### Estimating Application

Get the "Right Price" All the Time

"Profit is not what's left over after all your expenses are paid, but must be budgeted as the first line of expense in a disciplined planning process."

**ESTIMATING**

The first step in developing a price for a product is to determine the total direct cost of the item. Knowing the labor hours and material costs, allows for this calculation

**Calculating Direct Costs (Cost of Goods Sold)**

Direct costs are the expenses that can be directly applied to each job or product. Try to think of it as that cost which increases or decreases according to the product or services we make or distribute (i.e.: sales).

• Direct labor and related taxes and benefits (1099 or W2’s), (Retail or Construction)

• Materials

• Subcontracts

• Shipping

• Equipment rentals, etc. are all direct costs and must be included in this section.

• Sales commission

Labor hours are turned into labor and overhead costs by using the labor and overhead rate(s) and the following formula: How these rates were developed is covered elsewhere.

Labor hours X Labor Burden $/Hour = Labor Burden Cost

For example, if the estimate to rebuild a car is 80 hours and the company’s labor rate is $15/hour with a labor burden rate of 33%, gives a labor burden rate of $20/hour, the total labor burden cost is 80 hours X $20/hour = $1,600.

Material costs come from the company’s supplier’s unit costs. Remember to include any freight charges, delivery charges, sales tax and other similar items. Also include any equipment rental, subcontractors, etc.

**Overhead, or the operating expenses, are allocated to the order via the % overhead rate.**

• The purpose of using an overhead factor is simply one method of absorbing or including an appropriate amount of overhead and other Non-Direct costs into the price of the goods or services.

• It is most important that one realizes, and fully understands the principles, concepts, inter-relationships, and dynamics of calculating an Overhead Factor for use in pricing. In the course of learning and using any method of calculating and distributing Overhead Costs into pricing it is imperative to remember the following:

• One must not lose sight of the simple fact that over the course of a year, a certain amount of fixed, and actual dollars will be paid out in overhead and other non-cost of goods sold. These costs must be re-captured before a profit will be realized

**Calculation**

• The Overhead Factor is the relationship between Total General and Administrative Expense and Total Cost of Goods Sold. In other words, you might consider that all of the indirect and overhead costs are there, or exist, to support the Cost of Goods Sold of doing business.

• Divide the Total General and Administrative Expense by the Total Cost of Goods Sold and the result will be the Overhead Factor, expressed as a percent.

• For example, referring to your P&L for 2016 and the results we find the following Costs of Goods and General & Administrative Expenses

**Sales = $1,000,000**

**Cost of Goods Sold = $700,000**

**Gen. & Adm. Expense = $250,000**

• For 2016 Budget, we would divide $ 250,000 by $ 700,000 which equals 0.3571 or expressed as a percentage, the Overhead Factor would be: 38.46% or rounded 35.7%.

**Once you have established our overhead factor, you can proceed with pricing.**

Steps | |

1 | Determine the total cost of all materials required to complete the job. |

2 | Estimate the labor cost required to complete the job (Fully burdened labor dollar). |

3 | Total your direct costs (Materials + Labor). |

4 | Multiply your total direct costs by the overhead factor |

5 | Add that product to the total direct costs. |

6 | Divide the sum by the inverse of your desired markup. |

****THAT IS YOUR SELLING PRICE**** | |