• Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • PRODUCTS
  • CONTRACTORS
  • ENGINEERS
  • RADIANT & HYDRONICS
  • INSIGHTS
  • MEDIA
  • RESOURCES
  • EMAGAZINE
  • SIGN UP!
cart
facebook instagram twitter linkedin youtube
  • CONTRACTORS
  • BATH & KITCHEN PRO
  • BUSINESS MANAGEMENT
  • HIGH EFFICIENCY HOMES
  • TECHNOLOGY
  • WATER TREATMENT
  • PMC COLUMNS
  • PMC COLUMNS
  • Dave Yates: Contractor’s Corner
  • John Siegenthaler: Hydronics Workshop
  • Kenny Chapman: The Blue Collar Coach
  • Matt Michel: Service Plumbing Pros
  • Scott Secor: Heating Perceptions
  • ENGINEERS
  • CONTINUING EDUCATION
  • DECARBONIZATION | ELECTRIFICATION
  • FIRE PROTECTION
  • GEOTHERMAL | SOLAR THERMAL
  • PIPING | PLUMBING | PVF
  • PME COLUMNS
  • PME COLUMNS
  • Christoph Lohr: Strategic Plumbing Insights
  • David Dexter: Plumbing Talking Points
  • James Dipping: Engineer Viewpoints
  • John Seigenthaler: Renewable Heating Design
  • Lowell Manalo: Plumbing Essentials
  • Misty Guard: Guard on Compliance
  • RADIANT & HYDRONICS
  • RADIANT COMFORT REPORT
  • THE GLITCH & THE FIX
  • INSIGHTS
  • CODES
  • GREEN PLUMBING & MECHANICAL
  • PROJECT PROFILES
  • COLUMNS
  • SPONSOR INSIGHTS
  • COLUMNS
  • Codes Corner
  • Natalie Forster: Editorial Opinion
  • Guest Editorial
  • MEDIA
  • PODCASTS
  • VIDEOS
  • WEBINARS
  • RESOURCES
  • INDUSTRY CALENDAR
  • DIRECTORIES
  • EBOOKS
  • PM BOOKSTORE
  • CE CENTER
  • MARKET RESEARCH
  • CLASSIFIEDS
  • EMAGAZINE
  • EMAGAZINE
  • ARCHIVE ISSUES
  • CONTACT
  • ADVERTISE
  • PME EMAGAZINE ARCHIVES
search
cart
facebook instagram twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • PRODUCTS
  • CONTRACTORS
    • BATH & KITCHEN PRO
    • BUSINESS MANAGEMENT
    • HIGH EFFICIENCY HOMES
    • TECHNOLOGY
    • WATER TREATMENT
    • PMC COLUMNS
      • Dave Yates: Contractor’s Corner
      • John Siegenthaler: Hydronics Workshop
      • Kenny Chapman: The Blue Collar Coach
      • Matt Michel: Service Plumbing Pros
      • Scott Secor: Heating Perceptions
  • ENGINEERS
    • CONTINUING EDUCATION
    • DECARBONIZATION | ELECTRIFICATION
    • FIRE PROTECTION
    • GEOTHERMAL | SOLAR THERMAL
    • PIPING | PLUMBING | PVF
    • PME COLUMNS
      • Christoph Lohr: Strategic Plumbing Insights
      • David Dexter: Plumbing Talking Points
      • James Dipping: Engineer Viewpoints
      • John Seigenthaler: Renewable Heating Design
      • Lowell Manalo: Plumbing Essentials
      • Misty Guard: Guard on Compliance
  • RADIANT & HYDRONICS
    • RADIANT COMFORT REPORT
    • THE GLITCH & THE FIX
  • INSIGHTS
    • CODES
    • GREEN PLUMBING & MECHANICAL
    • PROJECT PROFILES
    • COLUMNS
      • Codes Corner
      • Natalie Forster: Editorial Opinion
      • Guest Editorial
    • SPONSOR INSIGHTS
  • MEDIA
    • PODCASTS
    • VIDEOS
    • WEBINARS
  • RESOURCES
    • INDUSTRY CALENDAR
    • DIRECTORIES
    • EBOOKS
    • PM BOOKSTORE
    • CE CENTER
    • MARKET RESEARCH
    • CLASSIFIEDS
  • EMAGAZINE
    • EMAGAZINE
    • ARCHIVE ISSUES
    • CONTACT
    • ADVERTISE
    • PME EMAGAZINE ARCHIVES
  • SIGN UP!
Columns

Calculating Dollar-Per-Hour Overhead

By Frank Blau
June 6, 2000
Sad but true, most contractors charge less for their labor than it costs them in overhead alone.

Last month I addressed the general issue of overhead. That is, too many people in our industry don't take into account the overhead costs they entail in the course of business. As a result, their selling prices tend to be less than the cost of doing business.

Once you learn how much overhead costs, you need to break it down to a dollar-per-hour basis. This month, let's take a closer look at exactly how that's done.

The chart on page 32 shows an actual firm's dollar-per-hour overhead (DPHO) over the course of 1991. Note the references to "allocations." The allocations referred to were a profit-sharing plan for employees and management bonuses. This firm, like most companies that offer profit-sharing or bonus plans, only pays out if profits reach certain levels.

To apply overhead, obviously you must keep track of it. The key is to have good bookkeeping and accounting systems that enable you to keep close watch of your business expenditures. Every business owner ought to see a financial statement at least monthly.

Notice, in column E, that this firm's monthly DPHO fluctuated rather substantially from a low of $53.17 to a high of $71.26. However, Column

F, showing the year to date numbers, is much more consistent.

It's impractical to keep changing prices each month to reflect different overhead. Updating once or twice a year is sufficient. The final YTD number ($62.70) is the one this firm applied to its selling prices going into 1992.

Keep in mind that this $62.70 figure is just overhead. It doesn't include the direct labor, materials and profit components of this firm's selling prices. Yet this overhead figure is greater than most PHC firms charge for an hour's billing. Is it any wonder why so many people in our industry are going down the tubes?

The other key component of DPHO is the number of productive - i.e., billable - hours of labor your firm sells. This, too, will fluctuate month by month, and even year by year. The final figure of $62.70 was derived by dividing the year's total billable hours (Column D) into the overall YTD overhead dollars (Column B).

Shrinking Dollars

The numbers shown here are adapted from the workbook I pass out as part of my "Business of Contracting" seminar series. Let's do some number crunching based on data not shown here.

Let's say this firm's total truck maintenance expenses for the year totaled $175,000, which would not be far off the mark. This would include all parts, labor and fueling charges. Dividing that by 37,764 billable hours comes to $4.63 in DPHO from truck maintenance alone.

What's your DPHO for truck maintenance? Do you even charge any? I fear in too many cases the answer would be no. Yet every PHC firm in existence has truck maintenance costs, and most would be more or less in line with this company's costs on a dollar-per-hour basis. Think of it this way, if you don't factor in truck maintenance on a DPHO basis, it comes out of your hourly billings. So if you charge a labor rate of $50 an hour, you are, in actuality, only making $45.37, because you must pay for truck maintenance out of that.

What about advertising dollars? Thanks to an aggressive program in the Yellow Pages, this firm spends over $250,000 a year in advertising. Divided by 37,764, that comes out to about $6.62 per billable hour. If you fail to factor that into your prices, guess what? The

$45.37 left over becomes the equivalent of $38.75.

But wait. Ever hear of depreciation? This is a measure of the diminishing value of various equipment that is bound to break and wear out over time - including your vehicle, power tools, office equipment such as faxes and copiers, etc. Charging for this in overhead enables you to build up a reserve of cash that will enable you to replace these items. This company calculates around $75,000 a year in depreciation expense, or $1.99 per billable hour. Oops, that $38.75 selling price just dropped to $36.76 if you failed to build something into it for depreciation.

Then there's this firm's rent and utilities, which cost some $80,000 a year, or $2.12 per billable hour. Down to $34.64.

Office supplies and telephones cost over $100,000, or $2.65 per billable hour. They have a broad miscellaneous category that includes everything from medical and dental premiums to dues and subscriptions, from hiring expenses to charitable donations. Total cost is around

$190,000 a year, or $5.03 an hour.

Look out below! This firm's $50 an hour labor rate has been whittled down to $26.96, and we haven't even begun to apply some other heavy overhead factors, such as administrative salaries and pension contributions.

The firm contributes about $186,000 a year to an employee profit-sharing and money-matching pension plan, about $4.93 per billable hour. Ask around the industry and you won't find one out of 10 that does so. Then people wonder why it's so hard attracting good people to work for them.

Small Firm Comparisons

Granted, the company in question is very large, and the gross expenditures are way out of line with what most of you spend. However, the DPHO figures aren't.

For instance, if you run a small company shop with one or two trucks, you certainly don't spend $250,000 a year in advertising. But $10,000 is not out of the question for even one-man operations, especially if you have a Yellow Pages display ad.

Instead of 37,764 billable hours annually, a one-man shop more likely bills around 1,500. So your DPHO for advertising would be $6.67, pretty close to the big firm's DPHO.

Same with various other expenditures. Annual truck maintenance won't cost $175,000, but for one truck it could very well run $7,500 counting fuel. So add another $5 in hourly overhead.

That truck depreciates just as much as it does for the bigger firm. Rent, electricity, heat, telephones and many other expenses cost just as much proportionally for the small operator as for the big guy. In fact, in some areas economics of scale enable the big guys to operate with less DPHO than the little guys.

We can speculate about these numbers, but in the real world it is imperative that you find out exactly how much your DPHO amounts to.

Some people operate with less overhead then others, and those firms will have pricing advantages in the marketplace.

But don't automatically assume you have low overhead. Take the time to crunch all the numbers and find out for sure. Find out before you set your selling prices, not after. Or else you'll end up like the businessman who shrugged his shoulders after finding out he lost $10 on every sale he made.

"That's OK," he said. "I'll make it up in volume."

Links

  • Frank Blau

Share This Story

Looking for a reprint of this article?
From high-res PDFs to custom plaques, order your copy today!

Frank Blau can be reached at Frank J. Blau Jr. & Associates, 12221 W. Fairview, Milwaukee, WI 53226. 1-800-FLAT RATE. Fax: 414/258-3307. Web site: www.blauplumbing.com

Recommended Content

JOIN TODAY
to unlock your recommendations.

Already have an account? Sign In

  • Worker using the Milwaukee Tool SWITCH PACK drain cleaner

    Pipeline profits: Drain cleaning, pipe inspection create opportunities

    Drain cleaning and inspection services offer lucrative...
    Green Plumbing and Mechanical
    By: Nicole Krawcke
  • Uponor employee, Arturo Moreno

    The reinvestment in American manufacturing and training

    Plumbing & Mechanical Chief Editor Nicole Krawcke and...
    Plumbing News
    By: Nicole Krawcke and Natalie Forster
  • March 2024 Women in Plumbing hero image of woman engineer overlayed by circle of hexagon shapes with numbers from 1 to 10

    Celebrating 10 Influential Women in the Plumbing Industry

    Celebrating Women's History Month and Women in...
    Plumbing News
    By: Nicole Krawcke
Subscribe For Free!
  • eNewsletters
  • Online Registration
  • Subscription Customer Service
  • eMagazine
  • Manage My Preferences

IPEX celebrates grand opening of new Florida distribution center

IPEX celebrates grand opening of new Florida distribution center

NIBCO Press Solutions

NIBCO Press Solutions

AI can boost efficiency and profitability for plumbing, HVAC contractors

AI can boost efficiency and profitability for plumbing, HVAC contractors

Bell & Gossett Illustrates Path to Net-zero at AHR Expo

Bell & Gossett Illustrates Path to Net-zero at AHR Expo

More Videos

Sponsored Content

Sponsored Content is a special paid section where industry companies provide high quality, objective, non-commercial content around topics of interest to the Plumbing & Mechanical audience. All Sponsored Content is supplied by the advertising company and any opinions expressed in this article are those of the author and not necessarily reflect the views of Plumbing & Mechanical or its parent company, BNP Media. Interested in participating in our Sponsored Content section? Contact your local rep!

close
  • J.J. Keller CMV vehicles on road
    Sponsored byJ. J. Keller & Associates, Inc.

    The dash cam game-changer for small business safety

Popular Stories

Underfloor heating installation with drain sewer hole in bathroom close up on water floor heating.

Using hydronics to leverage time-of-use electrical rates

Watts Nexa mobile image

Behind the Wall: Where smart plumbing gets smarter

Six tankless water heaters that feed the nutraceutical manufacturer’s operations.

How to deliver large volumes of hot water quickly and intermittently

PMCE Home-X April 29 Free Webinar: From Legacy to Leadership: Preparing Your Home Services Business for the Next Generation

Events

November 13, 2024

Future Proofing MEP: Navigating the 2026 High Efficiency Water Heating Standards

Join our deep dive into DOE’s new standards so you can future-proof your MEP practice.

EARN: 0.1 ASPE CEU; 1 AIA LU/HSW; 0.1 IACET CEU*; 1 PDH

View All Submit An Event

Poll

Will business be up or down in 2025?

Do you anticipate business in 2025 to be up or down in comparison to 2024?
View Results Poll Archive

Products

The Water Came To A Stop

The Water Came To A Stop

See More Products

Download the FREE Water Conservation, Quality & Safety eBook: Plumbing Trends Increasing Safe Water Availability

Related Articles

  • The Ultimate Profit & Loss Statement

    See More
  • Why I Don't Like Commissions, Either

    See More
×

Keep your content unclogged with our newsletters!

Stay in the know on the latest plumbing & piping industry trends.

JOIN TODAY!
  • RESOURCES
    • Advertise
    • Contact Us
    • Directories
    • Store
    • Want More
    • Supply House Times
  • SIGN UP TODAY
    • Create Account
    • eMagazine
    • eNewsletter
    • Customer Service
    • Manage Preferences
  • SERVICES
    • Marketing Services
    • Reprints
    • Market Research
    • List Rental
    • Survey/Respondent Access
  • STAY CONNECTED
    • LinkedIn
    • Facebook
    • Instagram
    • YouTube
    • X (Twitter)
  • PRIVACY
    • PRIVACY POLICY
    • TERMS & CONDITIONS
    • DO NOT SELL MY PERSONAL INFORMATION
    • PRIVACY REQUEST
    • ACCESSIBILITY

Copyright ©2025. All Rights Reserved BNP Media.

Design, CMS, Hosting & Web Development :: ePublishing

search
cart
facebook instagram twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
  • NEWS
  • PRODUCTS
  • CONTRACTORS
    • BATH & KITCHEN PRO
    • BUSINESS MANAGEMENT
    • HIGH EFFICIENCY HOMES
    • TECHNOLOGY
    • WATER TREATMENT
    • PMC COLUMNS
      • Dave Yates: Contractor’s Corner
      • John Siegenthaler: Hydronics Workshop
      • Kenny Chapman: The Blue Collar Coach
      • Matt Michel: Service Plumbing Pros
      • Scott Secor: Heating Perceptions
  • ENGINEERS
    • CONTINUING EDUCATION
    • DECARBONIZATION | ELECTRIFICATION
    • FIRE PROTECTION
    • GEOTHERMAL | SOLAR THERMAL
    • PIPING | PLUMBING | PVF
    • PME COLUMNS
      • Christoph Lohr: Strategic Plumbing Insights
      • David Dexter: Plumbing Talking Points
      • James Dipping: Engineer Viewpoints
      • John Seigenthaler: Renewable Heating Design
      • Lowell Manalo: Plumbing Essentials
      • Misty Guard: Guard on Compliance
  • RADIANT & HYDRONICS
    • RADIANT COMFORT REPORT
    • THE GLITCH & THE FIX
  • INSIGHTS
    • CODES
    • GREEN PLUMBING & MECHANICAL
    • PROJECT PROFILES
    • COLUMNS
      • Codes Corner
      • Natalie Forster: Editorial Opinion
      • Guest Editorial
    • SPONSOR INSIGHTS
  • MEDIA
    • PODCASTS
    • VIDEOS
    • WEBINARS
  • RESOURCES
    • INDUSTRY CALENDAR
    • DIRECTORIES
    • EBOOKS
    • PM BOOKSTORE
    • CE CENTER
    • MARKET RESEARCH
    • CLASSIFIEDS
  • EMAGAZINE
    • EMAGAZINE
    • ARCHIVE ISSUES
    • CONTACT
    • ADVERTISE
    • PME EMAGAZINE ARCHIVES
  • SIGN UP!