FIGURE 6–6: Comparison of Overhead Recovery Methods
The break-even point is the point at which you are now covering your expenses with income. It’s important to know how much you will need in business to break even and recognize when you have reached that point. It often takes businesses a number of years before they show a profit; this is the turning point.
Refer to Figure 6–6 and study the data for Project A, Method A, numbers we will use for the remainder of this book, which indicates a break-even point of $722. This includes the wage costs and associated labor burden to complete the project as well as all the overhead related to these direct costs. As long as the costs stay within this budget, the company will begin to make a profit when they receive more than $722 for the project.
Let’s summarize the annual budget by combining the information gathered in Figures 6–2, 6–4, and 6–5. These include all of the anticipated costs of doing business during the entire year. In the next section, we break out the numbers and show how to prepare an estimate for an individual project. Following is the summary of the charts.
Fixed costs and variable costs are the components of overhead because they are the expenses that support the direct costs, the expenses directly related to the implementation of projects. As indicated earlier, total overhead in this case is 46 percent of direct costs. At this point, the level of total costs is useful only to give a general indication of how much revenue will be required to break even. However, this is true only at the level of direct costs indicated in Figure 6–2 (page 72). Chapter 7 covers the concept of contribution margin and the revenues required to generate a profit.
Preparing an estimate for an individual client can be a relatively easy task once an annual budget has been set and the cost of materials for the project determined. The only other major piece of information required is the amount of labor required to complete the project. The best way to do this is to make a chart of all the individual tasks your company does and assign a time budget for each. Each task should indicate the units involved (each, square feet, cubic yards, etc.) and the time required for a single employee to complete the task. Refer to Figure 6–7 for an example from a hypothetical landscape contracting company.
With this information in hand, you can begin to develop an estimate. We’ll go through the process step by step using the following information. Upon completion, we’ll use a spreadsheet to calculate a price for the job.
Figure 6–8 on page 82 demonstrates a simple estimate using the spreadsheet:
FIGURE 6–7: Sample Worksheet for Time Required Per Task
FIGURE 6–8: Example of a Simple Estimate