What G&A overhead costs and time have in common

Jim HustonFour of the six estimating methods I discuss in my new book, “A Critical Analysis of the MORS Estimating System,” calculate general and administrative (G&A) overhead costs to allocate to a project or service in relation to the direct costs on a project or service.

Factoring, SORS, DORS and MORS all calculate their G&A overhead by multiplying one, two, three or four of the direct cost components (materials, direct labor and burden, equipment and subcontractor costs) by predetermined percentages. 

The G&A overhead and profit per hour (OPPH) method differs from the other methods in that it calculates the G&A overhead costs to allocate to a project or service based on job duration and a time unit (man-minute, man-hour, man-day, crew-day, etc.).

The G&A Overhead Budget
If you’re going to use any system that allocates G&A overhead costs to your services and projects, you have to identify, define and calculate G&A overhead costs. You normally do so in one-year increments prior to the year in which they’ll be incurred.

We need to note that this budget is based on a time unit – one year. Once we determine the G&A overhead costs to allocate to and recover in our projects and services, we need to decide what mathematical formula(s) we’re going to use.

Take an example budget where G&A overhead expenses total $250,000, or 25 percent of annual revenue. Approximately $220,000 of the G&A overhead amount is incurred based on a time unit. This amount is 88 percent of our G&A overhead total in our example. Typically, 85 to 90 percent of all G&A overhead costs are incurred based on some time unit; weekly and monthly are most common.

The direct costs identified in our budget are not incurred based on a time unit. Rather, they are incurred based on an event taking place, either a service or a project.

One unique and important feature regarding direct labor payroll and labor burden is that they can be broken down into a time unit, whereas the other direct costs cannot. Direct labor payroll and labor burden are both event- and time-related.

If 85 to 90 percent of your G&A overhead items are incurred based on a time unit, and if the annual G&A overhead budget is based on a time unit, it makes sense to allocate these costs to services or projects based upon a time unit. And what is the link that connects G&A overhead costs to the events (the projects and services provided by the company) in direct costs? It is field labor hours – not dollars.

Another important feature of G&A overhead costs is that the salaries for office staff, owners and the related labor burden make up approximately 50 percent of all G&A overhead costs. These salaries do not change much – or often – during the annual budget cycle.

G&A overhead costs do not vary much from month to month. The items incurred based on a time unit are pretty stable: Telephone bills, overhead payroll and burden, rent and utilities are relatively consistent for most landscaping businesses. Even if off-season G&A overhead expenses vary from seasonal ones, it’s a moot point. All G&A overhead expenses are allocated to jobs or services that occur during the season, whether it’s six, nine or 12 months long.

Job or service costs are referred to as “direct” expenses. The reason is that these costs are directly caused by their related projects or services. G&A overhead costs, however, can’t be tied to specific service calls or projects in the field. Which job caused your electricity bill to go up or down? Or which one prompted your office manager to ask for a raise? It’s important to distinguish between expenses incurred based on time and those incurred based on events that are job- or service-related. Costs incurred due to events are usually direct. Ones incurred due to time generally are not. This is the primary reason why allocating G&A overhead costs to projects or service pricing utilizing predetermined mark-up percentages is a faulty mathematical assumption that can cost you jobs and lots of money.

Costs must be allocated to jobs or services in the same manner as they are incurred. Somehow, you need to put these indirect G&A overhead costs into the pricing for projects and services and pass them onto the client to pay. This is why I use the G&A overhead and profit per hour (OPPH) method to allocate indirect costs to service pricing and projects. Next month, I’ll explain my OPPH method.