Let’s say we are considering two jobs that are very different. The first we’ll call Custom House. We’ve done a takeoff and we know it totals about 5200 BF, has 50 setups and 75 trusses altogether. The second job we’ll call Straight Run, and what catches our attention is that it too has about 5200 BF. But this job has just one setup and 40 trusses altogether. Straight Run has 2x6 chords, and so the lumber cost is slightly higher than it is for Custom House. We think we can sell Custom House for $8,000 and make about $2800 gross profit. We think we can get $4,900 and in the process, have a gross profit of $750. Which is better for business?
Comparing Work
Let’s put these two jobs side by side to help us with our comparison.
Custom House Straight Run
5200 BF 5200
$8,000 Price $4,900
$2,800 Est. GP $750
35% Est. GP % 15%
85 Trusses 40
50 Setups 1
$2,070 Lumber $ $2,510
The only thing the two jobs really have in common is the board footage. Which is “better?”
Assumptions
OK, in the current economy we may consider any job we can get as “great.” The biggest problems in recent times have been getting enough work to keep the shop operating and attempting to make any profit - “gross” or otherwise. So for the purposes of this thought experiment, I am making the assumption that we have enough work to keep our shop busy, and we simply would like some way of figuring out, “If I can only get one of these two jobs, which one would I be better off getting?” I will also be making the assumption that our production tables, not our saws, are our “bottleneck.” Stated another way, I am assuming that, “Our ability complete more jobs is limited by the production capacity of our tables.”
What’s Missing
What’s of course missing from the comparison is the time that each job will take to build. Let’s say our estimating system does not tell us how long the work will take at the tables; let’s see if we can create some plausible estimates. With Straight Run, it will take no more than 20 minutes to set up, and about 4 minutes per truss to build. That’s 20 minutes + (40 x 4 minutes) = 180 minutes altogether. In other words it will take about 3 hours of table time to complete the job. For Custom House, the most of the setups will be small changeovers, not a complete re-jigging of the table. So let’s estimate 10 minutes per Setup x 50 setups = 500 minutes. And for building time, 4 minutes per truss x 85 trusses = 340 minutes for a grand total of 840 minutes (or 14 hours) of production time. OK, you can knock holes in my math, but still I think we are coming up with plausible estimate based on reasonable assumptions. You are of course invited to put your estimating routine to work on this problem, if you prefer to do so!
Who’s Better?
The Custom House consumes 14 hours of table time and nets us $2,800; that’s $200 per hour profit. Straight Run consumed only 3 hours of table time and netted us $750; that’s $250 per hour. We are making $25% more profit by doing Straight Run than by doing Custom House. We now see the crucial elements for making good decisions about jobs coming into focus – knowing our costs and coupling them with “what the market will bear” allows us to determine estimated gross profit. If we also know “time consumed to produce,” we can then figure “estimated gross profit per hour.”
Custom House not only used up 14 hours of table time, but I would argue it consumed 14 hours of the business’ time, and is therefore liable for 14 hours worth of overhead as well. More on applying overhead to individual jobs in later articles.