Understanding indirect expenses will greatly benefit your remodeling business. By pretending they don’t matter, you’re jeopardizing your remodeling company’s fiscal health.
Last week one of my very favorite people (yes you, that’s right YOU!) and I agreed to ‘argue’ about Indirect Expenses. This is so important to me (and to you!) that I dropped everything including decorating my tiny Christmas tree to write this very important PowerTips Article.
First things first – some definitions:
FIELD LABOR BURDEN: all costs related to employees who work on jobs, including
- Field employer paid payroll taxes – FICA/Medicare/FUTA/SUTA
- Field insurances – workers comp and general liability
- Field benefits – medical/dental/life insurances, paid time off, retirement contributions, among others
- Field indirect expense allocation – an allocation intended to move indirect expense from overhead to COGS and therefore to the jobs
INDIRECT EXPENSES: all expenses related to keeping a field employee productive on the job but that can’t be easily tied to a specific job. Field cell phones are a perfect example – if you provide cell phones to your field employees, it makes them more efficient. However you can’t easily tie that cell phone bill to the jobs he/she worked on.
So we ‘bundle’ all these indirect costs into an expense range – called INDIRECT EXPENSES. Here’s a good list from my QuickBooks Manual showing all the costs I think should be included. Comment below if you’d like the chart of accounts and I’ll send it to you.
Now you know all the costs that should be included in Indirect Expenses – next we need to get these expenses into COGS AND equally important ONTO THE JOBS.
The BEST way to do this is through payroll – this makes the process automatic! And it makes your average hourly field labor cost complete.
This is the payroll setup in QuickBooks:
- Company contribution
- Name – Field indirect allocation
- Track expense by job
- Liability Account: overhead expense account Indirect Allocation
- Expense Account: COGS/Field Labor Burden/Indirect Allocation
- Skip through the remaining data entry screens to Default Rate & Limit
The % rate to be allocated is the TOTAL of the Indirect Expense range (from your 2016 budget, you have completed your budget haven’t you?) DIVIDED by the TOTAL of the Field Gross Wages (from your 2016 budget).
SO – here’s the test: what would the Default Rate be if
The TOTAL budget for INDIRECT EXPENSES for 2016= $150,000 and
The TOTAL budget for COGS/FIELD LABOR/GROSS WAGES for 2016 =$450,000
If you said 33% – PAT YOURSELF ON THE BACK. You get an A+ – $150,000 (the Indirect Expense total) is 33% of $450,000 (Gross Field Wages).
The PROOF of the accuracy of this rate shows in the Actual vs. Budget for the INDIRECT EXPENSE range over the year …. If you actually spend $150,000 in Indirect Expenses AND your field gross wages are $450,000 then the balance in the Indirect Expense range at year end will be ZERO. And you’ll earn another A++.
EXAMPLE of ZERO BALANCE BELOW
And NOW you’ll have all indirect costs applied to COGS AND to the JOBS – you can now calculate your estimated labor costs so your estimates will capture all labor for the New Year!
Think this was good? Well it’s just the beginning!
I do a session titled “Measure What Matters” at the Mastering Your Remodeling Business Workshop next month! (Yes, January 2016). Register right now so we can meet and discuss your financials! And there will be some other experts there, too. 🙂
GO FORTH AND PROSPER and HAPPY NEW YEAR!