Question: Can you explain the calculation of gross profit per man day?
Gary Elekes; EGIA Contractor University Faculty Member:
Gross profit dollars per man day, or crew day, or hour, are all essentially the same. Obviously, we’d just be looking at an eight-hour day as a man day. A crew day would be 16 hours if you have a two-man crew. And an hourly basis would be based on the idea of dividing out by the hour. The divisor is just how you want to determine your own internal company measurement. It’s a relatively simple calculation.
Gross profit dollars that are produced are simply divided by the number of days we had on a job. If it’s a man day, we would look at $2,000 that we would produce on a gross profit amount divided by one man day would be $2,000 per man day. If you had a two-man crew, then that would be $1,000 per man day. If you were looking at that as a multiple-day job at $2,000 and you had two days of the two-man crew on it, you would have four man days. That $2,000 would be divided by those four man days, so you would end up with $500 gross profit per man day.
It’s less about the division and getting to what the hourly or man day number is, and more about understanding what the appropriate amount for your company is. Understanding what the number is that you should be producing. I can attest that according to our own budget, our overhead per day is $800 per crew per day. So, we target a minimum of $2500 gross profit per crew day to cover up that $800 per crew day cost when we price our jobs. The trick to the calculation is a lot less about what it is and more about what it needs to be for your particular company.
Each company can be different because your overhead is going to be different. Your building rent, your insurance, your vehicles, and your administrative costs are going to be different. A second really important point is how you derive your cost of goods sold. I would say that for 95% of companies, in my personal experience, the cost of goods sold or the chart of accounts are incorrect, meaning do not have an allocated fringe benefit. In the cost of goods sold, they have allocated fringe benefits and the benefits burden of the company’s payroll, tax costs, workman’s comp, insurance, all of those things are in the overhead line below the line. That’s not wrong, it’s just inaccurate.
In other words, the bottom-line accounting on profit is going to be the same. But if you put all of your benefits for your field labor, your production, your technicians, and your install crew all in the overhead, you’re misrepresenting what the gross profit line actually is. For example, FICA, FUTA, and SUTA are all tied to the wage. If I bid a job at one day and it ends up taking two days, not only do I pay the second day of wage, I’m also paying the second day of FICA, FUTA, and SUTA and the install benefits. It’s a double whammy and we’re not getting an accurate picture of what the costs of the benefits are as it relates to the wage. Therefore, that’s telling me my gross profit number is too high.
We want the chart of accounts to be something that people understand. Labor, benefits, materials, permits, subs, commissions, any type of subcontractor arrangements that you might have, rebates, financing, and customer promotions would all be examples of items that would be included in the cost of goods sold that would reduce the gross profit amount. You can always visit the financial section of the EGIA Best Practices Library and look at the budget process, the income statement examples, and the chart of accounts. The trick in calculating gross profit per day isn’t just about getting there but also making sure it’s accurate.