Last week I wrote about the first critical KPI to track: net profit per hour. This week I’ll cover the second: overhead cost per hour.
To determine how much profit drops to the bottom line for each billable hour you must calculate your overhead per billable hour.
Overhead cost per hour means: for every billable hour or revenue producing hour, how many dollars do you need to add to cover the overhead cost of the department (or the company)?
Make sure that your overhead payroll costs include only overhead personnel. Field labor costs should be in costs of goods sold. If they are in overhead, make the payroll corrections necessary to put them in cost of goods sold. Otherwise, your overhead cost per hour will be inflated.
Different departments can have different overhead costs per hour. As a general rule, the highest overhead costs per hour are for service and maintenance. The lowest overhead costs per hour are for new construction.
Here’s how to calculate your overhead cost per hour.
There are two types of overhead costs: space related and people related.
First, space overhead. There are five things that cause space expenses: rent, utilities, building maintenance, building taxes, and building insurance. These include security systems, snow removal (in the north), landscaping, janitorial services, and other building maintenance.
Determine the total productive space used by each department. Productive space is the space occupied by either people or things related to a revenue producing department. Do not include common areas such as a conference room, kitchen and bathrooms or space occupied by accounting and other overhead related people.
If the warehouse contains parts and materials for several departments, make an educated guess as to the square footage for each department.
Next, people overhead. Every overhead item not included as space overhead is related to people. For example, the more people you have, the more office supplies you have. The more people you have, the more telephone calls you have.
If you know the exact amount of time that somebody spends in a particular department, then take that percentage rather than the overall estimate. For example, you, as the owner, should estimate the amount of time you spend in each department.
Then, there are specific overhead expenses that are not shared. For example, the installation department should not be responsible for the service manager’s salary and vice versa. These people spend 100% of their time in a specific department.
Once you know the total amount of overhead for each department, then calculate the overhead cost per hour by dividing each department’s overhead by its revenue producing labor hours.
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Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
