Riggs Construction & Design
The old adage, “If it has anything to do with a job, it should go above the line,” makes sense, but our production manager's job description is not easily defined.
On the job side, Steve Bange visits job-sites, trains project managers, and even does some carpentry. He builds schedules, handles safety meetings, helps schedule trades, and figures out change orders.
On the overhead side, he helps our estimator calculate preliminary and final labor and lumber on our large projects, sells some jobs, and writes contracts for carpentry subcontracting we do for others. He also acts as a liaison between sales and production.
So, we split his time evenly above and below the line.
R.L. Rider Remodeling
I charge production management salary/benefits to overhead. Our accounting system is accrual rather than cash-based. As accrued sales are calculated for any particular month, there will be highs and lows in the sales figure from one month to the next.
If production management costs are placed in direct job costs, in a high-accrued sales month it decreases the actual job costs and increases the gross margin, and vice versa in low-accrued sales months. This gives me inaccurate cost comparisons between similar jobs, which, in turn, makes it hard to evaluate the accuracy of the estimating system and estimator and the efficiency of the production department.
The PM is part of the management team, with a specific cost to the company. That gives me a consistent overhead cost percentage to sales and an easy check on the gross margin percentage generated per job.
STEPHEN L. NASH JR.
I have put the salary in both places and do not see the difference. If it's part of overhead, we mark it up to cover it. If it's part of direct costs, we just include it in direct costs and it gets marked up to cover what is a lower overhead figure.
We don't disclose our markup percentage to clients, but if I did, I might place it above the line so that our markup percentage would be a lower figure, making it easier to sell the job. QuickBooks does not deal well with this arrangement. I think we should create a standard across the industry so we can better compare our numbers.
I carry my PM's salary as overhead for a couple of reasons. He is a salaried management-level employee who has responsibilities beyond production, which include sales, marketing, and design. Since we use a team management approach, he has oversight on every project, making job costing more complex.
I also consider his salary to not meet the COGS [cost of goods sold] definition of an expense that you would only have if you have work to produce. His salary continues even if we are without current production. That is usually the qualifier for overhead. We still track everyone's time, including the PM and myself, and attribute it to specific jobs for individual job costing and future estimating purposes.
ROBERT T. CRINER
Criner Construction Co.
We place it, and the owner's salary, in overhead. I believe that the NAHB [National Association of Home Builders] recommends you place it under indirect construction cost.
It is more important that one intimately understands the income statement and how the numbers relate to one another than where you place a single item. You need to accurately figure your break-even point and determine your markup to give you your desired net profit.
North Wales, Pa.
We split our PM's salary: 80% in direct cost and 20% in overhead. I believe he is a cost of doing a job. We budget his time into our estimates and he tracks his time per job. This reduces my overhead, which in turn, reduces my need for a higher gross profit.