BF Double Check

In previous articles we've talked about the characteristics of the good pricing system. This article assumes we are using a less-than-perfect pricing method and would welcome a way to “check” ourselves on price. The method we’ll talk about here is not intended to be the “last word” in pricing, but it is simple, and doesn't require any time studies. The goal is, once again, to consider all of our costs when pricing a job.

Based on Board Footage

Board footage is the most common measurement applied to truss work, and it’s easy to understand why. In one nice, easy to understand number, the design software can provide us with an exact measure of the volume of wood being used; wood – the “main ingredient” in building a truss. Since we know, or have a pretty good idea of, the cost per BF of the lumber, we are off the a good start on estimating our job cost. The BF Double Check works with other costs in the same way – relating them to the board footage of the job.

Our Example Job

Our example job is 5,000 BF. We are going to estimate the costs associated with this job by following the material from the time it comes on the property as uncut bunks of lumber, until it leaves as finished product – ready for use in the field.

With lumber, we usually have a pretty good sense of our current average “cost per BF.” Let’s say that’s $350 per 1000 BF. Will put that into our table and work from that to see that in terms of dollars on our 5000 BF job.

Once through the gate, the lumber needs to be unloaded. We estimate how long unloading the truck and storing the material takes, and how many people are involved. If we think that amounts to $200, then we divide that cost by the BF of the material unloaded (let’s say 20,000 pounds.) This will be the only factor where we use the BF of something other than the job to calculate the BF cost.

Next we have to pick the material, bring it to the saw, cut the lumber, stack it and then stage it (unless it is going directly to the line.) Calculate how many people and how long each operation takes and then come up with a dollar cost estimate of cutting this job. For this job, let’s say we estimate that will amount to $685.

The plate cost varies from truss to truss, but like the price of lumber, you probably have some sense of your overall plate cost per BF. For our example, we’ll say it is $0.09 per BF.

Fabrication is the single biggest labor component of cost. Roughly estimate the time and number of workers it will take to complete the task of building and stacking the trusses, and then turn that into dollars. Doing this on several different jobs may get you thinking about how much your production per BF can vary. For a typical day, week or month your cost per BF in the plant may be fairly consistent. But from job to job, how much can it vary? 10%? $30%? 80%? It would be good to know what the difference in your plant between a “hard job” and an “easy job” is. For our example job, we’ll say it’s $1500, which works out to $0.30 per BF.

We then estimate the time and expense to load the truck, making sure that things like fork lift costs are accounted for.

We know how far and how many loads our job will require and use our standard “cost per mile” figure to come up with a cost for delivery, and then convert that into “cost per BF.”

Lastly will be the estimate for the design staff, sales, and management – the overhead. You might have to look into the books for this one, but if you know how much your “non-direct labor” costs are per month, and if you divide those by the amount of BF you produce in a typical month, you have the number you need here.

Summing Up

The point of this is to keep things simple, but also to “keep it real” in the sense of accounting for all of these very real costs. With a pencil and paper and a little thought, you could come up with rational estimates for all of these costs for your plant. And if you go through this exercise, what do you have then? Possibly your break-even point. Notice we have not added anything for margin here. If you’ve thoughtfully estimated these costs, you are probably pretty close to seeing “how low you can go” and NOT lose money. As I said at the beginning, this isn’t the last word on pricing, but it might be a good “double check” of your current pricing system.

A Method of Attributing Overhead

In an earlier article I described what a better pricing model might look like and in another defined in very general terms what “overhead” means within a component manufacturing company. Suggesting a way to put the two together will be the purpose of this article.

In my Technical Support days I used to help explain to component manufacturers how the costing part of the design software worked. Setting up the materials with their proper costs was straightforward, and I could get through the labor estimation with its “setup” and “run” factors without much of a problem. With overhead, the program seemed to want a percentage of something – of material or sale price. We’ll go a different direction and describe a method of attributing overhead based on time.

Two Bins

Let’s say we’ve looked at our business and have put our costs into two large bins. Into the ”direct” bin we’ve put the shop labor, everything that goes into the actual manufacturing process. Into the “overhead” bin we’ve put everything else: rent, office salaries, taxes, and a whole lot more. The important thing is that every cost be accounted for in one of the two bins. The overhead is then added up and converted into a total dollar figure “per month.” Let’s say our figure adds up to $52,000 per month.

Total Direct Hours

Next, we look at the production workforce; everyone who helps us produce deliverable product. Let’s say that’s 18 people, including people who saw, catch, move, build, and stack. Now we’ll multiply the number of people by the number of hours we are working. If we are not too busy and not working overtime, that would be 8 hours x 18 people x 22 working days per month = 3168 hours per month. We need to  double check this against the payroll to make sure that that’s about the total number of hours we are actually paying people.

A Labor Model that Estimates Time

Here is the hardest part. We want to create a labor estimating routine that accounts for every part of the direct labor that is being used, and we want it to come very close to predicting what labor we end up actually using. At the end of the month (week, day,) we want the total hours that we thought we would use up (using our labor model) to add up to the hours that we will actually be paying people for. This will be challenging at first if we have been using a very simple method to estimate labor costs, but it is far from impossible. We begin by looking at each activity that people are involved with and provide our initial “best guess” as to the time that the activity will take “per” something – per piece or per truss or per plate. We then apply it to all the jobs we did in a given day or week and see how it compares to the “real” time. We adjust, refine, and through the process learn more about our how our people are actually working. We won’t actually use this labor model until we are confident that can reasonably accurately predict our real production on every job, and very accurately predict our real production over many jobs. Nothing good comes easy and this is where the real work – and reward – of this process will come from.

The Endgame and the Big Payoff

Back to overhead. You’ve calculated that your overhead is currently $52,000 per month and your direct hours add up to 3168. That works out to an overhead of $16.41 per direct labor hour. Now, when calculating the cost of a job you will tally the materials, direct labor, and, using the formula we’ve just created, add an overhead cost equal to $16.41 x the number of direct labor dollars that job is expected to consume. If you estimate the job will consume 100 hours of that precious 3168 hours you have to build things with every month, the job needs to “pay back” $1641.00 to pay for its share of the overhead. You’ve identified your break-even point (congratulations!) and with that comes a lot of power to intelligently decide what jobs to take and which to let go.

Which Job is Best for Business?

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.