BENCHMARKING YOUR BUSINESS Taking the Mystery out of G&A Overhead

General and administrative (G&A) overhead costs (also known as office overhead or indirect costs) are a slippery topic within the green industry.

General and administrative (G&A) overhead costs (also known as office overhead or indirect costs) are a slippery topic within the green industry. Not only do people disagree as to how to define them, they also disagree as to what to include in the figure and how to include it in the pricing of work.

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Jim Huston

The basic issue boils down to this: Once we define them and decide what to include in them, we then need to ensure  we include all of it in our pricing and pass its cost on to our customers. Needless to say, we want the cost for our G&A overhead to come out of our customers’ pockets – not ours.
 
G&A OVERHEAD BENCHMARKS. The first industry benchmark that applies to G&A overhead costs compare G&A costs to total annual sales or revenue in the form of percentages.
 
The total G&A overhead cost for 90 to 95 percent of all green industry contractors will fall between 20 to 25 percent of sales. Large companies with more than $10 million in sales will normally see their G&A costs fall under 20 percent of sales.
 
G&A overhead salaries range from 8 percent to 12 percent of sales. They normally comprise half of all G&A costs. In other words, the biggest G&A expense that a company has is office staff. I call them bureaucrats. Anyone in the company who isn’t producing billable hours is a bureaucrat and their pay goes into G&A overhead.

THE 4/10 RULE. If you know what your actual G&A salaries and total G&A costs are, calculate what your sales ought to be by applying the 4/10 rule. Multiply your actual G&A cost by four. This will tell you roughly what your annual sales ought to be. Multiply your total salaries for bureaucrats by 10 and this will tell you roughly what your sales ought to be. These multipliers actually range a little, but using four and 10 will place you in the ball park.

ALLOCATING G&A COSTS TO JOBS. The next benchmark for G&A overhead costs relates to how we pass them onto our clients.

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First, we divide the total G&A costs for the year by the total billable field-labor hours for the company or related division. This gives us a G&A overhead per field-labor hour amount. I call it OPH (overhead per hour). Here are some OPH benchmarks.
 
To allocate G&A overhead costs to actual jobs being bid, you multiply your OPH by the total projected field-labor hours in the bid. This will give you the amount of G&A overhead to put onto that job. I call this the OPH method. This method is simple, accurate and easy to track.
 
G&A overhead costs are too often mysterious and misunderstood by green industry contractors. Once we clearly define these costs and what is included in them, we can then use some simple industry benchmarks to zero in on them. Once we do that, we can confidently bid them into our jobs and track them to ensure we not only take the mystery out of the process, but we pass these costs onto our clients. Otherwise, G&A overhead costs end up coming out of the contractor’s pocket—not the client’s.
 

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APPLYING G&A BENCHMARKS. A couple of years ago I was working with a client who wanted me to review his budget for his residential design-build division. It was January, two to three months before the season started. Before I saw any of the projected revenue numbers, he told me he had three full-time designers (who would als be doing the selling), $167,000 was the total G&A overhead salaries in the budget and projected revenue was $1 million. I told the division manager he was going to have a bad year. How could I know how the year was going to end when it hadn’t even yet begun?
 
I explained  the following benchmarks. I estimated three full-time designer/sales persons should sell $500,000 each. Estimated sales should be about $1.5 million. Then I multiplied the projected G&A salaries by eight (a little less than our benchmark of ten) and came up with $1.336 million. Sales for the upcoming year should be in the vicinity of $1.4 million. If actual sales were about $1 million, it was not going to be a pretty sight come December 31st.

Jim Huston is president of J.R. Huston Enterprises, a Denver-based green industry consulting firm. Reach him at  800/451-5588, benchmarking@gie.net or via www.jrhuston.biz.

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December 2006
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