What goes into costing in a contractor’s shop?

The following article, which originally appeared in the pages of JobScope in 1988, is as accurate today as then…

Ask yourself a question: What does the average mechanical contracting firm make in profits on annual sales? We’ll give you the answer at the end of this brief article, which is condensed from “Your Heritage and Future in the Pipe Trades,” published in 1985 by the National Joint Steamfitter-Pipefitter Apprenticeship Committee.

The function of estimating properly and then controlling costs is crucial to the contractor — and to all people working for a contracting company.

Start with DIRECT COSTS. They include materials, productive labor, and other costs directly related to a particular job. Direct costs can run 85 percent or more of the total job price. The other major category of contractor expense is INDIRECT COSTS, also known as overhead. These are the costs necessary to the contracting company’s operations but which, because they aren’t directly related to any job, must be apportioned to the selling price of each job performed by the company.

Many employees have trouble understanding overhead. This is understandable, since many of these costs are hidden.

Perhaps the best way to look at overhead is to think of you and your family as a “contractor.” You are the sole breadwinner, selling your time and skills — as you in fact do. Your spouse runs the home, allowing you to go to work every day to provide food, clothes and shelter. Your spouse isn't a wage earner; instead, some of the money you earn must be used to buy food, store it in a refrigerator or cabinet, cook it with spices and salt on a stove, and serve it on plates and with utensils.

Money is also necessary to pay the rent or mortgage. There is homeowner’s insurance, roof repairs and siding replacement. Clothes must be bought, washed or cleaned, and replaced. There’s a stove to buy, repair, and eventually replace. And so on. In a very real sense, your spouse is your home administrator in charge of your overhead expenses.

The next category is building and shop expenses. This includes shop labor, janitor and watch personnel salaries and fringes, building rent or mortgage, utilities, insurance, taxes, and maintenance. The larger the building or shop the higher these expenses.

Finally and not least, there are selling expenses, to make certain there is more work tomorrow for the contracting company and its pipe tradesmen. These include salaries and fringes for engineers and estimators, plus expenses for advertising and promotion.

All of these indirect expenses are necessary to obtain, coordinate and track work on each job performed by the contracting company. These expenses are usually apportioned pro-rata to each job.

Assume the company does $1 million in gross sales in a year and the value of a given job is $100,000, or 10 percent of the year's gross sales. In that case, 10 percent of indirect expenses for the year will be charged to that job. All of these costs — direct and indirect — must be recovered before the contracting company makes money on a job.

The answer to the question above, from the Heritage booklet: Many people think profits run 5, 10 or even 25 percent of sales. According to surveys conducted by their national associations, mechanical contracting firms make about a 1 to 3 percent profit on annual sales.