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Stephen G.
Stephen G., Sr Financial Expert
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I am a and driven 26 year old breaking my way into project

Customer Question

I am a young and driven 26 year old breaking my way into project management.
I have a question regarding profit margins and direct/indirect expenses and the best way to calculate them. Or better yet, if they should be 'calculated'.
First i'll explain my situation. I've recently been awarded several new projects from a new client. Our work is in the construction field, and our billing methods vary depending on client preferences. I have and have had several ongoing projects for several clients that are all billed at an hourly rate. This is really cut and dry, and I don't need any help here. For these projects, i've been using templates to track profit margins for this work. 'Production' on these types of projects is simply your hourly rate* hours billed. All direct expenses are taken out, and what's left is your 'profit'. Now, the demon(indirect expenses) has been discussed between myself and my managers, and basically I have been told if we are hitting 25-30% profit margins using these calculations then indirect expenses are being 'covered'.
This new client has requested to be billed based on production, rather than at an hourly rate. Although hesitant, I was not given another option so I spent several days putting the numbers together and bid the project based on production. All billing now is directly related to production on site. There are up weeks and down weeks, but overall I feel it has been a successful project. Using the template I have been using for our hourly work, but changing 'hours work' to basic 'production', the projects are yielding 18-22% profit margins.
Recently it has been disclosed that we want to start 'tracking' our indirect expenses. I've been told now that, the calculation for this is .96/1 or each dollar paid out in direct wages including overtime. This seems odd to me because this number has been extremely inconsistent. On average our crews are working 55-65 hours a week, so on weeks when we do not have any downtime due to weather, etc., the indirect expenses are much more than they would be on an 'assumed' 40 hour work week. There are also weeks that some of our crews have worked less than 40 hours due to site conditions, so these weeks our indirect expenses are less. On average, our crews work between 10-20 hours of overtime a week, so the indirect expenses have been huge.
Let me also note that, this .96/1 taken out in addition to all direct expenses(material/daily equipment costs/wages,etc.).
I understand that indirect expenses are real. Admin, insurance, mortgages, utilities, etc.. It all makes sense. but- i'm trying to justify this large 'indirect expense' and trying to generously calculate what our companies overhead could be and it doesn't seem to make any sense to me.
So:
Is it logical to base you indirect expenses on wages that vary from week to week?
Is it logical to base your indirect expenses on wages if you assume a 40 hour work week for all direct wages? (this seems a bit more stable?)
Is it logical to take 96/1 of wages out of 'production' in addition to all direct expenses on construction work that requires an abundance of man hours?
Are there any 'rules' being broken here? Should indirect expenses be tracked rather than 'assumed' or 'calculated'. I can see how this really would be a pain but- if we want to get 'real' about our indirect expenses it seems odd that applying a 'calculation' would yield any accurate results.
I have been working for this company for 10 years, and have recently approached my managers about profit sharing. I feel that maybe this is a ploy to change my mindset.
Any feedback is very much appreciated.
Submitted: 1 year ago.
Category: Finance
Expert:  Stephen G. replied 1 year ago.

Are you saying that you are figuring that your indirect expenses are computed based upon 96 cents for each $1. of wages? If so, it sounds like the company's profit is built into that figure.

Obviously, it depends upon what costs are considered in the indirect costs. There are no set "rules" relating to the way a company computes or allocates it's overhead. Generally if those costs are to be allocated based upon hours worked, that is based upon a normal 40 hours work week. So, you would add up your projected budget expenditures for the expenses to be included in overhead (indirect expenses) and then you would determine an hours overhead rate based upon an annual 40 hour work week. So there would be no allocation of indirect expenses to overtime hours as it would be impossible to accurately project the amount of overtime necessary to complete all of the company's projects for the year ahead.

Without a great deal of additional information, it is difficult to comment upon what is going on politically with respect to your mindset with respect to profit sharing, etc.

Expert:  Stephen G. replied 1 year ago.

Do you have any additional follow-up questions or comments?

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