Your presentation is fine for analyzing a business from the perspective of an accountant. But the problem in the contracting world is that cash flow is more important than profitability. That is, a business can stay in business as long as bills are paid and the owner pays himself "enough." Staying in business is ultimately more important than a balance sheet. Unless you're applying for credit. But for day to day operations, where the phone may not ring for 2 weeks or longer, and for the situations where you really have to "compete" for work, the average contractor is going to price the job based on the job and his expectations for time and expenses. Being able to turn a profit is too often dependent on (a) the contract provisions; (b) the client's ability/willingness to pay; (c) the presence or absence of unknowns that can shift a job sideways in no time; (d) the ability of the contractor to control costs; and (e) the ability of the contractor to negotiate from start to finish. Note: commercial projects typically have more cost burdens than residential, and so have to be priced accordingly. But they're usually also more competitive. Only the most in-demand, large-scale contractors can run a business the way you describe. For the typical guy-and-a truck, it'll always be hand-to-mouth with fingers crossed, one job at a time.
Thank you. Seriously valuable content. Can you elaborate a little on the overhead percentage, would it be 56% of the $900 total.. so $1404 total? Thanks again
The 56 % at the end is a very misleading number, it is not the percentage of overhead from cost of total job, the way he has expressed it , its nothing more than overhead expressed as a percentage of total cost. ie materials and indirect expense.
This is a great introduction to calculating your hourly rate. It's a great public service Ian. Once contractors have mastered this method, they should think about unbillable time. They have to account for all of the hours that they were not able to bill somebody. One thing I would recommend is looking into a concept called gross profit dollars per man day. The key is to make sure that you are recognizing that every hour you do not bill someone, you must make it up somewhere else. Those hours add up fast. You quickly run out of time to do that every week. That kills the one to five person business owner. After that is mastered, the next level is to price off of a budget. You create an annual budget that you adjust each month or even every week. Thanks Ian.
Thanks for the video. The overhead idea sounds useful. Would I be right to assume this is the margin you put on direct expenses? I.e. a job costs you $30 in materials, so you add (for your example business) 56%, so you know need to charge $46.80 for materials?
Easy: add material, labor (and associated payroll expenses) and misc (dump fees, permits, etc). Then multiply by your markup factor that will cover indirect job expenses which is usually around 1.5 to cover overhead and generate a 10% company profit.
I just charge the indirect expenses to my customer by adding a few hours to the quote/job. The customer pays for all the materials plus 4 hours labor if I pick it up ($140 included in the overall contract price).
Hy Ryne - I've been in sales and marketing for 20+ years but got my start working for a consulting firm from Chicago. I've been doing part-time consulting work for several consulting firms in addition to direct customers. Take care
I learned something today I was charging my customers a flat rate per hour but I didn't add whatever percentage per hour. This is an old video but like I said before l learn something in 2019
Contractor friend used to mark up his subcontractors 15%; is now at 50% and not one complaint. Another friend has a boat repair business. Prev shop rate was $85/ man hour. His competition folded. He raised his rate to $125/ man hour and no one complained.
I think it's simply a lack of respect for trades. The thing is people tend to look at tradesmen almost as "unskilled" labour and think "Well anyone can be a carpenter or mechanic or plumber or electrician..." etc, but nobody really thinks that of doctors or lawyers or accountants etc. Plus, there's that popular notion that contractors are all getting cash-in-hand and aren't paying taxes so there's a bit of resentment. I base this on comments that I have repeatedly seen on various news articles, and things I've heard people say. I used to be a contractor for a telecoms company and would get members of staff commenting on how I get paid "so much money", and I'd remind them that while they leave the office at 5PM, I'm there until 8 or 10PM and I'd come in before them as well!
@@Agnelum1 Except most folks don't realize those people in the 'Trades' have to be technically competent in their trade AND business/managerial finance.
@@ranger2316 Lawyers are straight out thieves make no mistake. I had a client who had started but never finished a law degree and he said the very first thing the lecturer said to the class was if you get your degree you will have a licence to print money and that is exactly the way they operate.
Hi Ian great piece of information. I'm a carpenter in the U.K. When I invoice a customer with expenses etc breaking down material costs for them and so on. How would I go about this as surely I'm not going to be putting down about my 15% profit added on? Would I just add that onto the hourly salary? Thanks
Hi Ian, I think its better to calculate the price per m² . The same logic to siulate the pricing but much easier to work with. Greetings from Belgium..
Yes, I find this really weird. As a plumber, I would obviously charge an hourly rate, but the direct expenses can vary from a few pence (tap washer anyone?) to several hundred pounds (new high-quality bath taps). I suppose your method works well if your direct expenses vary very little from job to job.
Thank you for this very informative video I'm going to use it in my business. I just have a question: In your example you have 56% overhead costs, do we add it on to the hourly rate to charge the customer? I have a person who works for me so was wondering where this fits in to the calculations. Thankyou in anticipation!
Hi Jackie - the overhead costs are part of your hourly calculation. It's your hourly rate that should cover all your fixed and variable costs - and the rate you pay your employee. Take care
We have a floor covering company in an industry where labor expenses and material expenses are measured in square footage and yardage. My question is, can we incorporate this same method by using yardage/footage? Also, do you account inventory stock as an indirect expense until sold to the consumer? Great video by the way.
I owned a general contracting company. You could add determine labor on a sq ft/yd basis. Let's say you calculated, using several different jobs, how many hours it took for a 50sq ft, 100, and 1000. You then divide that by the # of hours and average the hours out. So you may determine it too 4 hours with two guys for 100 sf. That is a total of 8 man hours for 100 sf. 8 /100 = .08 hours / sq ft (If your hourly cost is lets say 25.00 then you know your cost per sq ft is (25.00 * .08 = $2.00 /sq ft in labor) The key is getting the actual Labor Cost when you combine every possible company expense. This software worked for me to do that really well.www.labor-burden-calculator.com
@@dustinowens8252 where paying by the foot is legal(not all states) and workmans comp(whatever it's called where you are) is typically calculated by the hour, as is unemployment taxes. So it's all math and very few shortcuts take out the complexity.
remember this is just one way of "pricing jobs" I wouldn't use it as this method doesn't allow enough of a profit, which is the life blood of any business big or small.. this would get someone going in the right direction tho. I can tell you from 25+ yrs of self employeed experience, before you go out on your own, learn what your "TRUE COST ' of doing business is first.---remember your family time that you'll miss is worth something.
WHY IS THIS NOT BEING TAUGHT IN ELEMENTARY, MIDDLE AND HIGH SCHOOL. AMAZING. IF KIDS NEW THIS BEFORE THEY GRADUATE THERE WOULD BE BILLIONAIRE ENTREPENEURS AT ASTOUNDING NUMBERS. MY HAT OFF TO YOU SIR!!!
Lol it does. Simple math
Maybe because it's called "cost Accounting" and that is taught in an accounting course - not high school or middle school. There are other ways how this could be done as well.
I could have use this information when I was In school taking construction classes.
slaves dont need this knowledge.. thats why
WE BUY HOUSTON HOUSES ASAP All caps lowers the quality of your post.
I live in ct . I own a home improvement business and have no problem getting jobs. I created a checklist because of this video. I keep track of my jobs (invoices) but everything else makes my head spin. So thank you for simplifying it. 👍🏼
This is what I love about youtube! So much good info, Thanks for taking the time to post!
You have no idea how valuable his vid has been for me!
Thanks, brother! I sub to ur channel! Keep them coming
Ive just started being self employed as a domestic electrician and I was concerned about under and over pricing, this is by far the most valuable explanation I've seen so far when it comes to estimates...I live in the UK.!
Great Video clip! Forgive me for the intrusion, I am interested in your opinion. Have you heard about - Rozardner Successful Handyman Reality (search on google)? It is a good one of a kind guide for how to start a handyman business without the normal expense. Ive heard some awesome things about it and my mate after a lifetime of fighting got astronomical success with it.
Lovely Video! Apologies for the intrusion, I would love your initial thoughts. Have you considered - Rozardner Successful Handyman Reality (search on google)? It is an awesome one of a kind guide for how to start a handyman business without the normal expense. Ive heard some great things about it and my buddy at very last got cool success with it.
Join sparky ninja on FB and watch his and John Ward's video on YT.
That was a brilliant way to explain in a straightforward and objective, how calculating hourly rates for a contractor or small business. That will be useful for many contractors that don't know even to have how to contextualise such relevant information like that. Excellent, Congratulations Ian!!!
Thank you Ricardo - well appreciated.
Average hours
Love this video! This couldn't have come soon enough for me. You just got yourself a sub. 👍
I learnt more in this 8 min video than I did in 2 years of business management classes (high school)
Thanks for the video content! Apologies for butting in, I would love your initial thoughts. Have you researched - Rozardner Successful Handyman Reality (Sure I saw it on Google)? It is a good exclusive guide for how to start a handyman business minus the normal expense. Ive heard some great things about it and my m8 after a lifetime of fighting got amazing success with it.
and paid a lot more for it than just time!
Im not surprised. Most of those teachers have never even ran a business themselves.
Learnt? Where did you go to school? Alabama?
@@MikeMike-xx9of Scotland... so yeah the original Alabama haha
This is also a good way for the client to see if the fee being charged by the contractor is reasonable. My rule of thumb is to estimate the direct hourly wage rate a particular tradesman gets for doing the job (e.g. $20/hr.) and multiply that by a factor of 3 which would take into account indirect expenses, overhead and profit. Add material costs and you are in the ballpark. $20/hr x 3 = $60 x16 hours = $960 + 285 = $1,245. This would account for any downtime that would not be chargeable included travel time, vacation, sick, marketing time, etc.
We basically use this same method in our HVAC business. Knowing your overhead is the toughest part but once you have that we use the divisor method to calculate our sell price. Thx for the video!
HVACmillionaire I didn't see any discussion about billable hours in this video example. How do billable hours factor into your pricing with your business? And also, shouldn't owners salary be part of overhead and not direct expenses?? And I also didn't see any mention of material markup, accounting for call backs, etc...
I enjoyed this so much, 3 years ago I made an excel spreadsheet that automated the process you describe in this video.
I just re-visited this video today and wanted to give it another thumbs up.
Would you be willing to share your spreadsheet?
@@robertstellan6017 sure. I did modify it just for me and my business. I had a little this and subtracted a little of that. Kind of like a cook in the kitchen but it works pretty good and of course you can modify it.
How do you want me to get it to you?
Man, first of, AMAZING explanation. I really appreciate that you took some time out of your life and dedicate it to a whole 400,000 number of people. Thank you, and why ins't this taught in companies, or schools? WOW!!
It is taught in schools; its called accounting. In this case, cost/managerial accounting.
Great video. 56% is correct. One more overhead expense to consider is unapplied labor. Time spent at the supply house, shop etc. Calculate as a percentage of a typical 40 hour week and add to overhead.
Awesome Ian, thanks so much, that's just what I needed right now. Thanks.
Awesome, thank you for taking the time to make a video. I appreciate your knowledge. Thank you
Great contents, thanks for keeping it simple
As a building/remodeling contractor, I've never; in 30 years in business, EVER gave an hourly rate...if they ask, I tell them my multiplier builds that in...Of course; it's like playing poker-you throw out a bet, and see if they call or fold. ..We walk a fine line with pricing. because NO TWO JOBS ARE ALIKE. Also; you screw yourself if you get a "daily rate" because; the one day you leave early; the customer will say; "hey, that wasn't a full day" ... Plus; if you spend more time on the project than THEY think you should; you'll be accused of milking the clock...Know your numbers and make a price. You'll make some mistakes and you'll make some scores...C'est la vie!
Holy crap , that’s spot on . I stupidly said to a bloke I was doing a installation of an ac and said what my hourly rate would be on average although I told him the total price would be ,, well the day came and I decided to put an extra effort in and finish early . The job was finished and done well but he paid me $400 less saying I finished too early , I said you agreed to a fixed price but that didn’t matter to him because I stupidly said what my hourly price was around about , however I said what if I took twice as long would he pay me double .... that didn’t faze him as he didn’t care only that I went quick , moral to story never say your hourly rate .
@@glenndejong6817 Well, you learned a cheap lesson...:)...That's all part of owning a company; I bet you won't do that again...:)...I don't get mad; I get even; Sorry next couple of customers...:(.... Good health and freedom to you and yours...
I find it works best if I say an hourly rate, because decorating in old houses there is no chance of my idea of filling and sanding prep matching the customers expectations, if its a price job they are more likely to point out any defects and say 'you could have filled that ding' etc, there is no chance of getting woodwork in period properties perfect
@@utubeape :)...There are exceptions to every rule...It's a personal choice...it's about being satisfied with what you're paid...
Exactly
This video has so much value. Thank you for sharing! @Ian Johnson
What an informative video. Thank you so much for sharing your knowledge 🙏
Thanks Ian, this content helps me alot...mahalo
Awesome video, thanks for sharing the knowledge!!!!!!!!!!!
Ok Ian you did a great job at this subject
Excellent formula, thanks for sharing....
Thank you, wish I'd learned this in my earlier years or as an elective in Art school..
Hands Down!!! This is OFFICIAL!!!!!
wow that was so helpful and pretty straight forward. thanks ian!
Thank you Jerry!
Thank you ..this really helped me
I love this you made it easy to understand!!! Thanks.
Thank you Thomas. I appreciate the feedback.
I see you have made a friend before this video in Thomas. I have a successful electric company. I think you will find yourself growing further if you respond to some of these young men who have valued your information and have questions. God bless Ian
This is a wonderful learning tool. Keep up your good work!
+j jones Thank you very much - if you ever want another topic covered, don't hesitate to contact me.
Indirect expenses vary by location (insurance, licensing, bonding), nature of work (new, renovation, repair), and who you work for (gov't, general contractor, owner builder, or private party). You can keep it simple, not knowing exactly what you've earned until years end. Or hire a professional accountant who can keep you on track. The best thing is to educate yourself so you are less easy to take advantage of. Find a good lawyer also.
Great information, thank you !
Loved the video!
Good video. One correction though. 15% on 47.81 is calculated by multiplying 47.81 by 1.15 (not by dividing it by 0.85). This will give you a rate of $54 and some change (not $56 as is calculated in the video).
No, a 15% profit margin is calculated exactly how he did it. You're suggesting a 15% markup, which is different. Close but different. It's really a big difference across a year of invoices.
15% profit margin says that 15% of my total invoice before tax is profit. If you instead markup 15% over costs, your profit margin is less than 15%. On
$100.00 of costs the difference is $2.64. On annual sales of $50,000 that is $1,320. Most companies cannot succeed on a 15% margin. Their equipment will be in decline and employees will seek work for a better equipped employer. Self employed people will limit work opportunities due to the diminished quality of their equipment.
Back to the point he makes. The $1,320 would help a paint contractor to invest in a backup sprayer that would enable him/her to keep commitments without disruptions from sprayer problems. Or many other ways to improve service. Profit margin is different from markup.
Cheers
(In accounting classes this difference was stressed.)
very helpful thank you Ian.
Intresting and easy, thx for the upload
Nice! Inspired me to do my own contracting videos
Great video ! 👍🏽
Thank you for this helpful information.
O. Man this genius tank my friend
Very informative Video! nice job Ian
Thanks
Thanks. I like the idea that you don't want to invest with your own salary. Smart.
Very helpful. Thank you.
just start logistic delivery as IC w/ Amazon. this video help me
Awesome video...thanks! 👍
Good video but leaves out a one important part. You can't just "charge" what you think your worth and expect to get a business going right away. People on here are commenting that they would never pay $900 for painting 3 rooms. Well that's kind of true, but it also completely depends on your MARKET. Painting in Chicago will cost more than painting in Kansas. You need to know what your competition is charging and include that in your formula to affect your rate if you ever want any business.
Yea, that's what we in business call 'Market Forces'. The amount your local market will bear. Then you need to analyze your bargaining power. How many other competitors are in your market and barriers or costs for initial startup and market entry, This is all summarized in Porter's Five Forces.
czcams.com/video/_IaBZmB09RE/video.html
He explained that in the video. Did you watch the video?
Exactly! Competitor survey is very important
Thank you great teacher
I use a super simple formula:
A. Labor = Hourly wage x 2 (I.E. $25/hr = $50/hr)
B. Materials = Hard cost of materials x "X %" markup (I.E. 15 - 50%)
Sub-Total = A + B
20 years of successful contracting - K.I.S.S.
How do you account for indirect expenses and overhead?
@@ranger2316 It is all accounted for in the margins above.
The Labour = 100% markup. That results in an approximate profit margin of 25-50% depending on your variable overhead costs (50-75% of markup).
Therefore an employee (/yourself) who gets paid $50/hr as a wage must get billed out at $100/hr in order to produce a $12.50 - $25/hr profit. If you bill less than $75/hr you are losing money because overhead accounts for at least 50% of labour markup.
Materials get marked up a rate commensurate with your “handling fees”, which is the overhead costs associated with handling materials (mostly liability and administration). 10% is usually enough but I like to make a profit on materials as well so I usually mark up 15 - 35%
@@peterthebull8578 Fair enough. That's a bit more information than your original equation. Sounds good though! Have a good one. 👍
really good info
keep it up
Really appreciate this!
Thank you very good info.
Thank you so much for this💕🙏
Excellent video I’m now a subscriber
I’m starting a small welding business in Canada and have been worried about how to charge hourly rate
Only thing I don’t understand is the 56% overhead is that 56% of the hourly rate. Thank you
Defensive estimating
Contractors guide to markup and profit
Those two books are Bibles in construction
Thanks 👍
Nice and simple. Many ways of doing it win some lose some
Thank you - This is champion - Again thank you
great video. thanks
great video..i just started my own small company and this info is great.
Great basic information to get people thinking numbers and $$. Caution for new to construction business owners - direct cost! Begin with (cost +). Until you can accurately estimate, I highly recommend not basing your rate to include direct cost. Also not mentioned in this video is utilization. Rather than saying: "I want to make $20 per hour!", ask: "how much per week do I want to make?" Now if you want to make $800 per week as indicated in this video, rarely do you work 40 production hours per week, its closer to 30 or 75%. That works out to $26.67 per hour! Customers tend to know how much time you spend onsite. If you try billing out 40 hours but only there 30, good chance you are only getting paid $600 not the $800 expected. You will spend an additional 30-40 yours per week on paperwork, quotes, supply runs, material you forgot or short, tools etc. If you haven't contracted before, STOP thinking like an EMPLOYEE. Adding a couple bucks to your employee wage and running out doing quotes is recipe for failure. This video shows how quickly additional expenses add up. Best of luck to anyone venturing out for the first time, construction is brutally rewarding!
Hey Ian, thanks for the video. Would you explain more about the function of the Overhead Rate? What does it used for?
i have lent alot ...very simple and on point
Great video!!
Thanks Christopher.
Patch, plaster, sand and paint. Ceilings,walls,trim,baseboards, and closets. New electrical covers and we clean the windows before and after we paint. Doors, louver closet by folds, and sometimes radiators. ...and people still think painters will work for bear money.
What Rob-In -Philly said. Your presentation is fine for analyzing a business from the perspective of an accountant. But the problem in the contracting world is that cash flow is more important than profitability. That is, a business can stay in business as long as bills are paid and the owner pays himself "enough." Staying in business is ultimately more important than a balance sheet. Unless you're applying for credit. But for day to day operations, where the phone may not ring for 2 weeks or longer, and for the situations where you really have to "compete" for work, the average contractor is going to price the job based on the job and his expectations for time and expenses. Being able to turn a profit is too often dependent on (a) the contract provisions; (b) the client's ability/willingness to pay; (c) the presence or absence of unknowns that can shift a job sideways in no time; (d) the ability of the contractor to control costs; and (e) the ability of the contractor to negotiate from start to finish. Note: commercial projects typically have more cost burdens than residential, and so have to be priced accordingly. But they're usually also more competitive. Only the most in-demand, large-scale contractors can run a business the way you describe. For the typical guy-and-a truck, it'll always be hand-to-mouth with fingers crossed, one job at a time.
Well said.
Excellent point about overhead
Thank you. Seriously valuable content. Can you elaborate a little on the overhead percentage, would it be 56% of the $900 total.. so $1404 total? Thanks again
The 56 % at the end is a very misleading number, it is not the percentage of overhead from cost of total job, the way he has expressed it , its nothing more than overhead expressed as a percentage of total cost. ie materials and indirect expense.
This is a great introduction to calculating your hourly rate. It's a great public service Ian. Once contractors have mastered this method, they should think about unbillable time. They have to account for all of the hours that they were not able to bill somebody. One thing I would recommend is looking into a concept called gross profit dollars per man day. The key is to make sure that you are recognizing that every hour you do not bill someone, you must make it up somewhere else. Those hours add up fast. You quickly run out of time to do that every week. That kills the one to five person business owner. After that is mastered, the next level is to price off of a budget. You create an annual budget that you adjust each month or even every week. Thanks Ian.
Thank you 🙏🏾 sir.
Nice. Very useful.
Wow great video 👍
Thanks a bunch. Take care
Thanks a lot man!!!!!
Good job!
Guys! Quit complaining about the numbers he's using and use the math on the numbers that apply to you. Good Grief!
If I was using a 30% margin what would it be? How would I divide that?
Hi Ian. Thanks for the video. I was wondering what type of business do you own (which industry)?
Thank you!
Thanks for the video. The overhead idea sounds useful. Would I be right to assume this is the margin you put on direct expenses? I.e. a job costs you $30 in materials, so you add (for your example business) 56%, so you know need to charge $46.80 for materials?
AWESOMEEEE thank you
Easy: add material, labor (and associated payroll expenses) and misc (dump fees, permits, etc). Then multiply by your markup factor that will cover indirect job expenses which is usually around 1.5 to cover overhead and generate a 10% company profit.
great video
Yep this is awesome 😎
I just charge the indirect expenses to my customer by adding a few hours to the quote/job. The customer pays for all the materials plus 4 hours labor if I pick it up ($140 included in the overall contract price).
Wow these videos are so helpful as a small business owner. THANK YOU SO MUCH!!
Hi Ian, great video! It was very informative. Where did you learn this information and type of equation from?
Hy Ryne - I've been in sales and marketing for 20+ years but got my start working for a consulting firm from Chicago. I've been doing part-time consulting work for several consulting firms in addition to direct customers. Take care
I learned something today I was charging my customers a flat rate per hour but I didn't add whatever percentage per hour. This is an old video but like I said before l learn something in 2019
Smart man!
Gresy info for me today !
You need to include labor burden in your labor calculation: payroll taxes, benefits, worker’s comp-don’t put those into indirect expense.
Do you can make tablet improving this subject?
Contractor friend used to mark up his subcontractors 15%; is now at 50% and not one complaint. Another friend has a boat repair business. Prev shop rate was $85/ man hour. His competition folded. He raised his rate to $125/ man hour and no one complained.
Thank You. #finance #projectmanagement #sales #painting #enjoylife
Have no idea why people beat up contractors, nobody breaks down lawyers,stores,restuarant, doctors etc,
They use the same cost/managerial finance principles to compute their hourly rate.
I think it's simply a lack of respect for trades. The thing is people tend to look at tradesmen almost as "unskilled" labour and think "Well anyone can be a carpenter or mechanic or plumber or electrician..." etc, but nobody really thinks that of doctors or lawyers or accountants etc.
Plus, there's that popular notion that contractors are all getting cash-in-hand and aren't paying taxes so there's a bit of resentment. I base this on comments that I have repeatedly seen on various news articles, and things I've heard people say. I used to be a contractor for a telecoms company and would get members of staff commenting on how I get paid "so much money", and I'd remind them that while they leave the office at 5PM, I'm there until 8 or 10PM and I'd come in before them as well!
@@Agnelum1 Except most folks don't realize those people in the 'Trades' have to be technically competent in their trade AND business/managerial finance.
@@ranger2316 Lawyers are straight out thieves make no mistake. I had a client who had started but never finished a law degree and he said the very first thing the lecturer said to the class was if you get your degree you will have a licence to print money and that is exactly the way they operate.
Hi Ian great piece of information. I'm a carpenter in the U.K. When I invoice a customer with expenses etc breaking down material costs for them and so on. How would I go about this as surely I'm not going to be putting down about my 15% profit added on? Would I just add that onto the hourly salary? Thanks
Could you explain how to apply the overhead percentage? Do you then increase your target profit by the overhead percentage to account for overhead?
Thank you for a quick and easy way to understand cost and sell. Do you consult business?
Hi Lisa - yes I do - my email address is ijamesjohnson@yahoo.ca
Hey thanks for good info. So where do taxes fit in with hourly rate? Income and SE Tax. Thanks
correction overhead is indirect costs/sales. Overhead and profit should be a % of your annual sales volume
Couldn't have said it better.
Hi Ian, I think its better to calculate the price per m² . The same logic to siulate the pricing but much easier to work with. Greetings from Belgium..
+Teodor Spita Good point. Take care
Yes, I find this really weird. As a plumber, I would obviously charge an hourly rate, but the direct expenses can vary from a few pence (tap washer anyone?) to several hundred pounds (new high-quality bath taps). I suppose your method works well if your direct expenses vary very little from job to job.
Thank you for this very informative video I'm going to use it in my business. I just have a question:
In your example you have 56% overhead costs, do we add it on to the hourly rate to charge the customer? I have a person who works for me so was wondering where this fits in to the calculations.
Thankyou in anticipation!
Hi Jackie - the overhead costs are part of your hourly calculation. It's your hourly rate that should cover all your fixed and variable costs - and the rate you pay your employee. Take care
Ian Johnson thankyou Ian 🙂
Try the Pocket Estimator app to calculate the cost of refurbishing or extending your home.
We have a floor covering company in an industry where labor expenses and material expenses are measured in square footage and yardage. My question is, can we incorporate this same method by using yardage/footage? Also, do you account inventory stock as an indirect expense until sold to the consumer? Great video by the way.
I owned a general contracting company. You could add determine labor on a sq ft/yd basis. Let's say you calculated, using several different jobs, how many hours it took for a 50sq ft, 100, and 1000. You then divide that by the # of hours and average the hours out. So you may determine it too 4 hours with two guys for 100 sf. That is a total of 8 man hours for 100 sf. 8 /100 = .08 hours / sq ft (If your hourly cost is lets say 25.00 then you know your cost per sq ft is (25.00 * .08 = $2.00 /sq ft in labor) The key is getting the actual Labor Cost when you combine every possible company expense. This software worked for me to do that really well.www.labor-burden-calculator.com
Just mark down your rate per sq ft so that you can make a profit and cover overhead. Then pay your installers by the square foot and not by the hour.
@@dustinowens8252 where paying by the foot is legal(not all states) and workmans comp(whatever it's called where you are) is typically calculated by the hour, as is unemployment taxes. So it's all math and very few shortcuts take out the complexity.
THANK YOU FOR DIVIDING rather than using the markup method.
remember this is just one way of "pricing jobs" I wouldn't use it as this method doesn't allow enough of a profit, which is the life blood of any business big or small.. this would get someone going in the right direction tho. I can tell you from 25+ yrs of self employeed experience, before you go out on your own, learn what your "TRUE COST ' of doing business is first.---remember your family time that you'll miss is worth something.