In a service business, bidding jobs accurately is important. If you’ve been flying by the seat of your pants and haven’t crashed yet, you’ve been very, very lucky. Your bidding process could probably benefit from more rigor. In this post I’m going to talk about how to do it right.
When you work by yourself as a caterer, gardener, writer, or programmer — or in any other service capacity — figuring out how to bid a job is relatively easy. You estimate your hours, multiply by your rate, adjust a little up or down if necessary, send off your bid, and cross your fingers.
But as soon as you decide to hire an employee or two to help out, the accounting becomes a little more complex. And you must understand the basic principles behind that accounting or you’re in danger of bidding yourself out of business.
One important concept that comes into play is direct vs. indirect costs. (Indirect costs are commonly referred to as overhead.) In a service business, the direct costs are primarily what you pay your employees per hour for actually doing the job. (We’ll talk about materials later.) The indirect costs are the rent for your office, the fees you pay your accountant, and the cost of leasing the computers, trucks, machinery, or anything else your employees use to get their work done — in other words, all the costs that are associated with running the business in general, as opposed to costs you attach to a specific job.
Your bid has to take into account both direct and indirect costs, and the way you do that is by marking up the hourly wage of your employees. The question is: How much should you mark it up?
If you just hate thinking about numbers, the rule of thumb is to triple the hourly wage you pay your employees. One-third covers their salary, one-third covers indirect costs, and one-third is for profit.
If you want to be a little more precise, here’s the process: First, figure out what your indirect costs actually are. Add them up for a year. Second, figure out how many hours you have to “sell” in a year. I calculate 1,920 hours per employee, which is 8 hours per day for 48 weeks, a figure that takes into account holidays, vacations, and sick days. Third, divide the indirect-cost number by the hours number and you’ll get how much you have to add to an employee’s basic wage to cover overhead.
Example: You operate a small cleaning service out of your home and your expenses are $2,400 per month. You have three employees, which means 5,760 hours. When you divide $2,400 by 5,760, you get 0.417, or $4.17. You need to add $4.17 to the hourly rate you charge customers for each employee hour to cover your indirect costs. So if you pay your employees $10.00 an hour, you have to bill them out at a minimum of $14.17 per hour or you’ll lose money on every hour.
Of course, you’re not operating your business just to break even. In my next post I’ll talk about profit.