Dual Overhead Explained
Dual Overhead (aka: Dual Rate Method) is the correct method to calculate
your breakeven point. It allows you to properly price installations
and replacements. It is also very appropriate for commercial work. We
did not invent the dual overhead concept. This concept is well documented
and spoken about heavily on the internet. Dual Overhead has been taught
for years by Gary Elekes
Fails Management Institute
and others. It is used for replacement and installations sales. It is
also a favorite among large construction companies whose jobs may span
many months or even years.
Dual overhead works on the idea that labor drives overhead expenses,
meaning the more labor hours used, the more overhead will rise. In
other words, the only reason you have overhead is because you have employees.
Dual overhead pricing uses the department’s overhead to create two factors
used in setting a breakeven price.
The first factor is what is called a MESO Factor (from our materials,
equipment, sub-contractors, and non-labor costs).
The second factor is what is called a Labor Factor (from our direct
labor costs). This factor also considers what is called the Dual
Overhead S Factor. This is an adjustment to account for higher
than normal labor to MESO ratios.
The dual overhead pricing method does require a company
to have a strong financial framework to be certain the figures
used in the dual overhead calculations are up-to-date and accurate.
Your accounting software should be providing you with fully
departmentalized income statements so that you have labor and
MESO figures for each department. It is also important to have
an operating budget so that your pricing can reflect where you
are going – not where you have been. Using specialized software
such as Total Office Manager
from Aptora will offers these capabilities.
Labor is the toughest thing to provide so your gross margin on
labor must be higher than it is on MESO. Using the same multiplier
for both labor and MESO can hurt your company financially and
result in big losses. Jobs with a lot of labor can be underpriced
and you will lose money. Jobs with a lot of MESO can be overpriced
and you run the risk of losing out on the sales opportunity.
MESO stands for materials, equipment, sub-contractors, and other
non-labor direct expenses. Subcontractors, rentals, permits, freight,
etc. are treated as materials because there is very little overhead
attached to them.
Our X formula was derived using MS Excel's Trend-Line formula. It very
closely approximates X-factor chart data. This formula has an error
rate of approximately + or - 2%.
Add for Net Profit
The above calculations are your breakeven point. Be sure to add for
net profit. We generally recommend that you have a higher net profit
for labor than you would for MESO. The reason is due to the fact
that labor is harder to produce and manage than MESO.