This is a great topic so i wanted to start a new thread with this: I read an article stating that the economy of scale does not hold true for electrical contracting. Basic overhead for large companies with hundreds of employees is about the same as smaller companies... until you get to fewer than 5 employees, then the overhead goes up with the removal of each employee until you reach the one man shop, the highest overhead. I say basic overhead because obviously some shops have more efficient managers or are in a niche market. In the one man shop the $80 per hour guy is wasting his time doing $20 per hour work. I believe the basic overhead number was 22% of gross sales.
Big vs. Small company
- Thread starter mlnk
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kwired
Electron manager
- Location
- NE Nebraska
I wouldn't say he is wasting his time - that work still needs to be done and nobody else is going to do it, he is just not getting it done as economically as it could be done.
At same time that $20 per hour work may still be done more efficiently by a good and proven $50 per hour guy. If the $50 guy always gets it done right the first time he likely costs less than the $20 guy that has to do tasks more than once to get it right. It all really depends on how much $20 per hour work there is on the job. Some jobs there is not that much. What do you do with a $20 guy when all the $20 work is done, or are waiting for when there is more $20 work to do? You have him do some of the higher wage tasks and hope he doesn't mess up, and you might even consider it some training and maybe his wage will eventually increase - now you no longer have $20 guy for the $20 tasks. It gets complicated doesn't it?
Rewire
Senior Member
- Location
- Lake of the Ozarks
what you are looking at are two seperate numbers the important number is the 22% of gross for overhead. If you are at 30% of gross for overhead you need to lower that % now you have two options cut overhead or raise your price. Cutting overhead is usually not easy as you need things to operate that cannot be cut so the easier option is to look at your price . That is where the $20.$50,$80 become important. Raising your price increases revenue which increases your gross. If your exspenses stay the same as your gross increases the % lowers. You continue to increase gross the % will eventually go below 22% to say 20"% that means you now can increase your exspenses by 2%
renosteinke
Senior Member
- Location
- NE Arkansas
I have little use for discussions of 'economy of scale.' So often, the speaker is making a claim so broad that it's more an expression of faith.
Yet, let's look at the details of a contracting business. Let's assume "Joe" has always worked a full week, even had regular overtime, and decides to go solo.
Well, if "Joe" is going to continue to maintain his income, he needs to keep working 40 hours. That is, 40 hours on his jobs. That means he needs to put in additional time meeting customers, chasing permits, preparing bids, invoicing, doing his books, maintaining his vehicle, etc. What is that? Another 2-4 hrs. a day? So, our 1-man operation is already behind the curve.
So, "Joe" gets a helper. That takes a lot of the grunt work off of Joe, but also means that Joe now needs additional cash reserves, to start paying workmans' comp and unemployment insurance, and have a payroll. That's more administrative work for Joe. Now Joe's admin time is at least 3 hrs. each day- and he still needs to spend the day working alongside the helper.
Since Joe can't be with his helper, he gets another guy, so the two can work together. Joe can now spend all day on those admin tasks. The admin time and associated costs don't change much. Problem is, Joe is still putting in some long days. In effect, the wages for the three of them is now being earned by the two guys in the field. That's a heavy load; especially since Joe is approaching the point where he needs to provide outfitted trucks for the crew; that's a big expense.
Joe decides to add another crew. Naturally, this now means he must find more work. No longer can he just use his cell phone and the clipboard in his truck. It's time for a real office, with someone to answer the phone. Might as well have them do the books too.
Joe's firm now has six employees (counting Joe), with the four 'field crew' guys paying six salaries. That's not a very easy 'spread.' There's a temptation to add more crews.
More crews? That's more trucks, and now a uniform service, and some serious advertising. At somepoint the 'office' staff will have to grow. An assistant for the first gal, someone to do the drawings, someone to chase parts, etc. You end up needing a 'shop guy' to maintainthe trucks. An important consideration here is that your regulatory burden - things like OSHA recordkeeping - starts to mushroom. At some point, having 'benefits' will be a requirement.
Thus, "scale" only brings economies to a point.
Let's say things continue to go well for Joe, and he continues to grow. I suspect the best he'll ever be able to do is to spread the pay of 4 people over 3 'field' guys. Only when he get to having a payroll of, say, 50, will there be enough of a base for him to be able to kick back and start living the 'high life.'
True, there are things that will let Joe seem better off as he grows. Credit will be very available, and a lot of the money that he formerly sent the taxman will show up in his business as trucks and equipment. Oddly enough, it is the management of this 'paperwork' that becomes the most important part of running the business.
"Scale" has with it other advantages than just any imagined economies. Name recognition, as everyone sees your trucks on jobs, makes it easier to get work. The pain from one bad job is spread over many other jobs.
Yet, let's look at the details of a contracting business. Let's assume "Joe" has always worked a full week, even had regular overtime, and decides to go solo.
Well, if "Joe" is going to continue to maintain his income, he needs to keep working 40 hours. That is, 40 hours on his jobs. That means he needs to put in additional time meeting customers, chasing permits, preparing bids, invoicing, doing his books, maintaining his vehicle, etc. What is that? Another 2-4 hrs. a day? So, our 1-man operation is already behind the curve.
So, "Joe" gets a helper. That takes a lot of the grunt work off of Joe, but also means that Joe now needs additional cash reserves, to start paying workmans' comp and unemployment insurance, and have a payroll. That's more administrative work for Joe. Now Joe's admin time is at least 3 hrs. each day- and he still needs to spend the day working alongside the helper.
Since Joe can't be with his helper, he gets another guy, so the two can work together. Joe can now spend all day on those admin tasks. The admin time and associated costs don't change much. Problem is, Joe is still putting in some long days. In effect, the wages for the three of them is now being earned by the two guys in the field. That's a heavy load; especially since Joe is approaching the point where he needs to provide outfitted trucks for the crew; that's a big expense.
Joe decides to add another crew. Naturally, this now means he must find more work. No longer can he just use his cell phone and the clipboard in his truck. It's time for a real office, with someone to answer the phone. Might as well have them do the books too.
Joe's firm now has six employees (counting Joe), with the four 'field crew' guys paying six salaries. That's not a very easy 'spread.' There's a temptation to add more crews.
More crews? That's more trucks, and now a uniform service, and some serious advertising. At somepoint the 'office' staff will have to grow. An assistant for the first gal, someone to do the drawings, someone to chase parts, etc. You end up needing a 'shop guy' to maintainthe trucks. An important consideration here is that your regulatory burden - things like OSHA recordkeeping - starts to mushroom. At some point, having 'benefits' will be a requirement.
Thus, "scale" only brings economies to a point.
Let's say things continue to go well for Joe, and he continues to grow. I suspect the best he'll ever be able to do is to spread the pay of 4 people over 3 'field' guys. Only when he get to having a payroll of, say, 50, will there be enough of a base for him to be able to kick back and start living the 'high life.'
True, there are things that will let Joe seem better off as he grows. Credit will be very available, and a lot of the money that he formerly sent the taxman will show up in his business as trucks and equipment. Oddly enough, it is the management of this 'paperwork' that becomes the most important part of running the business.
"Scale" has with it other advantages than just any imagined economies. Name recognition, as everyone sees your trucks on jobs, makes it easier to get work. The pain from one bad job is spread over many other jobs.
kwired
Electron manager
- Location
- NE Nebraska
That is exactly why guys that left a job where they were paid say $30/hr and become self employed think they can now charge $50/hr and think they will make a ton of money. At first it will seem that they are doing great. Once the newness of the situation wears off and they get tired of working 100 hour weeks and only collecting 40 or 50 hours of "billable" time each week do they understand.
And when you have employees you have to bill at least double what you pay your employees for billable time, to cover insurance, employers contribution to payroll taxes, other benefits - even just sick pay, holiday pay, or vactation pay if you are offering it, as well as the times they are being paid but not doing any "billable" work. Who is going to clean the shop, wash trucks, maintain equipment, receive/order inventory/supplies, and things like that? If owner, or even another employee - they have to be paid by what is done by the employees that actually perform income producing activities.
Rewire
Senior Member
- Location
- Lake of the Ozarks
As a one man shop to earn $30/hr you will need to be billing out at around $200/hr. for service work and $125/hr for bid work. As a two man shop for both to earn $30/hr you need to be billing out at $200/hr for service work and at around $125/hr for bid work. As a three man shop for all three to earn $30/hr you need to bill out at $200/hr on service work and around $125/hr on bid .........4,5,6, or 50 it will stay the same. What you gain with employees is more billable hours which increases your gross and allows you to spend more on overhead, advertising ,etc.
Fulthrotl
~Autocorrect is My Worst Enema.~
- Occupation
- E
excellent summary.
there is this "icky spot" where you have enough employees to require all sorts of compliance,
but don't have enough people in the field to support the back office work....
i talked to the VP of a firm i used to work for, 100+ man shop, large projects, etc.... and was
shocked to discover they are bidding stuff smaller than stuff i'm bidding... right now, it's
taking anything that comes in the door... owning a good size contracting company right now
is like trying to find worms to feed to a nest full of cheeping chicks.
i feel very fortunate... the phone is ringing, and i have people wanting stuff done... and sometimes
i get grousy about having to spend half the morning chasing jobs, money, or both, and then get
to work at 1pm, and work till 7pm, but thank god i don't have three people to keep busy tomorrow,
and payroll to make, even it it's slow, and they spend most of the day puttering on stuff to get a full
weeks paycheck...
every fortune has it's price. there is no free lunch.
kwired
Electron manager
- Location
- NE Nebraska
You also need to have billable hours of work to do otherwise you have problems, most don't go from one man to 50 overnight:happyyes:
When times are good and work is easy to come by, the numbers may change, temporary slow times can be expected, long term slower times need re-evaluation of the situation. Do you reduce employees, put more into marketing, cut your bids/estimates a little to help make a sale, raise your rates but be sure to make your services well worth the price, none of these desicions are easy to make.
renosteinke
Senior Member
- Location
- NE Arkansas
I remember a very successful ad campaign, on behalf of a big-city bank.
With artwork featuring a kangaroo with a little joey popping from the pouch, they presented themselves as 'the big bank with a little bank inside.' That is, they claimed to have the resources of the big bank to back you, and the personal service of a small town bank.
I speculate that any electrical contractor who can pull off this act will prosper.
With artwork featuring a kangaroo with a little joey popping from the pouch, they presented themselves as 'the big bank with a little bank inside.' That is, they claimed to have the resources of the big bank to back you, and the personal service of a small town bank.
I speculate that any electrical contractor who can pull off this act will prosper.
kwired
Electron manager
- Location
- NE Nebraska
- Status