Dr. Matt Stevens, the author of "The Construction MBA" (McGraw-Hill, 512 pages) and "Managing a Construction Firm on Just 24 Hours a Day" (McGraw-Hill, 416 pages) has created a critical app for all construction contractors to use.
The Construction Dual Rate Overhead Allocation Calculator is used in the construction industry mostly by self-performing contractors as a costing equation for 1) bidding a project, 2) costing an existing project or 3) allocating corporate overhead to multiple divisions of construction work. It relies on banking information and an accurate yearly overhead budget among other factors.
It is a highly accurate method. It produces two rates, 1) Labor / Equipment 2) Material / Subcontract. This equation produces a percentage allocation of each class of cost. This is the cost of overhead to manage those direct costs.
It is based on studies conducted by several researchers since the 1960’s including Fails, Somers, Cokins, Kaplan, Johnson, and Holland among others.
Chip Greene of Greene and Associates – Mechanical and Plumbing Contractors.
“In specialty contracting trades, the biggest risk we face is labor. The dual rate overhead calculation determines the overhead required for the risk being assumed by the contractor with labor moving this calculation up or down. What it does for us is gives us the knowledge to know that on any given project our overhead is "X" and that is the figure we must have to pay our bills.
We have used this process for over 20 years. I recommend this to any trade contractor as a must for a successfully profitable business.”
Robin Word, CPA of Orlando, Florida
"The dual rate overhead method is to a company what cholesterol screening is to our health. While knowing our overall cholesterol number is helpful, drilling down to the LDL and HDL numbers tells the real story.
The same holds true for measuring overhead related to the management of labor/equipment versus materials/subcontractors. Without measuring both, you simply cannot know the real story, thereby placing your company at risk."
From a practical perspective, one has to know the total cost of the job including the cost to manage it to know the breakeven number. This allows the contractor to play “poker” well in bidding or proposing a project. He or she can look at the project before bidding it in several ways: breakeven, ROI, labor hours, competitor’s bid history etc. However, knowing the breakeven cost of the job is a primary step to arrive at a reasonable proposal price. This prevents a construction firm from taking a job they will later regret getting or one that they erroneously bid too high but, would like to have won.
During project progress, the resulting percentages can be placed on job cost reports to fully calculate project expenses. Contractors typically put these at the bottom of project reports. If this is done, then savings can be calculated and shared. In the reverse, direct cost overages will show an even a greater loss on job. Each of these can be a “teaching moment” for the field and office staff of the total cost of the job.
The method is only as accurate as the information inputted. The contractor has to correctly project yearly overhead and direct cost expenses to accurately calculate overhead costs per project. Once determined, the contractor has “clarity of costs” which provides the best data when making bidding or management decisions.