A Comment on Labor burden and Company overhead as they relate to electrical estimating and project management
The challenges of either a project manager or estimator position contribute to making either career a fulfilling opportunity. Form the estimating side it is difficult to determine months ahead of time how various factors are going to influence the estimate that you work on today. That is partially why an estimate is called an estimate, no one can be 100% sure that the project will be completed as the estimator intended. Two areas that should not require any thought from an estimator while preparing an estimate are labor burden and company overhead. These percentages should be calculated well in advance of an estimate being started. A great estimate with faulty labor burden or overhead is a Bad Estimate.
Project Managers with projects that have faulty labor burden or overhead rates included, often have an uphill battle fighting runaway costs. Tracking labor hours, material and subcontractor costs will be problematic as the difference in both labor burden and overhead will still be paid out, causing the job to look bad upon periodic review even though the labor hours, material and subcontractor costs are within budget.
Labor burden
Labor burden is the difference between what is paid on the employee's check and what it cost the employer; it is a direct cost and is not difficult to determine. These costs will vary from employee to employee however they are a fixed costs and not difficult to determine.
Overhead
This is an entirely different matter then labor burden; this is the cost of keeping your business operating, not direct job costs. The list of possible items is long and varies from firm to firm. The following list is a sampling of items that may be part of your overhead,
- Office Rent
- Office utilities
- Office employee salaries
- Office equipment expense, stationary, computers, software and office equipment
- Vehicles
- Insurances
- Advertisement
- Association membership fees and dues
- Training seminars
- Theft/lost equipment
- Community or sporting event costs
To have an accurate estimate of company overhead, it is essential that all costs associated with the company be listed and understood. In more than one instance, we have seen projects with labor burden included in the firm's overhead, included again in actual labor costs in a bid. It's always been set up on our projects that labor burden is included as a project costs, not on the firms overhead. Once listed the yearly gross sales are divided by the overhead costs and the result is your overhead percentage. Overhead is certainly more difficult to determine than labor burden, as the actual costs are not fixed. To make matters worse the yearly gross sales rarely, if ever, actually meet those that were predicted. You still need to have a targeted overhead percentage for any chance of preparing an accurate estimate. The overhead rate will fluctuate depending on actual costs and gross sales volume. We recommend a yearly review of labor burden unless changes are made during the year to payroll. Also recommended is that your firms overhead is checked quarterly, this will allow changes in the overhead rate if your projected rates are not correct.
Labor burden and overhead percentages are typically not the responsibility of an estimator. However if these figures are inaccurate, the best estimate will still be flawed, as you will not have a accurate cost projection for the estimate.
