Ballpark Numbers: Materials, Labor, Overhead, and Profit

      Business owners compare notes on their numbers. March 11, 2009

Question
Without too much overanalyzing, what is the percentage breakdown for doing business in the commercial casework field? The four biggest ones are labor, material, overhead, and profit. When you guys look at the spreadsheet pie charts, there is a bottom-line to all of this? What are your averages over the long haul? It seems to me, when it comes to bidding, the material percentage is the best indicator of whether or not the bid is too low. What does it need to be to have a healthy company? I suppose a typical pie chart would look something like this. Labor 35%, Material 27%, overhead 20%, profit 18%. I would like to see some actual numbers out there.

Forum Responses
(Business and Management Forum)
From contributor R:
Join AWI. As a member you will receive a cost of doing business book that is done annually. It is from all size of participating shops and will give you all of the info you are looking for. You will also receive an Operational Estimating cost book, to help you 'price' work appropriately. Only you know your true hard costs, but this will help you compare to other shops.



From the original questioner:
I'm not a business owner. I do want to be informed of what average percentages are in this business. I don't have plans to sign up for anything. Just want to be in the know.


From contributor E:
I really feel that the first thing to be aware of is overhead. We figure 18-20% and about 30% for labor. We try and get about 20% for profit, but that doesn't always happen. Sometimes you make more and sometimes there is a mistake and you make less. A real important thing to do on a regular basis is job cost. Don't run your company by how much you have left in your checkbook.


From contributor S:
Here's my four year average: 49% materials, 17% payroll, 11% overhead, 23% profit.


From contributor A:
I'll share my numbers but I want to be sure that we are comparing apples to apples. It seems as if you ask five cabinet businessmen to define profit, you get five different definitions.

Contributor S - I will go out on a limb here and assume that the 17% payroll you are posting is money paid to your employees, and your income is coming from the 23% that you are posting as profit. Am I right? If not, you have one heck of an efficient operation over there.

Only one problem, it looks like your guys are extremely efficient at throwing your lumber and materials in the trash at 49% - just kidding! But seriously, it looks like your materials are on the high side. This lack of balance could be because you may outsource more than some of us. Not a bad thing, I would just like clarification.

Of all who have shared so far you have the best numbers of the two attributes that count the most, #1 Low Overhead, #2 High Profits. Just like to know a little better of how you derived those numbers.

Here are my numbers:

Material=34%, Labor32% Includes my salary, Overhead=16%, Profit=18%. We primarily do frameless high-end custom kitchens. We outsource doors, and drawer boxes. In house we assemble, paint/stain, install accessories, compile millwork packages for installation complete with fillers and touch up kits. We wrap, and deliver.

We only install when our arm is twisted, however we offer full support to the installers including 1-2 field trips for final adjustments, touch ups etc. The frustrating part of this whole thing is the overhead attribute. The overhead percentage is a major slider. The numbers I posted are based on doing 3-4 25K jobs per month. If we only do two of these in a month, our overhead percentage skyrockets and puts our profit in deficit.

Are my numbers in line, and do any of you have recommendations as to how to keep overhead in check? The only obvious solutions are either increase sales, or decrease overhead. In today’s market, I have no control over sales, and yesteryear (before the recession and markets crashed), I entered into a three year lease on a huge building that I am only using about 1/3 of now. Any advice, suggestions or comments on my numbers and post are graciously requested appreciated.



From the original questioner:
All businesses have to have a breakdown like this at the end of the year, and profit needs to be defined in only one way, after all the bills are paid, and the owners draw is taken out, if there is one. Then the owner needs to decide what to do with the leftover money. Seems to me, if the percentage of the materials is much over 35%, you won't have enough money for labor and overhead, and very little profit. So the bid must be too low.

My experience with contractors of old (over 25 years ago) that they lived by the 18% profit margin for the year. If it was 12%, than it was a bad year. It seems like a 20% overhead is needed to run a business. If it is 15%, then you are running a tight ship. Not much new tools or machines. Or you’re living off of something else, like your shop cost is real cheap for some reason.

If labor costs are over 35%, then more efficient tools and/or work space is needed. Then you end up bleeding off some of the money from the other things to cover high labor.



From contributor S:
The 23% profit is my income. We're only a two man shop so I get paid what's left over. The main reason the materials are a bit high is because my prices are a bit low. I think we are very efficient as far as waste goes. This year I have been able to charge more and thus far, materials are at about 37%. But at the same time I bought an edgebander and trailer so my overhead is at about 20% and profit is about the same. Also, we outsource doors and moldings which increase the materials percentage too. They account for about 32% of the costs of materials or in other words, about 16% of the total price.

One thing that may need to be considered when comparing these numbers between different shops is the area in which they are located. For example, if my shop were in California, I imagine I would be paying about the same price that I currently pay for materials. But my overhead and labor would be much higher. My prices would be much higher too. My old boss did a small remodel in the L.A. area for about $24,000 but the same job in my area would have sold for about $8,000. So bottom line, it may be just as hard to compare percentages between different areas as it is to compare prices.



From the original questioner:
I really wanted this forum thread to focus on the actual numbers for your business at the end of the year, and not what the goal is for work. And, there is a distinction between owner draws for one who’s labor is necessary to complete a job. Therefore, the income needs to be put in with all the other labor figures. And an owner draw, that does not work at the place of business. That money comes out of the profit. Let’s try to stay focused on the cabinet construction business. The retail business is a different monster. They don't bid on jobs to make a sale. Things are run differently.


From contributor C:
Our numbers on 2.5 million in sales:

32% material
15% labor
28% oh
25% profit (that's profit not my salary)



From contributor L:
None of these numbers mean anything without knowing what is included in each. Office staff could be HO or Labor. Lots of small shops don't count the owners wage as labor, but consider it in the "profit." Like someone else said HO% can fluctuate a lot month-to-month depending on sales. The first 1/2 of this year was really poor for us in terms of sales/ no profit at all. Our break-even point is about $9,000 a day in sales. Once that break-even point is crossed our profit jumps a lot with each additional sale. OH, office staff, rent, equipment don't change (much) with sales level once you are set up. Some things we make the market will bear a bigger profit margin than others so product mix counts. This is where keeping track of your costs on every job really helps.

I know that in store fixtures the average profit reported by the NASFM is about 5% with 20% or so of the respondents making double that. We put 14% in our bidding and hope for 10% before taxes. Shop size will have a lot to do with how much profit is reasonable. Every 1% we can add to profit represents $25,000. If you are a two-man shop turning $250,000 that 1% is only $2,500!



From the original questioner:
Payroll for everyone should be kept in a separate pool of money from overhead, since it is treated differently, such as tax and insurance. Everyone has a hand in producing a product or service rendered. Overhead is everything else necessary to do business that is not labor. I know, owners like to play with the percentages to make themselves feel good. But the end of the year profit percentages drop very quickly, when it comes time to pay taxes.

Why is it important that an owner, that works full time, keep track of hours worked? It makes a bid more accurate and realistic. And when a day comes, a serious injury puts the boss in a wheel chair for a year, someone has to replace that labor during recovery.

The way I see it, a smart owner would take time to look at the numbers over a period of years, see what kind of work is just dead weight. What work is making profit as compared to norms, or better. And change the direction of his own company. You can't do that, unless the real bottom line numbers are there to look at. The more costs are just mixed into a grey mud, so that no one can really understands the profitability of a job, or the company as a whole. The closer you are to just concluding, I don't understand why the costs are all over the place. I don't know what to do here.



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