Whether this is for quoting or setting and reviewing your Flat Rate Book, the process to determine the cost of each job (before you add a profit margin) is critically important to get right to ensure you make profit.
In order to determine the cost of each job, there are five elements that need to be considered. These are:
Let’s take a look at each one.
Material – the major cost component of a service is the materials required to completed the job.
Material cost which can be specifically identified with the finished product is referred to as direct material. e.g. the amount of timber used to manufacture furniture, or power points specific to a job.
Indirect material costs are those costs which cannot be specifically traced to any specific job and therefore need to be allocated to them on some equitable basis. E.g. lubricating oil needed to grease the machines or the cost of pallets in the warehouse.
Labour (hourly rate) costs are incurred as a result of the service provided. It includes wages at the operational level as well as supervision costs. Labour-related costs such as overtime premiums, sick pay and holiday pay have to be taken into account.
The cost of wages, which can be traced directly to the final job cost, is known as direct labour.
Indirect labour represents the wages of supervisors, cleaners and security staff who are not directly involved with the physical production of goods and services.
The cost of idle time due to delays and the provision of sick leave and holiday pay are also regarded as direct costs.
Overheads include indirect materials, indirect labour and other expenses such as rent and electricity/power rates, insurance, repairs and depreciation.
It can get quite confusing when quoting a job when you need to consider all five of the areas above. That said, it is important to understand the detail within. That said, it is for that reason why we INSTEAD work out an hourly rate to break even, and then add our profit margin.