Starting a low voltage business, part 5: building a working number for startup costs and overhead

The previous post covered building a presence and finding early customers. This one covers the number behind those decisions: what it costs to open, and what it costs to stay open.

One of the first questions every aspiring owner asks is how much it costs to start a low voltage business. The honest answer is that there is no single number. In some areas, a technician who already owns a solid tool kit and a reliable vehicle can reasonably start with $2,000 to $5,000 in the bank. In others, where licensing, bonding, and insurance requirements are more demanding, a startup investment closer to $10,000 to $15,000 is more realistic. Neither figure includes the working capital needed to carry the business while it waits to be paid.

The second question, what it costs to keep the business running each month, is harder to answer in advance. Established contractors know their overhead because they have years of bank statements, invoices, and financial reports to look back on. A new business has none of that.

That is the purpose of this post. Rather than offering a number that may not fit a given situation, it walks through how to build a working number before the company has historical data.

What this post covers

The post builds a startup budget and an overhead rate from local quotes. Along the way it covers:

• Startup budget. Licensing, bonds, insurance, tools, and setup fees, and which of those have to be funded on day one versus which can wait (shop space, owned certifiers, employees, paid ads).
• Working capital. Cash to carry labor, material, and household bills through 30- to 90-day payment terms. Kept separate from the cost of opening.
• Monthly overhead. Software, insurance renewals, compliance, professional services, and the smaller subscriptions that add up once they are listed.
• Unbillable time. Why an established shop may bill 70 to 80 percent of paid hours, why a new shop is often closer to 50 to 60 percent, and what that does to the true wage cost of a billable hour.
• A work vehicle. Purchase, upfitting, graphics, financing, commercial auto, and the ongoing costs past the window sticker.
• An overhead rate. Annual overhead divided by realistic billable hours, then replaced with actual books after three, six, and twelve months.

Why a working number matters

Overhead is the cost of operating the business that is not tied to a specific job. If a project is canceled tomorrow, the material and job labor go away with it. The overhead does not. The insurance premium, the phone bill, the accounting software, and the vehicle payment still come due.

Every dollar of overhead is recovered through the work the company performs. If it is not built into pricing, it comes out of the owner's pocket. Many new contractors price work to cover the labor and the parts, and then discover at the end of the year that email accounts, software subscriptions, insurance premiums, license renewals, unbillable labor, and accounting fees consumed the profit.

A working number will not be perfect. It does not need to be. It needs to be grounded in real quotes and realistic assumptions, so the first bids are priced on something more reliable than a guess.

Step 1: Research the requirements where you will operate

The biggest reason startup costs vary so widely is location. Two technicians with identical skills and tools can face very different costs because they live in different states, or even different cities.

Use the research from the licensing post in this series to build the first part of the number:

• Licensing and registration fees. State licensing boards publish their application, examination, and license fees. Add any city or county business licenses and registrations.
• Bonds. Determine whether the state or locality requires a license or surety bond, and request quotes from a surety provider.
• Insurance. Covered in detail below, because it deserves more attention than any other item on this list.
• Professional services. Ask a CPA and an attorney what they charge for initial setup, entity advice, and contract review.

This research is what moves a startup budget from the lower end of the range to the higher end, or the reverse. It is also the part most new owners skip.

Insurance: get real quotes, and get them from the right source

Insurance is often the largest single variable in startup costs, and an estimate from an internet article is no substitute for a quote based on the state, the scope of work, and the owner's experience. Request actual quotes for general liability, commercial auto, workers' compensation if the company will have employees, and any umbrella coverage target customers require.

Before requesting quotes, it helps to understand why insurance tends to cost more for a new company. Insurers price risk largely on history, and a new business has none. It has no claims record, no track record of completed projects, and no experience modification rate (EMR), the workers' compensation rating that reflects a company's safety history. The EMR has a significant effect on insurance costs, prequalification, and bidding opportunities, and it will be covered in detail in the next post. For now, the point is that without that history, many insurers treat a new company as an unknown risk and price it accordingly. In our experience, new businesses pay what could fairly be called a "first-timer's tax."

Where the quotes come from makes a considerable difference:

• Large, well-known carriers are not always the best starting point. Companies such as The Hartford and Hiscox can be very competitive for established businesses with a proven history. For a brand-new contractor, their pricing and terms are often less favorable than the alternatives.
• Work with an independent broker. An independent broker is not tied to a single insurance company. Rather than offering one carrier's products, a broker can submit the information to multiple carriers and compare the results to find the best combination of coverage and cost. An agent who represents only one company can offer only that company's policies.
• Look for trade-specific insurers. Some insurers and insurance programs specialize in contractors, and some focus specifically on electrical, low voltage, and security work. Because they understand the risks of the trade, they often offer more favorable terms than general business insurers. An experienced broker can help identify them, and trade associations sometimes offer access to programs designed for their members.

When comparing quotes, confirm they are truly comparable. The lowest price is not a bargain if the policy excludes the work the company performs or cannot provide the certificates and endorsements customers and general contractors will require.

Step 2: Inventory what you already own

The second major variable is what is already on hand. A technician with a complete tool kit, test equipment, a reliable vehicle, and existing software licenses starts in a very different position than one who needs to buy them.

List the tools, equipment, and vehicle already owned, then compare them to what the planned scope of work requires. The gap between the two is part of the startup budget. If the company plans to sell certified cabling, it needs a way to certify it or an alternative that customers will accept. If it plans to install access control, it needs the tools to program and troubleshoot it. For expensive equipment used only occasionally, weigh the full cost of ownership against renting, subcontracting, or less expensive alternatives, as discussed later in this post. Renting is often more costly than it first appears.

Step 3: Build your startup budget

With research and inventory complete, list the one-time costs required to open the doors. Typical categories include:

• Business formation and registration fees
• Licensing application, examination, and issuance fees
• Bonds
• Initial insurance premiums or down payments
• Tools and test equipment needed to fill gaps in the current kit
• Domain, professional email, and a basic website
• Initial software purchases and setup
• CPA and legal setup fees
• Basic branding, such as a logo, business cards, and a few company shirts

Add them up. For some owners, the total will land near the lower end of the $2,000 to $5,000 range. For others, particularly in states with demanding licensing and insurance requirements, it will approach or exceed $10,000 to $15,000. Whatever the number is, it belongs to that shop, and it is based on real information rather than someone else's experience.

Step 4: Plan working capital separately

A startup budget covers getting the business established. It does not cover operating it while waiting to be paid, and that is where many new businesses run out of money.

As discussed in Part 1, payment terms of 30 to 90 days, pay-when-paid clauses, and retainage mean the business will pay for labor and material long before customers pay the business. A company can win work, perform it well, and still run out of cash.

To estimate working capital without historical data, consider:

• How long the company will wait to be paid. If customers pay in 60 days, the shop may need to carry roughly two months of labor, material, and overhead before the first payments arrive.
• The material cost of the jobs expected. Until supplier credit is established, material may need to be paid for up front.
• Personal living expenses. Many owners pay themselves little or nothing in the early months. Household bills do not stop while invoices wait to be paid.

Keep working capital separate from the startup budget in planning. It is not spent to open the business. It is the cushion that keeps the business open.

Step 5: Estimate your recurring overhead

Next, estimate what the business will cost to operate each month. This is where the smaller, recurring expenses that catch new owners off guard belong. Using real pricing from vendors' websites and the quotes gathered in Step 1, estimate each of the following.

Technology and online presence

• Domain registration and annual renewal
• Professional email, typically billed per user per month
• Website hosting, maintenance, and updates
• Phone service and a business line

Software and subscriptions

• Accounting and bookkeeping software
• Estimating, takeoff, and markup software such as Bluebeam
• Drawing and design software for plan sets and as-builts
• Project management, scheduling, or field service software
• Manufacturer software licenses and programming tools
• Cloud storage and file sharing
• Prequalification platforms, some of which charge annual fees

Most of these are billed per user. A subscription that is inexpensive for one person becomes a meaningful expense when multiplied across a growing team.

Professional services

• A CPA for tax preparation, entity decisions, and financial statements
• Bookkeeping, whether performed by the owner or outsourced
• Legal review of contracts, subcontract agreements, and terms and conditions
• Payroll services once the company has employees

Licensing and compliance

• License renewals, often on a one-, two-, or three-year cycle
• Continuing education required for renewal
• Background checks, fingerprinting, and employee registrations
• Bond renewals

Insurance

• Annual premiums for general liability, commercial auto, workers' compensation, and umbrella coverage, based on the quotes gathered in Step 1
• Year-end premium audits. Workers' compensation and general liability premiums are often based on estimated payroll or revenue and then adjusted after an audit of actual figures. A company that grows faster than it estimated can receive a substantial additional bill after the policy year ends. Plan for it.

Operations

• Tool replacement and repair, since tools are lost, stolen, and worn out
• Consumables not charged to a specific job
• Personal protective equipment and safety program materials
• Manufacturer training and certification costs, and dealer program requirements
• Professional memberships and industry association dues
• Bank fees, credit card processing fees, and financing costs

Vehicle costs, if the company owns or plans to purchase a work vehicle, are covered in detail below.

Unbillable labor is covered in detail below.

Convert every monthly cost to an annual figure and include annual items such as license renewals, bonds, and insurance premiums. None of these items is large on its own. Together, they can easily run into thousands of dollars per month for even a small operation.

Because the estimate has no history behind it, add a contingency line to cover the costs that were not anticipated. Many owners use 10 percent of their total estimated overhead. There will be expenses that were not planned. A contingency keeps them from coming directly out of profit.

Deciding what to fund early and what can wait

As the budget comes together, it will likely be larger than hoped. Not every expense has to be paid on the first day. The distinction is which ones do.

Fund these from the beginning

• Business formation, licensing, and bonding. Without them, the company cannot legally operate.
• Insurance. Many customers, general contractors, and licensing boards require proof of coverage before any work begins, and a single uninsured claim can be catastrophic.
• A CPA and a basic bookkeeping system. Correct setup from the start prevents expensive cleanup, missed deductions, tax penalties, and unreliable financial statements later, which matter for licensing limits, bonding, and prequalification. Good bookkeeping is also how the working number eventually becomes real historical data.
• Contract review. Having an attorney review a standard proposal, terms and conditions, and the approach to subcontract agreements is far less expensive than a dispute over an unclear scope or unfavorable payment terms.
• A professional domain, email, and basic website. As discussed in Part 4, these establish credibility with the people deciding whether to hire the company.
• The tools and test equipment the scope requires. Selling work the company cannot properly install, test, or troubleshoot is not a savings.
• Estimating and takeoff tools. Accurate estimates are how the business makes money. Guessing at device counts and labor is how it loses money.
• Working capital. As covered in Step 4, this may be the most important item on the list.

Consider waiting on these

• Office or shop space. Many contractors operate from home, a small storage unit, or a shared space for years. Confirm that local zoning and the insurance policy permit it.
• Specialized, high-cost equipment. Fusion splicers, OTDRs, and high-end certifiers are expensive to own, but renting them is neither as simple nor as inexpensive as it may appear. Rental periods typically run from the day the equipment ships until the day it is returned, so a tester needed for a single day may be billed for several days of transit, plus the cost of expedited shipping in both directions. A one-day need can easily approach $1,000. Whether renting makes sense depends on the size of the job: a large project can absorb that cost, but many smaller jobs cannot. For those smaller jobs, many customers will accept test results from a qualifier, a less expensive tester that verifies a link can support a given network speed, in place of full certification. Confirm the testing requirement before bidding, since projects that require a manufacturer's extended warranty generally require full certification. Subcontracting the testing or splicing to a company that owns the equipment is another option. Whichever approach is chosen, build the cost into the bid, and revisit ownership once the volume of work justifies it.
• Advanced business software. Full field service management, CRM, and project management platforms are valuable at scale, but a small company can often operate effectively with simpler tools at first.
• Paid advertising. As covered in Part 4, relationships and organic visibility are the better early investment.
• A premium website redesign. A clean, credible website is enough to start. Invest in a more elaborate one once the business has projects to showcase.
• Branded apparel beyond the basics. A few company shirts are worthwhile. A full uniform program can wait.
• Employees. Hiring is one of the largest commitments a business can make. It brings payroll, payroll taxes, workers' compensation, management responsibility, and, as the next section explains, a significant amount of paid time that no customer will pay for. Many owners use subcontractors or temporary help until the workload is steady enough to support a full-time hire.

Deferring these items can be the difference between a startup budget near the low end of the range and one near the high end.

Account for billable hours: you pay for more time than you sell

One of the most important, and most misunderstood, parts of a working overhead number is unbillable labor. Not every hour a technician is paid for is an hour a customer pays for.

The 70 to 80 percent target

In a well-run, established low voltage company, technicians are generally billable about 70 to 80 percent of the time. The remaining 20 to 30 percent of their paid hours have no paying customer. For those hours, the company is the customer.

Unbillable time comes from many sources:

• Travel between jobs and to the supply house
• Picking up material, loading vehicles, and organizing the shop
• Warranty work and callbacks
• Training, certification classes, and safety meetings
• Waiting on other trades, access, or decisions from the customer
• Estimating walkthroughs and site surveys that do not become projects
• Gaps between projects

This time is unavoidable, and it is built into pricing. If a company prices labor as though every paid hour will be billed, it will lose money on every technician it employs.

Expect lower billability in the early years

In the early stages of a business, productivity is often lower still. A new company may find its technicians billable only 50 to 60 percent of the time, because work comes in unevenly, projects are smaller, and the schedule has more gaps. The owner, who is also estimating, selling, purchasing, and handling administration, may be billable even less.

Without historical data, it is tempting to assume the established company's figure. Resist that temptation. Build the working number on the lower percentage, and let actual results prove that assumption wrong.

The difference is significant. Consider an example using illustrative figures:

In the early-stage scenario, nearly half of every paycheck is covered by the company rather than a customer. If that technician earns $30 per hour, the company pays $1,200 in wages for the week but bills only 22 hours. The true wage cost of each billable hour is not $30. It is roughly $55, before payroll taxes, workers' compensation, benefits, and the rest of the company's overhead are added.

Stable pay and who gets the hours

Employees generally want stable, predictable pay. Most technicians expect their employer to provide a consistent minimum number of hours each week, and a company that cannot provide it will struggle to keep good people. The work, however, does not arrive in consistent weekly amounts, especially in the early years.

That creates decisions the owner makes deliberately:

• What minimum hours can the company commit to? Guaranteeing 40 hours per week to a technician who is billable only 55 percent of the time is a real cost. The company has to be able to afford the unbillable portion during slow weeks.
• Who gets the billable hours when work is limited? When there is not enough work for everyone, the owner decides how it is assigned. Many consider seniority, skill level, reliability, and which employees are most critical to retain. Whatever the approach, apply it consistently and communicate it clearly, since uneven or unexplained decisions damage morale quickly.
• Does the owner take the field hours or give them to the crew? An owner-operator who fills every available field hour personally may keep costs down, but leaves employees short of hours and neglects estimating and sales, which is where the next project comes from.
• How will unbillable time be used? Unbillable hours do not have to be wasted. They can be used for shop organization, vehicle and tool maintenance, pre-assembling equipment for upcoming projects, inventory, training, certification courses, and documentation. Productive unbillable time still costs money, but it reduces future costs and improves the quality of the work.
• Is a full-time hire the right step yet? If the workload cannot support an employee's minimum hours at a reasonable billable percentage, subcontractors, part-time help, or temporary labor may be the better option until it can.

Each employee added to the payroll increases the company's fixed commitment. Hiring follows a steady backlog of work. It does not come before that backlog.

Account for the true cost of a work vehicle

A work vehicle deserves its own line in the working number, because it is one of the largest early purchases a new contractor can make, and its costs extend well beyond the price on the window sticker.

Consider a typical example:

That is a potential outlay of $36,000 to $52,000 before the vehicle performs a single job. On its own, it can exceed the entire startup budget of an owner who begins with an existing vehicle. The costs continue:

• Financing. A financed vehicle adds a fixed monthly payment to overhead for years, whether or not work is coming in.
• Commercial auto insurance. A business vehicle requires commercial coverage, which is typically more expensive than personal auto insurance and may increase general liability exposure as well.
• Registration, fuel, maintenance, and tires. These are ongoing and rise with mileage.
• Liability. A vehicle with the company's name on it is a moving advertisement, and also a moving liability. Every accident, traffic violation, or careless driving incident reflects on the business and can affect insurance costs. Once employees drive company vehicles, their driving records affect insurability and premiums.
• Depreciation. The vehicle loses value from the day it is purchased.

This does not mean a new business avoids buying a vehicle. A branded, well-organized work vehicle improves efficiency, reinforces professionalism, and, as discussed in Part 4, can help with Google Business Profile verification. The decision is made with the full cost in view, and budgeted as a significant increase in overhead rather than a one-time purchase.

A note of caution for owners who start with a personal vehicle: personal auto policies often exclude or limit coverage for business use. Confirm with an insurance agent that the vehicle is properly covered before using it for work.

Step 6: Turn your estimates into an overhead rate

With recurring costs estimated, they can be converted into a figure that can be built into every price.

Total the annual overhead. Combine the recurring costs from Step 5, vehicle costs, unbillable labor for both employees and the owner, and the contingency.

Estimate billable hours. A full-time year contains roughly 2,080 working hours per person. Multiply that by a realistic billable percentage for each person, using the early-stage figures discussed above, and remember that holidays and paid time off reduce the total further.

Divide overhead by billable hours. The result is the amount each billable hour carries to cover overhead, in addition to the cost of the labor itself and the company's profit.

Example (illustrative figures only):

In this example, every billable hour recovers $50 of overhead in addition to the cost of the labor itself and the company's profit. A contractor who prices labor based only on wages leaves the overhead portion of each hour unpaid.

Note how sensitive this figure is to billability. If the same company bills 1,500 hours instead of 1,200, overhead per billable hour falls to $40. If it bills only 1,000, it rises to $60. Improving billability is one of the most effective ways to improve profitability without raising prices, and it is another reason to build the working number on conservative assumptions.

Many contractors also track overhead as a percentage of annual revenue, which helps when pricing material-heavy projects and comparing performance from year to year. Either method works. What matters is that overhead is measured, understood, and built into every price.

Step 7: Replace estimates with real data

A working number is a starting point, not a permanent answer. From the first day of operation, track every expense and every hour, both billable and unbillable. Then compare actual results to the estimates at regular intervals, such as after three, six, and twelve months.

Some costs will come in lower than expected. Others, such as insurance audits, software additions, equipment rentals, and unbillable time, often come in higher. Each review makes the number more accurate, and within a year or two, the business will have the historical data that established contractors rely on. Pricing changes with it.

Budget for overhead to grow

Overhead is not a fixed number. As a business grows, it adds users to software, raises insurance limits to meet larger customers' requirements, obtains additional licenses, and takes on more professional services. Costs also rise with inflation and price increases from vendors.

In the early stages, plan for overhead to grow by approximately 5 to 10 percent per year, even without major new investments. Adding a vehicle, an employee, a shop, or a new service line will increase it significantly more, and each of those decisions is budgeted separately before it is made.

Review overhead and billability at least once a year, and recalculate pricing when either changes. A labor rate that was profitable in the first year may not be profitable in the third.

Bringing it together

No article can state exactly what it will cost to start and run a given business. Depending on where the company operates and what the owner already owns, the startup investment may be closer to $2,000 to $5,000 or closer to $10,000 to $15,000, before working capital. Overhead will be shaped by the state's requirements, the insurance quotes, the software choices, the equipment and vehicle decisions, and how many of the paid hours a customer will actually pay for.

What can be done is to build a working number grounded in real research and realistic assumptions: gather local quotes, shop insurance through the right sources, inventory what is already owned, separate startup costs from working capital, estimate recurring overhead with a contingency, account for unbillable labor, equipment, and vehicle costs, and convert it all into an overhead rate. Then track actual results and refine the number as the business creates the history it does not yet have.

A number built before the first bid can be refined as the books fill in. Costs discovered after the cash is gone leave nothing to adjust.

Next in this series: insurance, bonding, and your EMR.

Planning and device counts are numbers. Those live on the calculators. Office takeoff, proposal files, and Bluebeam chests are a later storefront. The rest of this series is on the business setup page.

Related on this site

• Starting a low voltage business, part 6: insurance, bonding, and your EMR
• Starting a low voltage business, part 4: building your presence, online and in the community
• Starting a low voltage business, part 3: registration and licensing