The One Calculation Every Contractor Should Know

You get a lead for the type of job you do day in and day out.

The prospect is asking you if you know what it’d cost them to do the job.

“Sure! Let me work it up.” you say.

You quickly run through your process, and come up with a price.

But, hold on a moment…

Do you know your breakeven on that price for that job?

If you don’t know your breakeven – you don’t know your price.

What is your breakeven?

Direct costs + indirect costs = breakeven.

Indirect costs can also be referred to as overhead expenses.

You can find your breakeven on a job by adding up your direct costs + overhead costs.

The sum is your breakeven.

Direct costs are the hard costs you pay, and you only pay them if you win the job.

Labor, materials, and potentially equipment and subcontractors.

Indirect costs are the costs you have to pay whether you win the job or not.

Things like your insurance, truck payment, marketing, etc.

The tricky part is discovering how much of your indirect costs that each job needs to bear.

You can’t have a $5,000 job bear all of your insurance cost for the year…

But how much of that insurance cost should that $5,000 job cover.

What is its “responsibility”?

And insurance is only one example. That’s before we’ve looked at marketing, office costs, etc.

How to find your breakeven

Finding the direct cost portion of the breakeven number is usually not the hard part.

That’s the part you are doing anyway, as you crunch the numbers to come up with a price.

The much more “foggy” number is the indirect costs that need to get baked in to your price.

Or how much money does each varying job need to produce to cover those indirect costs for the time you are on that particular job?

What happens when you buy a new truck? Spin up a new marketing program? Insurance goes up?

A simple approach to finding out just how much each job “owes you” to cover indirect costs is to bake the indirect cost recovery into your hourly labor rate.

So, let’s say you have 5 team members that work 2,000 hours a year. That’s 10,000 hours per year total.

Now, let’s say you have $250,000 in overhead expenses/indirect costs each year.

Take the $250k divided by 10,000 total hours worked = $25/hr just to cover the indirect costs.

So, let’s say you have $35/hr direct costs in your labor to pay your staff and payroll taxes.

$35/hr for direct costs + $25/hr to cover indirect costs = $60/hr just to breakeven.

Bingo! You’ve found your breakeven on your hourly rate.

I’ve got a cool little hourly calculator here where you can calculate your own breakeven and hourly rate using your own numbers.

Now, to answer the question of how much does that $5,000 job owe you to cover its fair share of overhead costs?

Well, how many man hours will it take to complete that $5,000 job?

Let’s assume it’ll take 40 man hours.

40 man hours X $60/hr breakeven = $2,400.

That $2,400 is where you breakeven, after you’ve paid your labor and overhead/indirect costs.

Add in your cost of materials and equipment yet, let’s say that is $1,800.

$2,400 + $1,800 = $4,200.

$4,200 is your breakeven on that job, all in.

Leaving $800 for true net profit. After even your indirect costs are paid. 16% net profit. Not bad.

That $4,200 number in this example, is the number you need to know on every job you price.

If you don’t… well… you’ll likely think you’re making X, when you really are making Y.

To answer that question of “how much does this job owe me to cover my indirect costs?”, it comes down to how many man hours will it take me to do this job.

Once you’ve answered that, using this model, you have your answer.

This $5,000 job that will take me 40 hours to complete? 40 hours X $25/hr for indirect costs = $1,000 just to cover my indirect costs.

It’s a significant chunk!

And it’s why – when you’re not paying attention to it, you usually end up making less money than you think you are.

Not to mention that knowing your breakeven is a super powerful way to kill the temptation to undersell yourself.

It’s better to lose the job than to do it at a loss.

Not worth working for free.

Know your breakeven. Know your price.

If you don’t know your breakeven, you’re gambling.

If you’d like to see how we automate these breakeven calculations in estimating with the SynkedUP app, get on a call here.

Cheers!

Weston Zimmerman

SynkedUP CEO & founder