Q: Please explain the difference between General Conditions and Overhead & Profit when you want to separate them in a proposal for your client. What items fall into each category? Also, what percentage is the norm for General Conditions in a proposal? — Tonka S.
A: Let’s first define terms. There are two types of overhead expenses. Some contractors mix the two together, but that’s not a good idea.
• General overhead includes all the “costs of doing business” and is spread over all projects. These are indirect costs, sometimes called G&A (general and administrative). Most of these are fixed costs that a company needs to spend whether they are busy or not.
• Job overhead includes all direct costs associated with a specific job. These are often referred to as General Conditions. Most contractors include these costs in the job estimate as line items (my preference), but some count them as part of general overhead.
General overhead (indirect costs) include such things as office expenses, sales, advertising, training, insurance (worker’s comp and business insurance), legal and accounting, office and shop expenses, warranty work, cell phones, administrative salaries with labor burden, taxes, and the owner’s salary and expenses assuming he is not swinging a hammer on the job site. This would also include truck, tool, and equipment expenses not billable to a job.
Job overhead (direct costs) include such things as job prep, permitting, plan check, dumpster, trailer, clean-up, small tools and blades, tool rentals, portable toilet, salaries and burden for job-site supervision, temporary power, security, and liability insurance for a specific job. These costs are generally billable to a specific job on a cost-plus contract.
Whether a cost is considered general overhead or a direct job cost (entered in the estimate as a line item) varies from one company to another. This makes these numbers very slippery and hard to compare from one contractor to another. One contractor may have a lower markup, but count a lot more expenses as direct job costs.
The most important number to the customer is the final price, not how you get there.
A contractor should track these costs separately. Tracking direct job costs helps with estimating and job costing and lets you know if you are making a profit on individual jobs. Tracking indirect costs lets you know if you are making money overall as a company. It also shows you how much you must mark up all jobs to recover your overhead expenses – or if you need to cut your overhead.
For residential contractors, general overhead often ranges from 10% to 20% of total revenue. General conditions will vary a great deal depending on type and size of job. I think it’s better to include these costs in your estimate as line items than to wing it with a percentage.
Overhead numbers are going to vary a lot depending on company size and volume, project type and size, and how you do job accounting. It’s easy to throw percentages around, but they might not apply to you. Developers, custom builders, and remodelers have very different cost structures. — Steve Bliss, Editor, BuildingAdvisor.com
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