Let's return to HVAC business owner Bob. Aside from realizing that the company paid more for labor and materials, he also discovered that his overhead costs went up.

"When did this happen?" Bob asks himself. "How did I miss that?"

After looking at his monthly statements, he discovered that several overhead costs (utilities, rent, software, and truck fuel) had increased. Six months ago, he was paying $6,000, but now he's paying $7,000.

Calculating Hourly Overhead Rate

As discussed in our previous post "You Did the Work. Why Doesn't the Margin Show Up?", the overhead rate per hour is simply the total monthly overhead amount divided by the total monthly billable hours. Going back to Bob's scenario, his company was paying $6,000 in overhead each month, and since his company works 320 billable hours each month, his hourly overhead rate is $18.75/hour.

Why It's Important

It's crucial for business owners to track their overhead costs consistently because if they don't, they'll discover that, seemingly without warning, their overhead costs have suddenly increased. For Bob, his rent, utilities, and software had each increased by $300, and truck fuel to a total of $100 over the last six months, which altogether increased his overhead costs by $1,000.

Business owners also discover that, when their total overhead costs increase, it also increases their hourly overhead rates. In Bob's case, now that his company is paying $7,000 instead of only $6,000, he also realized that his hourly overhead rate has increased from $18.75/hour to $21.88/hour.

Margin

Finally, a business owner like Bob can calculate all their costs and still come up short. This is often because they treat the margin like a bonus, not the goal. The final step that will move the needle for most businesses is to stop guessing at how much they will make and to prioritize the margin for every job. Margin is a business's earnings after all the costs have been paid. The margin is what frees up the cash flow to chase bigger jobs or the flexibility for a business to decline a job that will not benefit the company. Businesses charge an hourly labor rate on every job, but then can't answer the question of whether or not each job is profitable. Our Gross Margin Calculator makes that answer easy to see job by job.

Bringing It All Together

After discovering the increases, Bob immediately reviewed all the current estimates to apply the new labor rate, labor cost plus the new overhead, to the quotes. Additionally, he creates a monthly task to review the monthly overhead costs. He also determines the target margin he wants to earn on each job to guide him in his job pricing. Now Bob's quotes have addressed the pricing that is driven by the actual costs. Next week we will look at how he can build margin into his pricing so that it is the goal not the hope.

Call to Action

Take last month's total overhead, and divide it by last month's total billable hours. That is your overhead cost per billable hour. Add it to your next quote. Add a new task of reviewing both your total overhead costs and your hourly overhead rates to your monthly to-do list.

Here is a link to a calculator to help you determine your hourly overhead rate: HVAC Overhead & Job Costing Calculator.

If you need additional assistance, book a complimentary consultation with Joseph.

Disclaimer: The information in this post is intended for general guidance purposes. For advice specific to your business finances or taxes, consult a licensed accountant or financial advisor.