Mike Holt Business Newlsetter Series
December 09, 2022
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Mike Holt
Estimating is a skill that can make or break a career or company. Understanding the estimating and bidding processes is essential for your business to remain profitable.

This is newsletter #40 in the series. If you have missed prior newsletters, and are enjoying the series, we encourage you to purchase the complete Electrical Estimating Program. Click on the coupon at the bottom of this page.

Determining Break-Even - Overhead Calculation Methods

There are two methods of applying overhead to a job: the percentage to prime cost method or the rate per labor-hour method.

Percentage to Prime Cost
Most contractors apply overhead as a percentage of prime cost. This method has worked well for many contractors over many years, but it is most accurate when applied where the contractor does jobs that are similar in size and content. For example, the percentage to prime cost method of applying overhead works well for a contractor that does strictly residential housing or one that does only office build-outs. This method should not be used by a contractor that does many different types of jobs such as residential, commercial, service, and so on, because the management demands are different for each type of job.

Cost Per Labor Hour
The percentage method is really only suitable when it is being used on similar jobs where the ratio of material cost to labor cost is approximately the same from job to job. Also, one has to be careful to apply the correct multiplier to the prime cost.

Since overhead is related primarily to the management of labor and not the cost of material, it should be applied to the labor man-hours of a job. We can calculate this value by dividing the overhead dollars for a given period of time by the actual field man-hours for the same period of time. Review the following example:

Author’s Comment: If you are not sure how to apply overhead to a job using the cost per labor hour, then apply overhead as the same value as your labor cost. Better yet, seek the advice of a good accountant.


For more information on this topic, get a copy of Mike Holt's Electrical Estimating video program and textbook.

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We'd love to hear from you about this series, and the ways you're using it. Send us your comments and feedback by clicking on Post a Comment below. Look out for the next part in this series a month from now, and please share with your colleagues.

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