Budgeting Tips for Contractors

Budgeting Tips

I just got back from MAHTS (Mid Atlantic Hardscape Trade Show) in Atlantic City, and had some great conversations with other contractors on the best tips for budget building for the next season.

Tip #1:

A general tip I always encourage when building a budget is to budget for the “worst-case scenario”.  Meaning if you think that you’ll keep that truck you bought for 10 years, budget for 6-8 years.

If you think you’ll spend $20k on marketing, budget for $25k. If you think fuel will be $15k next year, add a few k.

If you think you might buy that new piece of equipment, put it in the budget now.

Always round up.

Budget worst-case scenario.

We tend to spend more money than we had planned, and when we do that without budgeting for it, what was supposed to be our profit goes to pay for it.

I don’t like that.

I want projected profit to materialize into real profit.

So, to make sure that happens, I always budget for the worst-case scenario.

If you recognize the trend, it’s like we’re budgeting for things that haven’t happened yet.

Tip #2:

But there’s one place you do not want to plug things into your budget that “hasn’t happened yet”.

Your field labor.

What we’ve seen happen a few times now, is people take our “if you think you’ll spend it, put it in” advice, and plug in new field labor employees that they think they might hire.

That creates a real problem, that will cost you money.

Why?

I thought we just got done saying “If you think you’ll spend it, put it in”….

Well …except for labor (assuming you recover all or most of your overhead on labor)

What changed?

Most contractors recover most, if not all, of their overhead on field labor.

So what a budget does is look at all of your overhead and depreciation expenses, and figure out how much it needs to mark up your hard cost on labor, to also cover your overhead expenses.

The budget finds your hard cost of each man-hour of labor. (ie $30/hr)

And then also finds how many dollars per man-hour of labor you need to add to recover the overhead costs. (ie $40/hr)

When you add field labor employees and how many hours they’d work in a season to your budget, the budget tool adds up all the field labor hours from each employee in your budget and gets your company’s total man hours for the season.

It can’t tell the difference between existing employees, and those that you haven’t hired yet.

Let me describe a super simple example.

Example 1:

Let’s say you already have 5 field labor employees. They each work 2,000 billable man hours in a year. So your company has a total of 10,000 billable man hours a year.

Now, let’s say you have $250,000 of overhead expenses in a year.

The budget tool will take those $250,000 of overhead expenses, and divide it by the total of 10,000 man-hours. Which equals $25/hr.

This means that for every billable man-hour you work, you are recovering $25/hr toward overhead expenses.

But, let’s go to a second example.

Example 2:

Let’s say you are building your budget for next year, and you plan to hire your next field labor employee, bringing your total to 6 field labor employees.

This new employee will also work 2,000 billable hrs in a year let’s say.

If you add that employee (that you haven’t hired yet) to your budget, it brings your total company man-hours to 12,000 billable man-hours.

Let’s divide the $250,000 of overhead expenses over 12,000 man-hours. What do we get?

You’d now have to add $20.83/hr per man-hour to recover $250,000 of overhead.

Except…. you haven’t hired that person yet.

Meaning you are not yet getting that production out of that employee.

Meaning you are not getting more jobs done yet.

This means you can’t bill more customers for more money yet.

But…

Your budget sees $250k of overhead and 12,000 hours.

The estimate you are sending out to Mrs Jones this afternoon is based on your budget.

Meaning the estimate is priced incorrectly. Too low.

You’re not recovering enough overhead per man-hour.

Because of that “not-hired-yet” employee in the field labor section of your budget.

So, what’s the remedy?

Tip #3:

It’s simple.

Don’t add field labor employees to your budget until you actually hire them. Until you actually cut their first paycheck.

Then you can add them.

As long as you do that, you’ll be good. The estimate you’re sending out this afternoon will be priced correctly.

If don’t use SynkedUP, and you’d like to dig in and find out what your business should be charging per man-hour, schedule a free budget call with our team! We’ll help you determine that.

If you use SynkedUP, and want to dig into this and review your budget, book a call with our experts!

Until next time

Weston