Construction and Contracting Business. Entrepreneur magazine
worksheet, Figure 6–1. The reason for this is that we are reserving 10 percent of the cost of labor for what is called “yard time,” which is the cost of paying employees when they are not on the job sites generating revenues. They may be maintaining equipment, taking part in staff meetings, attending job-related seminars, on break, or performing warranty work. Every company will have its own calculation for yard time. But for the purposes of this book, we’ll use 10 percent (about four hours per week, average, per employee).
Therefore, K&K Contractors expects to spend approximately $600,000 for materials and labor that are used expressly for the projects it works on. We’ll save this amount for now and come back to this after we set a budget for the other two categories of spending.
FIGURE 6–2: A Sample Direct-Cost Budget
Every business has costs that it incurs regardless of the level of business activity. These are amounts due on a regular basis and are fairly constant from one year to the next when adjusted for inflation. Fixed costs include expenditures for items such as:
For example, a company pays a fixed amount of rent each month for its office space regardless of how busy it might be; it signs a lease agreement for $1,000 per month and must pay that amount whether its annual revenues are $100,000 or $2,000,000. However, some fixed costs may “break the rule” and increase more than an increase in revenues. Telephone service is one example: if revenues unexpectedly surge, a company may have to add additional telephone lines to handle the increased business. But for the purposes of this book, assume that fixed costs will remain relatively constant. However, before the fixed cost budget category is set up, the labor burden for the office staff must be determined. Refer to Figure 6–3 on page 74, which is very similar to Figure 6–1.
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If you find that your business is growing and you have the opportunity to rent a larger space than you currently need, at a good price, you might elect to go for it and split the space with another company or either lease it or sublet it if it’s OK with a landlord.
You can make the same mathematical calculation used in Figure 6–1 to determine the labor burden as a percentage of total office payroll as shown:
$14,769 ÷ $75,000 = .196 or 19.6%
This is much lower than the labor burden for field labor, primarily because workers’ compensation rates are much lower for office workers and because holidays, vacations, and overtime are included in the salaries of these workers. Once again, for every $10 that you pay office staff, you’ll pay an additional $1.96 to the various state and federal governments and for fringe benefits. Putting together the fixed-cost budget results in Figure 6–4, page 75.
Several items in the fixed cost budget need further explanation and clarification.
FIGURE 6–3: A Sample Analysis of Office Staff Labor Burden for K&K Contractors
FIGURE 6–4: A Sample Fixed-Cost Budget Analysis
To review, the fixed-cost budget for K&K Contracting amounts to $187,484, meaning that the company expects to spend that much regardless of the amount of revenues that are generated during the year. It is crucial that the fixed-cost budget be realistic and accurate because not only does it impact the pricing of services, it also helps determine the annual revenue required to make a profit. We’ll come back to the profit issue later in this chapter.
The third category of spending is called variable expenses