Where found? Administration menu > Project Settings > Indirect Costs

Accessibility? Users with administration permissions only.

How used?

1. Define and maintain the indirect cost percentages used in cost item pricing.

2. Create and maintain standard discounts that sales persons may apply to a solution's price. Standard discounts may be applied to pricing using either gross price input or cost items.

 

Indirect Costs (for Cost Item Pricing)

The indirect cost settings are ONLY used for the Cost Item method of pricing solutions (the Gross Solution Price input method assumes that the price you input already includes all indirect costs). The cost item method uses cost items from your Company Catalog. The solution template used to create a solution controls whether the solution price is created using cost item method, or via the gross solution price method.

SolarNexus considers indirect project costs to be overhead, profit, sales tax, and sales commission. The following summarizes how solution price is calculated in SolarNexus using indirect costs:

Indirect Costs = Overhead + Profit + Sales Commissions

Indirect Costs % = Overhead % + Profit % + (Sales Commission % * Profit %)

Solution Price Sub-Total = Total Direct Costs / (1 - Indirect Costs %)

Solution Price = Sub-Total - Discounts/adjustments + Sales tax

Global Indirect Project Cost Settings

Navigate to Project Settings from the Administration menu. Click on indirect Project Costs (shown below).

SolarNexus applies the globally defined indirect cost rates to any cost item groups that do not have override values defined. The following parameters are used to calculate indirect costs for all solutions using cost items:

Portion	Applies To
Overhead	Solution Sub-Total Price
Default & Minimum Profit
Sales Commission (optional)
Discounts	Deducted from Sub-Total Price
Sales Tax	Applied to sum of the costs for all items marked as taxable.

The sections below provide details for each portion of indirect costs.

Overhead

Overhead is an important portion of your solution pricing. It consists of all the business costs that are NOT DIRECTLY attributable to the implementation of specific jobs. These include:

• Management salaries (note - pay for operations staff, those who get projects built, should be considered direct costs).
• Sales and marketing costs (excluding sales commissions on specific jobs)
• Rents
• Office supplies, computers
• Utilities (electric, gas, water, internet, phone)
• Business and vehicle insurance (Note, do not include workman's comp for installers and operations staff, which is a direct cost)
• Business licenses

Determining Your Overhead Rate

We define overhead as a percentage of the sub-total price for each customer solution. To determine your overhead rate, do the following:

1. Sum all your revenue for a given period (an entire year is best so that it includes any annually paid items).
2. Sum all your overhead expenses for that same period.
3. Divide the overhead costs into the overall revenue number and you've got your Overhead rate (%).

Small contracting companies can vary significantly in their overhead rates. Typically we see a range from about 16% to 32%. Best practice is to review your overhead rate quarterly and modify your inputs.

Profit

The profit rate you input into SolarNexus is the net profit. All costs are covered by the cost items (direct costs) and the overhead rate (indirect costs).

SolarNexus defines two parameters to control the amount of profit automatically built into a solution's price:

• Default Profit - Defined as a percentage of solution sub-total price. SolarNexus automatically adds this amount of profit to each solution by default when it is created.
• Minimum Profit - Also defined as a percentage of solution sub-total price. This sets a "floor" to the amount of profit you are willing to accept. The difference between the default profit and the minimum profit for a project defines how much discount is allowed for any solution.

Before defining your profit rates, we strongly recommend reviewing the sales commissions section below, as they work together. See the Determining Your Profit and Sales Commission Rates section below for a recommended approach for defining your profit and sales commission rates.

Sales Commission

SolarNexus' sales commission feature directly ties sales commissions to profitability of the project. If company profit is reduced, the sales commission is proportionally reduced as well. Because after all, who wants to pay a sales person to sell jobs on which you lose money?

Sales commission rate is input to SolarNexus as a percentage of profit, rather than of price. SolarNexus ADDS sales commission to the profit already defined to come up with the total price. Also, SolarNexus only allows a single sales commission % to be defined.

But note that as with Overhead and Profit rates, you may set different rates on each cost item group in your services as an override to the default. This is an important aspect when selling types of work on which sales commission is not paid, or is paid at a different rate.

See the Determining Your Profit and Sales Commission Rates section below for a recommended approach for defining your profit and sales commission rates.

Implementing Differential Commissions

Many companies like to pay different commission rates to sales persons based on a variety of factors. Although SolarNexus does not provide sales commission features to auto-calculate different rates based on different factors, you can use SolarNexus features to implement differential sales commissions.

SolarNexus recommends the following approaches to paying differential commissions to your sales staff:

1. In SolarNexus, set base commission rate to be paid to entire staff (as percentage of company profit, typically 35-70%)
2. Define sales commission bonus amounts, either as a fixed dollar amount, or as an additional percentage of profit. For example, provide bonus when:
   1. Sales person generates the lead
   2. Individual sales person negotiates a higher commission rate
3. Define "Monthly Sales Commission Report":
   1. Create a Project Detail report
   2. Define criteria as: active or completed, with the field "Sold At" as a filter
   3. Include the following output fields:
      1. Sales owner
      2. Lead Source
      3. Project Name
      4. Sold At Date
      5. Solution Sub-Total Price
      6. Solution Sales Commission
      7. Solution Profit

With this report, you can output monthly sums of Base Commissions, and for projects where bonus's are relevant, you have the data on which to quickly calculate the bonus commission amounts to add to the base amount.

Determining Your Profit and Sales Commission Rates

Since sales commissions depend on profit in SolarNexus, you need to define them both together. Note that you are not required to use SolarNexus' Sales Commission feature, but it provides compelling feedback to your sales team, and can significantly simplify your management.

Determining your profit and commission rate numbers is a slightly iterative process. Rates for each can vary significantly, but here are general ranges:

• Net profit margins: 5-15% of sub-total price
• Sales commissions: 50-90% of profit

Since sales commission is added to profit, if you have 10% profit, and sales commission is 50% of profit, you end up with a total of 15% of the sale price being profit plus commission. Here is an example of a solution's price breakdown:

• direct costs of $9,900
• profit = 9%
• sales commission = 66.6% * 9% =~ 6%
• overhead 30% + profit 9% + sales commission 6% = 45% of price
• Solution sub-total price (before discounts, sales tax, finance fees) = $9,900 / (1-(0.3+0.09+0.06)) = $9,900 / 0.55 = $18,000.
• Company net profit = $18,000 * 10% = $1,620
• Sales commission = $18,000 * 6% = $1080

To determine your own default and minimum profit rates, you must first have your direct cost items and overhead costs defined. Here's a recommended process:

1. Define a couple of representative projects.
2. Determine your perceived customer prices for each representative project. Take into consideration your local competition and the competitive prices you see in your service area
3. For each representative project, use your cost items to come up with a direct cost
4. Pick a starting profit rate, such as 10%.
5. Add your starting profit rate to your overhead rate.
6. Calculate the resulting sale price for your representative project using this formula: Price = direct cost / (1-(overhead+profit+(sales commission rate*profit rate)))  - NOTE: If you pay commissions, you will need to also incorporate sales commission.
7. Compare your resulting price with your knowledge of your local market and customer base.
8. Modify rates as necessary.

We recommend using SolarNexus to do this process. You can use the Price screen to see the results broken down using the "Cost Category" popup. If you want to change the profit and commission rates, go to the Project Settings screen from the Administration menu, and click on Indirect Project Costs. Change the rates, then return to the project price screen for your test solution and click the "Recalculate Costs" button to update the test solution's price using your new rates. Then click the "Cost Category" button to see the results.

Standard Discounts

You may define a set of standard Discounts that your sales people can apply to customer solution prices. For example, if you give customers a discount for allowing you to setup a yard sign during construction, you can define such a discount here. Discounts may be changed over time. Whenever a discount is applied to a solution price, it is copied to the solution, so it will not be changed if edited in the Project Settings.

Standard discounts may be applied to either style of pricing, gross price input or cost items.

An administrator can define standard discounts that sales persons can simply apply to solution prices. A standard discount is simply a predefined amount and description (for example, $250 discount for yard sign).

To create and manage Standard Discounts, navigate to Project Settings from the Administration menu. Click on the Indirect Costs menu item.

 

Discounting Solution Price

On each project's price screen, SolarNexus automatically calculates profit and commission (if used) based on the defined Default Profit rate. SolarNexus also calculates the price using the minimum profit rate and displays the difference between the minimum price and the default price as the allowable amount of price that may be discounted.

The user may select either standard discount amounts or manually input a custom amount. As long as the total of discounts is less than the allowed amount, the discounts are accepted.

IF you are using sales commissions, the associated sales commission amount is reduced in proportion to the discounted amount. As such, sales persons "share" the pain of lower profits.

Default Sales Tax

A default sales tax rate parameter is optionally provided. If set, SolarNexus will automatically populate the provided value as the sales tax rate for all solutions. This feature is really nice if you work in a service area with only one sales tax rate. Most companies work in areas with multiple sales tax rates, so its a good idea to ensure that your sales team is trained to update sales tax rate on each solution. Having a default value automatically input is very important, however, to ensure that you at least considering an amount for every solution's price.