Masonry Magazine January 2001 Page. 67
DIRECTS VS. INDIRECTS
Each of these categories are then further broken down in direct or indirect costs. Direct costs (or directs) are those expenses that can be specifically (or physically) connected to the actual material, labor, supplies, and equipment used on a project. Other attached peripheral job costs like shipping & freight, restocking charges, cranes & hoisting, and scaffolding & staging could also be included as part of a direct line item.
Indirects, then become those outlays that are more associated with the peripheral aspects of the work. For project overhead, this includes items such as insurances, bonding, administration costs, and general office duties that can be attributed to a particular job in progress. Car and truck expense (including insurances, fuel, and maintenance) can also fall into this category. Wage and benefit costs due to labor (i.e. worker's comp, benefits, health & welfare, retirement and so on) could also be included as indirect expense... although I've known contractors in the past to include this particular expense within their direct line items.
But that's OK. You see, like the term overhead itself, the delineation as to what is direct and indirect can often get quite cloudy. But over the years, I've found that frankly it becomes far more important for you to be consistent as to where you place a particular line-item and not so important that you get wrapped up in the definitive aspects of what constitutes direct or indirect. In short, if you feel a particular cost is a direct cost, put it there; but then put it there every time! This organization is paramount, because only after you gain a firm grip on the costing procedure can you begin to determine and eventually assign an appropriate mark-up (profit) to your job.
OK, SO HOW MUCH PROFIT IS ENOUGH PROFIT?
So, let's assume that you get your costing under control. Well, we're not out of the woods yet! Now we have to come up with a profit percentage... and, as we spoke earlier, it's not as easy as pulling a number out of a hat. There are many considerations and it basically becomes a decision that is arrived at through a combination of factors that include:
1) Your Office Overhead cost (that we mentioned above). Ideally, this would be broken down proportionately (as close as possible) to the value of the job as it relates to the total value of all the work that was done for the year. For instance, if you have a one million dollar job to which you want to assign a markup, and your overall annual sales volume is $10 million, then you could calculate 10% of your yearly office overhead cost (using the actual previous year's record) and factor that amount into your markup.
2) Your local market economy and activity. Depressed market = less markup; active market = more markup will likely be allowed.
3) Your competition: not just how many, but also how aggressive.
4) The amount of revenue that you feel you need to perpetuate growth for your company. Or better put, how much you need to tuck-away for future endeavors such as that new, larger office, new computers, or other capital expense.
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