Last week I was on a consulting call with a nice guy from Baltimore Maryland when I realized how few people are charging for downtime and inefficiencies within their business. This is something I had not accounted for early on in my career either. I want to be clear, this padding is not to account for inefficiencies that are due to mistakes, improper setups/systems, or miscommunications. These costs should account for business-related tasks that are required for operation but are not necessarily billable to a specific job, rather the sum of all your projects throughout the year. This is especially important if you are a one man show, a small operation, or if you are billing time and material. Let me elaborate below.
Assume that you are a one-man-operation and you charge $75.00 per hour for your services. This can be applicable to a time and material job or a project that requires a bid or budget. That $75.00 per hour must account for your overhead and profit, but what about the time it takes to unload your van, clean paint brushes after work, pickup or deliver materials, meet with customers, perform invoicing/office work, or setup/breakdown a project? Assuming that you are not billing the customer specifically for this work, how are you compensated for your time?
If you hired an accountant to do your books, you would pay them a fee, and you would have to account for this within your $75.00 rate. If you had an employee clean your paintbrushes, you would be paying them to perform this task, and therefore your customer should be bearing the financial implications of doing so. If you had to pay a delivery driver to offload their truck into your project, you would have to pay that fee, or that fee would be accounted for in the price of materials. Why would you be responsible for that cost on a customer’s renovation? If you lose an entire day per week unloading your truck, setting up the next job, or breaking down an existing job, and you cannot specifically bill the customer for this time on an hourly basis, that does not mean this should be “free work.” All of this downtime and inefficiencies must be accounted for throughout the year, or else you are working for free.
The easiest way that I have found to account for this downtime is to build it into my rate. Rather than convince my customers how many hours I spend after work on their project and charging them for time they do not see me spending at their home, I account for the cost in my rate. For simplicity's sake, let’s say that I can only actually work 32 hours or four days a week and the other eight hours are spent doing office work, cleaning my van, loading and unloading materials, or maintaining tools. If you are not outsourcing these services someone needs to pay for them. They are part of the cost of doing business, but may not be attributable to a specific project. So I determine how much money I want to make in a year and how many hours I can work in said year, accounting for business related downtime. You can determine a more adequate and proper rate working backwards from there.
In the above example in which you want to charge $75 per hour, you may think that you can earn $156,000.00 per year working 260 days ($75 per hour x 40 hours per week x 52 weeks per year), but that is extremely misleading. That equation is based on the assumption that you have a perfect 8 hours of work a day with zero sick days, vacation, downtime, or hiccups. This equation was responsible for me working 10-14 hours a day for nearly 10 years to attempt to make up for off days and inefficiencies. It took me a long time to realize that I was doing it all wrong.
Now let’s assume you can actually work 4 days a week for 52 weeks a year to account for sick days, vacation, and inefficiencies. That leaves you with 208 days of actual work in a year. In order to earn that same $156,000.00 I would have to charge $93.75 per hour which is more realistic. Yes, some weeks I may get my 40 hours on the job, and some weeks I may only get 32, but I am accounting for time that it takes to maintain an operation outside of the typical work hours. I am accounting for and amortizing $31,200.00 across all of my jobs for the year and my customers are paying for that cost. It comes out to an additional $18.75 per hour. At this elevated rate I do not feel as though I have to work 10-14 hours a day to maximize my potential earnings in a year. If you chase that number or theory you will burn out and collapse. Your numbers are inaccurate, unrealistic, and skewed.
My equation and example above is essentially accounting for $31,200.00 worth of annual overhead that most owner operators or small businesses do not account for because they see their time as being free. It is their business and they are responsible for these burdens. That mindset is so incorrect, and it amazes me that it took me so long to understand that. If you were to pay someone for all of those tasks it would probably cost you more than $31k a year and you would surely charge your customers for that overhead. These costs and inefficiencies are directly related to being in business and I have found it easier to amortize these costs across all of my sales for the year than bill my customers for hours off-site that may or not be attributable to that job at that exact moment.
For some of you this may be common sense, and when put so clearly it seems obvious, but for many of us (myself included), you succumb to chasing the dollar and the potential earnings. Before you know it you are working before and after work to make up time or profits that you thought you had accounted for on a job. This is not smart, healthy, or sustainable. Do not fund your customer’s renovations. They should be paying for your business if you are serving them. Whether you account for this downtime within your overhead or build it into your hourly rate, it must be accounted for or else you will perpetually be behind the proverbial eight ball.
- Tyler Grace
