The Overhead Charge
As you might imagine, one of the more popular questions I get is about overhead charges.
Overhead is the expense a roofing company charges against a job before determining the final profit.
In the company where I learned the business, my overhead charge was 10% of the gross contracted amount. For instance, if my signed contract was for $10K, my overhead charge was $1K. Now, if my $10K job had $4K in material, $3k in labor, and $1K in overhead, that left a balance of $2K. I was on a 50/50 profit split. So, I made $1K of that $10K job.
10% Overhead is the most common expense level based on my experience in the industry. You may also recognize that number from official scope of work estimates. When an insurance company pays Overhead & Profit (O&P), the overhead is most commonly indexed at 10%.
To be fair, overhead charges can vary from company to company. Some companies may charge 19%, 20%, up to 30% in overhead on every job, while others may only charge 3%, 4% or 5% of the gross amount collected. Occasionally, you’ll hear about a roofing company with a flat fee schedule. They’ll charge $100, $250, or $500 in overhead per job regardless of the contracted amount.
Yes, there are those companies with no overhead charges at all. However, it’s been my experience that most roofing companies starting at zero eventually move to an overhead charge to help them stay in business. Sooner or later most companies figure out that running a legitimate business is a lot more expensive than they thought it would be.
What Does Overhead Cover?
The answer to that question is deceptively simple…
The overhead charge covers whatever the owner believes is necessary to stay in business. They charge whatever they want to charge.
The primary benefit a salesperson receives from paying the overhead charge is that the roofing company (hopefully) gets to stay in business so the salesperson can continue to sell more roofs. Some roofing companies provide their salespeople with truck magnets, an office space, logo shirts, advertising material, etc., but the primary benefit of paying an overhead charge is keeping the owner interested enough in the business to stay in business.
An overhead charge may not cover one single thing that a salesperson considers valuable. The overhead charge is based on whatever the roofing company wants to charge you in order to work under their name. You may even have to buy your own shirts, magnets, business cards, etc.
As a salesperson, there’s nothing written in stone that says you have to work for that company. If you don’t like what you’re paying in overhead charges, go somewhere else. Every roofing company has competition. There’s no shortage of roofing companies looking for qualified salespeople.
Like A Franchise Fee
Think of the overhead charge as being similar to a franchise fee for a fast food restaurant. You may not be able to go out and buy a McDonald’s franchise right now, today. They’re expensive, and you’ve got to have a ton of cash up-front just to have the opportunity to be put on a waiting list.
However, if you could afford to wait, had great credit, and tons of up-front cash ($750K for a McDonald’s or Taco Bell, and a net worth of $1.5 Million for a KFC), you could expect to make the industry average of 6% profit on your gross revenue in exchange for working long hours with primarily teenagers under massive liability and continual labor turnover.
By the way, you’ll also end up paying the franchisor anywhere from 4% to 9% in total gross sales for royalty, advertising, or service fees.
Considering some fast food restaurants do less than $6K a day in revenue, you’ll maybe clear $130K working 365 Days a Year — if you can average 6% profit on $6K a day in register receipts for 365 days a year. Good Luck!
How many years will you have to work before you make back just your initial franchise fee?
I don’t know for sure, but I bet it won’t happen in less than 2-3 years.
You would think that paying that much money out in franchise, royalty, advertising, and service fees you would at least get your fries free, right? NOPE!
How about your uniforms? NOPE!
Kids’ Meal Toys? NOPE!
What about your security system, drive-thru equipment, or interior decorating? NOPE! NOPE! NOPE!
Unless it’s part of the franchise agreement, you get NOTHING free, but you do get to PAY FOR EVERYTHING yourself, and buy it based on whatever price the franchisor agrees to charge you. Think you can buy your fries from somewhere else? Go ahead and try. There’s a good chance you’ll get your franchise taken away from you.
Compared to buying a fast food franchise, paying 10% Overhead on your roofing sales is a major bargain if you ask me, especially if you’re already working with a company you like and trust.
You Could Negotiate
What if you don’t like your overhead charge?
You may not think the overhead charge you’re paying is fair.
Fair is extremely subjective because it’s hard to measure until you’re the one responsible for the business. As a salesperson, it’s almost impossible to see things from the owner’s point of view.
By the way, if you’re good enough at roofing sales, the thought will eventually cross your mind that you could do it all by yourself. You’ll wake up one day and say, “Why am I paying this overhead charge? Why am I paying all these fees to sell roofs for them? I should be doing it for myself!” If you do make the leap into owning your own roofing company, you’ll then finally understand why you were paying all those overhead charges. Until then, it’s extremely difficult to understand.
You may be thinking your overhead charge is too high or isn’t fair.
Honestly, nobody wants to pay the overhead charge. Everybody wants to keep as much money as they can. You want more. The owner wants more. Even the insurance companies have been known to put up a fight about paying overhead, right?
[Tweet “Nobody wants to pay more than they feel is right, and everybody thinks they’re right!”]
Well, you could negotiate.
Everything in life is negotiable, maybe not the franchise fee for a McDonald’s, but you could probably negotiate your overhead charge with your roofing company, couldn’t you?
Before you decide to negotiate your overhead charges, let me leave you with a little advice…
Forget about trying to understand the costs of running a roofing company. You’ll never be able to justify the overhead charge in your mind because you’re not the owner. It’s always going to be more than you want to pay. So, forget about trying to make sense of it, okay?
You’ll never be able to put a fair price on what the owner is worth for creating the opportunity for you to sell roofs for them.
There’s an opportunity cost to everything in life. What I mean is this, the owner could be doing something else with their life. They didn’t buy a fast food franchise, didn’t become a doctor, or didn’t stay in a cushy, corporate job. They risked their future when they made the decision to own a roofing company — a choice they believed could become more valuable than any other option.
What did they give up to make that choice?
I don’t know what it cost them, but whatever the price they’ve decide to charge in overhead, you’ll never recognize that cost because it’s invisible to you. It’s not a physical bill, like a phone bill or an insurance bill, it’s an opportunity bill – what they could have done vs. what they’re doing now.
If you’re going to negotiate your overhead, be fully prepared to pack up and go somewhere else because you’ll be negotiating against their opportunity cost.
Obviously, you don’t want to leave, but if you’re bothered by the overhead charge, and you’re not able to negotiate an overhead you like, leaving could be your only option because the owner could decide you aren’t worth their opportunity investment.
Negotiations don’t always end well.
You may get the owner to give you a lower overhead, giving up some of their opportunity, but they may end up resenting your tactics and choose to give the better training, leads, and selling opportunities in the future to another salesperson who they believe respects the opportunity costs they’ve paid to create your opportunity to sell roofs.
If you’ve weighed all the risks, and you still want to negotiate, here’s my negotiation advice:
#1 SELL A LOT OF ROOFS
Don’t even bother trying to negotiate if you aren’t selling a lot of roofs already.
If you’ve just started selling roofs, don’t expect any concessions until you’ve got some skins on the wall. If you’ve just started, you need them (e.g. training, experience, paperwork, etc.) much more than they need you. Just because you heard the roofing company, “Chuck In A Truck”, across town charges 3% less in overhead doesn’t mean you can demand a lower rate.
Until you start putting up significant sales, you aren’t playing “Let’s Make a Deal,” you’re playing “THIS IS THE DEAL!”
The best way to start a negotiation is to sign a bunch of contracts, bring them back to the office – with several checks in-hand – and say, “Let’s Negotiate!”
That’s how you start a negotiation.
#2 EXPECT A COUNTER-OFFER
Just because you asked, doesn’t mean you’ll receive, but you can’t expect to receive until you ask.
The answer you get won’t always be the answer you like. Nobody with any experience running a successful business is in the habit of giving away money. If you want something, you can bet the owner will want something in return.
Maybe they’ll want you to double your sales numbers, hit a certain profit margin on every job, or hit certain recruiting numbers.
You can’t expect something for nothing. You have to be ready for the counter-offer.
Those counter-offers come with strings attached.
What if they agree to lower your overhead, but only if you hit certain revenue numbers for six months straight? What if they withhold that amount from your commission checks effective immediately? If you maintain the higher revenue number for six months straight, you get the lower overhead, and the amount withheld from the prior six months.
If you miss the six month revenue target, the owner keeps the withholding, and you continue to pay the higher overhead charge… or higher!
You’ve seen Shark Tank, haven’t you? Good things happen in negotiations, but bad things can happen, too.
#3 BE PREPARED TO WALK AWAY
I touched on this earlier, but it’s worth repeating.
The overhead charge may be more than you wish it would be, but if you’re not willing to walk away… at least, not right now… you’re better off leaving well-enough alone.
If you’re really ready to walk away from your roofing company, you’re in the best position possible to negotiate the overhead charge.
As a productive salesperson, you’re extremely valuable to the company. You’ve heard me say it before, but “nothing happens until somebody sells something.” There’s no use having an office, office staff, or a building for the company if there aren’t any sales. Selling makes everything else possible.
If you’re an exceptional salesperson, you’re exceptionally valuable, but don’t overestimate yourself. Everybody is replaceable. The grave yards are full of “indispensable men” who thought their company couldn’t exist without them. They’re dead and gone, but the company is still in business today.
[Tweet “The grave yards are full of indispensable men.”]
The company might go under without you, or they might struggle until they find somebody else, but that’s not where you should be focused if you’re going to negotiate. That’s a negative mindset. You want to negotiate from a positive mindset. Here’s how…
Think about you!
What are you worth?
The owner has an opportunity cost to doing business, but the idea of an “opportunity cost” is just as real for you as it is for the owner. Be positive about your future. Think about this from your perspective.
You could be doing something else with your life, too. You could choose to go back to school, be a dentist, or follow your life-long dream of selling condos on the beach. If you don’t like what you’re getting from your opportunity, you have every right to chase another opportunity.
Sure, it’s risky, but when you’re the one taking the risks, you’re also the one who gets to enjoy the rewards… or deal with the fallout from failure.
Just because you’re paying very little in overhead today, doesn’t mean you won’t be asked to pay more tomorrow.
Almost NOTHING is getting cheaper.
Almost EVERYTHING is getting more expensive.
P.S. If you want to talk about overhead charges, please leave your comments below. I would love to hear your thoughts on overhead charges in roofing sales.