This is a continuation of the conversation at the table on Thanksgiving Day between Linda, Mark and others I recently wrote in an email…
In that email I promised to explain overhead. Before I begin my explanation, allow me to explain why I am qualified to speak on such things.
Between the years of 1983 and 1992, I was employed in the aerospace industry, first as an engineer. My claim to fame was I designed the tools used to maintain the B-1B bomber. However, day the Challenger blew up; I observed hundreds of engineers frantically re-designing the space shuttle with one question, “Was it MY design that failed?”
My response to that observation was “I’m not sure I want that responsibility. I’m happy to support those who have that responsibility but I really don’t want to be the culprit who made a poor engineering decision like that.”
So I transferred to Advanced Research Sourcing, which means I purchased outsourced engineering services used to advanced aerospace technology.
When I would get ready to buy research for those proverbial $300 hammers and $600 toilet seats (that’s another story for another day), the subcontractor would provide details of why they were charging the money they were. (This is the law, which states over a certain amount of money, the subcontractor is required to provide details of their cost estimates on what the money is being used for).
Let’s break down the overall cost.
Direct Costs
In finance, direct costs are those costs that are associated with a specific project, department, or activity. Sometimes referred to as hard costs, expenses of this type are found with just about every type of business activity, beginning with research and development, moving through sales and marketing campaigns, and into the production of different types of goods and services. A direct cost is often some type of fixed expense, but there are some situations where a variable expense may also fall into this category.
Indirect Costs
Indirect costs are business expenses that are not directly related to a particular product or function within the general operation. Costs of this type tend to have an impact on the overall operation of the business, making it very difficult to charge the costs to a specific department or associate them with one function. Costs of this type are sometimes referred to as overhead, a term that helps to describe the broad application of these costs.
Overhead Costs
A business may take in one sum of money, but it is not likely that all of it can be considered profit. This is because a business is generally required to pay expenses. Those expenses are commonly referred to as overhead costs. Examples of an overhead cost include salaries, maintenance, and production expenses.
The above explanation on Direct, Indirect and Overhead was taken from mbaknol.com should you desire to understand this in greater detail.
ANYWHO, let’s put this in understandable terms.
Let’s say you want a sports car.
You could have an engineering team design and build a sports car for you.
You could pay time and material (unlikely) which means you would cover ALL the labor and materials it costs to design and build your sports car and since you covered ALL of the expenses, the engineering team wouldn’t have to charge much profit (possibly as low as zero profit).
You could tell the engineering team I will only pay you $150,000 for this sports car and you’ll have a fully functioning sports car delivered to me by December 25, 2022. Since the engineering team is now stuck with building the car within a specific budget, it’s a risk, so they charge a larger percent profit to cover that risk.
Getting back to Direct, Indirect and Overhead costs, typical overhead costs for a business are 5-15%.
Now we’re ready to continue the conversation at the Thanksgiving table…
I told Mark, if you recall, that gov’ment’s overhead costs is 78%. This means if the gov’ment passes a $1.2 trillion infrastructure bill, 78% of that $1.2 trillion, or $936 billion will be overhead, leaving $264 billion for costs attributable to the actual project.
“Here’s the question, Mark, if a business discloses an overhead rate of 5-15% to government when bidding a large contract, why is government allowed a 78% overhead when doing projects it is running. A business doesn’t have a second set of books where it charges the government 5-15% overhead while you are charged a 78-100 or 200% overhead if you buy something from that same company.
“Why is gov’ment allowed to be so inefficient they have a slush fund of 520% called overhead?”
“Additionally, although government does not charge a profit on the work they do, they do borrow 43% of every dollar they spend.
“As I noted before, the $1.2 trillion infrastructure bill which was recently signed has a $936 billion overhead within those funds and the government will borrow $516 billion to administrate which will end up being $264 billion of work completed, IF the work comes within budget.”
Still many believe businesses are bad and government is their savior from business. THIS is the illogical reasoning a person must have to believe free-enterprise and Capitalism is bad while gov’ment running society through a socialist regime is the pinnacle of virtue.
Should you like to understand HOW to yet flourish as an individual, a family or a company in a socialist regime, I can tell you.
It’s easy and simple. And it’s outlined entirely in my book found at TedLeithart.com
BTW, should you sign up for my emails, you’ll be on my priority list to give you first-dibs at the book.
AND, if you want your extended family and SOCIETY to do well in a socialist or tyrannical society, its imperative your friends, family and society has their own reference tool so these lessons can be easily referred to on a consistent basis.
That’s https://TedLeithart.com
