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How Underestimating the True Cost of Field Labor Can Kill Profit

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How Underestimating the True Cost of Field Labor Can Kill Profit

Are you a remodeling company with plenty of work but you still can’t seem to turn a healthy profit? Taking a hard look at your labor costs is essential if you hope to stop bleeding profits.

"Labor is the hardest thing to estimate, and you really have a lot of uncertainties. That's where most contrators slippage occurs. So if you're not estimating using the actual costs, if you're underestimating that, then you can wind up with a price that is also too low."

-Melanie Hodgdon, founder of Business Systems Management, Inc.

As a contractor, remodeler, or construction specialist, you know that Melanie is right, labor is the hardest thing to estimate due to numerous uncertainties. If your assumptions are off, your costs will be off, which can give you a false sense of profit. If you don’t know how to correctly estimate labor costs, you may continue to reproduce this cycle of errors, killing your potential profits.

On the PME 360 Powering Business Growth Show with remodeling marketing experts Ryan Paul Adams and Ron Rodi, Melanie Hodgdon, founder of Business Systems Management, Inc., tackles this money-draining issue, helping remodeling and home-building contractors understand labor costs, price work to make a profit, and bring business costs under control.

Don’t miss this opportunity to get some indispensable insights that will save your business money!

Watch the Webinar –

How Underestimating the True Cost of Field Labor Can Kill Profit with Melanie Hodgdon, founder of Business Systems Management, Inc.

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How Underestimating the True Cost of Field Labor Can Kill Profit
Ron:  Good morning! 

Welcome to the PME360 Powering Growth Show, where each session we discuss proven ways with our industry experts to help power growth for your remodeling business.

Our guests have proven themselves within their niche, and are the leaders in their space. Listen in as our experts provide practical tips that you can immediately apply to help power growth for your small to mid-sized remodeling business.

I’m your host, Ron Rodi, Jr. joining me today is the great Ryan Paul Adams. As the founder and CEO of PME360, Ryan and his team has helped power growth online for small to medium sized businesses with focus on the home remodeling and improvement space.

PME360 provides effective and affordable guaranteed complete marketing systems that power growth quickly. Ryan has developed several companies online and offline and has helped generate millions in revenues for local businesses for the past 8 years. Entrepreneur, author, founder of PME360, founder of – Ryan Paul Adams.

Good morning! How are you?

Ryan: Good morning! Thank you Ron for the introduction. Well done as always.

Ron: Welcome. My pleasure as always.

Also very excited to have on with us today, Melanie Hodgdon. 

Melanie is author, speaker and trainer. She is very well accomplished. She works with clients to identify financial and procedural challenges and to generate realistic solutions that reflect the resources in style with their companies.

Applying the blend of logic, insights and experience with scores of remodeling companies, she creates company-specific solutions to help contractors operate more profitably.  Author of A Simple Guide to Turning a Profit as a Contractor. She has been her clients’ easy button since 1994.

Please welcome Melanie Hodgdon.

Melanie, good morning! How are you?

Melanie: Good morning Ron! Thanks so much for that introduction. I’m well and looking forward to our session.
Ryan: Good morning Melanie!

Melanie: Hi, Ryan!

Ron: Very excited to have you on. Today’s topic is understanding the true cost of field labor and how it can kill profit.

I know Melanie this is something about that you’ve spoken in the past. Something that I know will bring a lot of value for our audience. So whenever you’re ready, please feel free to go ahead and get started. And, we’ll listen in attentively and provide feedback where necessary.

Melanie: Thanks so much. We’re off and running. The agenda today is to talk about the strategy, what burdened labor is, productivity and efficiency and how it affects that, crunching the numbers and finally, doing something about the numbers once you understand them better.

W-S-I-C: Why Should I Care?

Why is it important to actually understand what the labor cost. 

Well, when you’re estimating a job, presumably, you are putting together numbers, some of the numbers are easy, some of the numbers are harder to put together. 

If you get a bid or a quote from a sub, that’s pretty easy. If your electrician says it’s going to be $23,000, that’s easy. That goes into your estimate as cost.  Materials you can do your take-offs and it’s in the lumber yard, get a quote, same thing.

Labor is the hardest thing to estimate. And you’ll really have a lot of uncertainty. That’s where most contractors would have a slippage, the area of estimate. 

So if you’re not estimating using the actual cost, if you are underestimating that, then you can wind up with a price that is also too low.

So if your strategy is to take your cost, add a mark-up and come up with a price, then whether or not you are contract price or T&M, it really doesn’t matter. Either way, you’re taking cost and adding something to it and then coming up with a price. And if your assumptions regarding costs are off, then your price will be off.

When you are job costing, you also need to have the ability to see what your actual labor costs are as those hours start to accruing. And if you are not doing that using the correct numbers, that could give you a false profit.

So when you analyze your numbers, it will be inaccurate. You’d be thinking that the job is more profitable than it is. 

And that means, when you come to revise your estimation process, you may not pick up on that. And you may continue to reproduce this cycle of errors.

So the strategy. 

First of all, let us identify the challenges. Labor is the hardest piece to estimate. 

How long will it take? How much will it cost? For example, if you have a job that you think will be 1/3, 1/3, 1/3 sub, labor and materials, when in fact, it’s looking more like this, then once again if you are pricing for a circle then everything beyond the perimeter of what you think the labor is costing you is going to be left on the table or will come out to be a loss.

So identify what you can, if you estimate units of time as hours, days, man-days.

I have been asked by people when I produce estimates for them or when I produce estimating tools for them, some want it in hours, some want it by days, some want it by man-days or crew-days. All sorts of ways that people want to see and think through the process of estimating a project.

But whatever it is, you need to identify the actual cost per unit, whether it is a unit of crew-day with three guys or a unit of hours. And that is necessary in order to come up with a realistic cost of labor.  

So, that is the strategy.

Now, let’s take a look at the burdens themselves.  We have a picture of here, Pig Pen, a popular character of Charlie Brown’s Peanut comic strip.  

I bring in Pig Pen not because your guys are dirty. But rather because Big Ben is known for the fact that he is surrounded by this cloud of dirt and filth and dust. 

And wherever he goes, this cloud surrounds him.  And that little cloud, I’d like you to think of all the cost that are associated with your guys when they are on the job site, they are surrounded by a bunch of costs. 

They move wherever the guys move. Some of them move with your guy and even when he is not on the job site working for you.

We’ll talk more about that. For now, we’ll start with the wages – the easy one. What you’re paying per hour, add mandatory, voluntary and associated costs. Then we’ll look at what each of those comprises.

Let’s start with wages. So we look at the wages. Hourly is easy. 

If you have a salaried production worker, you can divide the annual amount by the estimated paid number of hours per year. This can get tricky.
If you have an hourly guy then basically you are paying him $15 per hour, $20 per hour or whatever that amount is. It becomes very easy. 

If you’re paying him $10 per hour to keep the math simple, and he works for 40 hours, then you’re paying him $400. If he works 38 hours, it’s $380. It’s very simple.

Salary is challenging because you’re giving him the same amount each pay period but he may be working a variety of hours.  So that’s a little more challenging. 

When possible, I like seeing all production workers on annual simply because the math works better and the job costing works better.

To that, you add mandatory cost. Mandatory cost consists of things like payroll taxes, workers compensation liability insurance. You have no say over this, it is imposed on you.

Then, we have voluntary costs. Depending on your company, you may have one or more of this, you may have other things.

You may be offering health insurance. Incidentally, if you’re offering health insurance, my suggestion is, you do not say in your employee manual that you are providing health insurance for the employee. 

Instead, give a dollar figure. This way, when your insurance doubles like recently for an acquaintance of mine, then you’re going to be tied to a dollar amount rather than suddenly jump and pay that.

Dental, retirement, bonus, whatever these other costs are that you give to your employees. 

Some companies offer other little perks. One company I know offers a membership to each of the employees at the local health club. 

Another one provides subscriptions for trade magazines to its production workers hoping that they’ll going to do a little reading and self-education. 

So these are all your voluntary costs.

There are associated costs. These are little things that often you don’t think about when you have in your head what it’d cost you to put a guy in the field.

When he’s driving your truck or if he got your cellphone or if he is driving his own truck but you are compensating him with a mileage reimbursement each pay period, then you’ve got to consider that as associated costs.  

Same thing with communications, if somebody has bought a cellphone that they’re using but they aren’t using a plan and you need them to, then you’ve got to consider that as cost as well. 

And, of course, training and education.

Now we have these wages, mandatory, voluntary and associated costs.  Let’s take a look at what it takes to calculate it.

We have fixed and hourly cost.  So fixed and hourly is if you paid Jim for an hour, you need to pay the wages plus the taxes and workers comp for that hour.  Because wages and workers comp are directly tied to the number of hours that he has worked.

The second one is fixed and annual. You pay health insurance whether or not you’re paying Jim or not.  That’s what I said, when your employee is not necessary working on a project, he can be vacationing in Aruba but you’re still covering for health insurance.

And then, you’ve got estimated cost based on history.  And this is where if you’ve got good numbers for what it cost to put the guy’s vehicle on the road for a year then you can get that as an estimated cost based on that figure.

Same with communications, what you’re paying for a month for any cellphone and cost associated with the employee.  Now if you’re lucky and you’ve got an employee using his own truck just for the heck of it and not charging or expecting anything of a compensation, for heaven’s sake, keep him! Because he’s saving you a lot.

Same with if you’ve got a 20 or 30 something who is all about getting the latest smartphone and delights in using it and paying for it on his own. Yipee! Get more of that. 

So we have two options for calculating. One, is you take up the total cost per year then you divide by the total number of hours and you get a per hour cost.

The other way to do it is to convert everything into a cost per hour and then when you add them all up should be the same.  You should be able to go either way.

My preference is to use the first option simply because it’s easier to look up annual cost for some of these things like vehicles and health insurance.

Now, let’s take a look at productivity and efficiency.  

What it has to do with burden?

 Is your employee’s time 100% billable? In some cases, it may be.  There are some service businesses that do nothing but service calls and as a consumer, I’m sure you can appreciate the fact that when somebody comes in with a truck to fix the toilet gushing in your bathroom, you’re going to be paying for the entire experience – from the time that he leaves the shop up to the time he goes back to the shop and your toilet has quieted down.

So you’re really not necessarily seeing the cost of the travel in there.  But if say, it’s a reputable company that’s been around for awhile. The only way they can survive is push that right into the bills of the consumer covering it.  

But for many remodelers, even for most remodelers your employees’ time is not 100% billable.

And does that matter in terms of what cost you to put that guy in the field?

Well, let’s do the math.

Let’s say your cost per hour would magically jump ahead and discovered that your employee is costing $31.25 per hour.  He might be costing you somewhere around $20 to $22. By the time you put in all the taxes and other burdens, it winds up being $31.25.

If we have paid hours of 2,080, the way that I got that is 8 hours per day times 5 days per week times 52 weeks per year – that comes out to 2,080.

The total cost then is $65,000. 

Let’s take a look at what it would be for the billable hours. Let’s say you’re paying him for a couple of week’s vacation, you’re taking him to a trade show for training, you’re sending him out for training, you have Monday morning production meetings where he is not out in the field doing production work. You’ve got the couple of times a year when some expert comes in to show you how to use a respirator properly or to talk about a new insurance or retirement plan.

So your billable hours, if you’re lucky will be down by like 1,875.  

So if we take that whole $3,125 and multiply that by the billable hours per year, which is what you’d really want to pay, then your total per year is only $58,005 which means you spend an additional $6,400 for this guy when really you only got out from him the equivalent of 58.

Productivity and efficiency tie in to how the cost works.

Ryan: So Melanie, just a quick question on that.

That’s running around 10% of the billable hours, is that a good rule of thumb for most people? 

I know all businesses are different but do you run into a consistent percentage of paid hours versus billable?

Melanie: I have not run the percentages. And you’re absolutely right. It always varies.  But here are the parameters:

Do you offer paid vacations: yes or no?
Do you offer paid holidays: yes or no?

For some companies, you may be looking at a 12-year employee to whom you are giving 2 weeks of vacation time. So that can affect it.  

The other thing that could affect it is whether or not your home remodeling business, if you are a remodeler with very small projects almost bordering on handyman then what’s happening is your guy might be doing two jobs in a day, we are talking travel, set-up, break down – all of that.

Do you, for example, require the guy to check into the office in the morning or can they, if they’re living by chance next door to the job site, is it okay for them to just walk next door and start work? So all of these are parameters.

Ryan: Makes sense. I was just curious if you run into a number. It’s really hard, I can see that.
Melanie: I’ve seen numbers everywhere down to from the high of 70% efficiency all the way up to companies with virtually (charging for travel time and possible they don’t have any benefits) they get around 98% to 99%. It depends on the model.

Now, let’s take a look at productivity and efficiency.

Identify what contributes to it: holiday, sick, education, meetings, uncharged travel time, customer face time. 

When Mrs. Homeowner comes out to greet the boys with a hot apple pie and some nice freshly-brewed coffee, what are they going to do?

Say, “No, thank you. I’d rather stay here in a pit of saw dust and keep on working in 90-degree heat.”

Oh, maybe it’s iced tea if it’s a 90-degree heat. 

But at any right, that’s going to be time that is lost. If it’s not Mrs. Homeowner coming out with the baked cookies, then maybe it’s going to be Mr. Homeowner coming out and asking questions.

Remodeling as with any other service business – and it is a service business. You may thing it’s a construction business but it’s not.
You are meeting somebody’s need so it’s a service business. It’s absolutely critical to keep a good rapport with the homeowners. 

So when they come out, then you need to pay attention to them.

And the other required company tasks. How many company’s require their guys to clean up the trucks or at least maintain them properly? They may even have a washing station where the trucks are kept clean.

If you got an older truck that is well maintained and clean, it will look better than a brand new flashy truck covered with crude. 

Then, you’ve got other type of paperwork tasks to do, or this day and age – transmission of timesheet data, for example.

So all of these take time away from productivity.

And productivity, I’d like to define as: Productivity would be the time during which the employees are engaged in the tasks which are included in the estimate.

So if you have estimated time for installing windows, if the guy is installing windows, they he is engaging in productive time.

Ron: Melanie, can you say that again? That’s critically important.

Melanie: Productivity or productive time for a production worker would be that time during which he is performing tasks that were included in the estimate. 

So if he is putting down roof shilling then if it’s that in the estimate then that’s exactly productive time.

Ron: And if it does not fall within the original estimate, then that’s were the additional costs come in that are critically important, that allow you to not be really efficient, correct?

That’s really what you’re saying?

Melanie: There are 2 types of tasks that can interrupt that flow.

One is, let’s say part of the task is to frame out the master bedroom expansion. So there was an old, nasty, nasty master bedroom upstairs and we need to put out a 2-storey edition. 

Now we’ve got a situation in which we’re blowing out the exterior walls of the old master bedroom and going to expand into this newly created space. 

So they’ve got a job, which is for framing for the new closets in the new space. And they are engage in that, and it is part of the estimate. 

And they are doing that when Mr. and Mrs. Homeowner comes in and say, “Oh my! We didn’t realize this space will be so large. If we’ve got this much space, then I’d really like a larger walk-in closet.”

Now, that becomes a change order. 

And that change order becomes part of the contractual agreement. But it’s like a sub-job and that then any work tearing up the framing that they’ve already put in and replacing it with a framing for a different-sized closet and a different location, perhaps. 

That all becomes productive work under the change order sub-contractual cost or an amendment to the contract.

But when Mr. and Mrs. Homeowner comes in and take up time showing them pictures of their new grand baby that’s just born or offering them snacks or threats, talking about the philosophy of construction and waste time then that is non-productive time. 

Is that distinction clear?

Ron: Yes. Thank you. Perfect.

Melanie: So how do we calculate that? What is productive time? Anything included I the estimate. And if it’s in the estimate and that would include a change order.

All change orders if you’re in contract price should be incorporated in the estimate. Otherwise, your estimated cost would not follow the actual progress of the job.

And of course, anything that is chargeable. If it’s in the estimate, if it’s in the agreement, logically it’s chargeable. 

If a guy is standing there, engaged in some sort of a task, he should ask himself, “Is what I’m doing chargeable?”

If so, then it is productive.

If not, then it is not productive unless in certain circumstances, particularly with things like a Lead Carpenter System.

And this is particularly important to look at, the lead carpenter system says that a duty of the lead is to not only to perform the work with the assistance of a helper but also to act as the administrator of that job.

That means that he is going to be responsible for any conversations with the homeowner that are related to change work. He is going to be dealing with the sub. He is going to be receiving and checking the materials. He is going to be acting as a project supervisor as well as the project implementer.

In that kind of situation, during the estimating process, you’ve really got two things to estimate for.

One component is the productive time and that is the time in this lead carpenter’s case, that the lead carpenter is actually engaged in nail-banging, sawdust-making activities which are part of the estimated scope of work.

The other consideration is you know in advance that the lead carpenter would be engaged in “non-productive” but essential activity related to that job, such as writing up change orders, receiving payments and dealing with subs.

In that case, during the estimating process, you’d need to be able to put in an allowance of hours for that.  

So that the time for the lead carpenter is going to be expanded based on historical records on the proportion of time that the lead is engaged in these “non-productive” tasks.

So for example, if you are recording your time in a way where it allows you to capture that information and you discovered that out of 1,000 hours of paid work from the Lead Carpenter (and for now, assume he’s at 100% efficiency to keep the numbers easy). 

You paid him for 1,000 hours, if by looking at his timesheet information, you discover that 300 hours were spent performing lead carpenter administrative activities and 700 hours were for producing the actual work, then what you know that 30% of his time is spent on these administrative tasks then you can add that in when you are calculating the labor cost for this employee.

You can calculate that and incorporate in your estimating process. In that case, anything chargeable on that lead would include both the time he’s making sawdust and banging nails and the time he is engaged in those administrative tasks because they are covered within the estimate. 

Is that clear?

Ryan: It is. It makes perfect sense.

Melanie: So how do we calculate?

You count up the paid hours, count up the non-productive times, subtract from the paid hours to get the productive hours. How does this affect things?
We are looking at a little labor burden calculator here. This is a free product which I’m happy to share with all of the viewers of this webinar.

Let’s say we are starting out with total paid hours per year, again it’s 2,080 (8 hour workday, 5 day workweek, 52 weeks pay period). 

So if you are paying 6 holidays a year or 5 sick vacations or personal days a year, training and education, whatever else. Then what we see as the total non-productive time per year in hours is 294.

And the total productive hours per year is down to 1,786. If you checked it out, 6 paid holidays, actually the number of legal holidays in the US is 10. That’s only a week of vacation here, training and education, if you take them to a remodeling show or JLC Live Show, that’s only 3 days out of a work week. Meetings these are hours per week for company meetings. This particular company is spending 1.5 hours a week in production meetings that are mandatory.

These other non-billable time like 2 hours a week for filling up the car, gasing up the truck, washing the truck, organizing the tools, sorting the materials for delivery or if you have the staging site off the delivery site maybe you’ve ordered the cabinets three weeks in advance and you have the warehouse for those are going to be stored off of the construction site because there is simply no room or because it’s just safer, perhaps of security issues – then those are all sorts of time going to be spent by those employees (legitimate time but non-productive time). 

So if we look at the total number of productive hours per year which is 1,786 and divided by the total paid hours, then we see this employee is only 85.87% efficient. And that’s not his fault. It’s just the way it is.

Any questions about that?

Ryan: You make sense, definitely.

Melanie: And if we put in for example an hourly wage calculation of $22.50 an hour, and we put in our 2,080 and here’s our 6, let’s even give them 3, let’s see how it changes, 5 days, let’s say we don’t even have training and education. Let’s say we only have half an hour per week for meetings. Let’s say that’s impossible to say, half hour for non-billable time.

If we look at the numbers, these are just crunching the mandatory taxes and other costs, so forth and so on. Voluntary costs, this one they happen to do health insurance of $200 a month, dental is $100 a month, cellphone is $100 a month. 

Then it comes out that when you start with $22.50 an hour, the total of all annual burdened costs including the total mandatory, voluntary additional cost is $73.05

If we divide that by the total number of hours this employee is paid, we see that he is costing the company $35.36 an hour.

But if we take that same annual burdened cost and we divide it with the productive hours, then we see him costing $37.45 an hour. So there is more than $2 an hour difference when you start looking at productivity.

Ryan: That’s amazing.

Melanie: It is! Shocking isn’t it?

Ryan: I had a client I was talking with, the last month and they’d be charging to their client between $25 and $30 an hour. 

And I was like, “You might want to reconsider.”

Melanie: So let’s take a look at two more things.

First is if the total paid hours is this and the total productive hours is this then we divide one by the other and we see that this guy’s got a utilization or productive hour per paid hour rate of 94, or an efficiency rate of 94.4% which is very high.

But again, we’ve been very, very chancy with this. We’ve only given him 3 holidays, he’s only having a week’s vacation, and these figures are probably let’s just say optimistic in terms of reality.

Finally, here’s sort of an optional thing that you can do. What is your mark-up as a percent?

If he’s costing you this $37.45, let’s say you have 50% mark-up that you apply across the board. We can do another whole cast thing on mark-up, margin and how to price the job. But if we add that 50% to the cost, to the productive cost, then you should be charging that guy at $56.17 an hour.

If you mark-up at 42% then $53. But you should not be charging $37. A lot of people have been told by their accountants, “You know, if you just add this much, you’ll be fine. Just double it and you’ll be fine. If you double it, you’ll be at 45.”

Ryan: Yup. And you’re not fine.

Melanie: You’re not fine. Let’s see what that’d be. It’s not even a 37% mark-up if we played around with this.

Ryan: Yeah, it’s not going to cover much of anything.

Melanie: If you’re somewhere around a 20% mark-up, you’re only marking up your cost by that 20%. If in this case, you double your rate and that’s a wake up call to a lot of contractors. They have no idea.

Ron: Melanie, you have mentioned that this labor burden calculator is something that listeners can get access to, this something very helpful.

I think every CPA who works with remodeling contractors should have access to this because it’s a absolutely helpful.

Melanie: I’m happy to share this. This is my free labor burden calculator. This is called PME360 Free Labor Burden Calculator and there’s an instruction at the end of the webinar on how to request that from me.

Ron: Perfect.

Melanie: So let’s go back to this. So now we get another burden.

Now we are adding a productivity component as well. The cost of non-productive time is another burden. It is something that the company’s got to allow for. And it can be calculated as we just saw.

So let’s take a look at crunching the numbers. 

What you need to do in order for you to come up with that calculated burdened figures is you need to know the hourly wage, the rate for various payroll taxes (that would be federal and state because tax varies by state and by company).

The calculator allows you to put in the rates that are appropriate for your particular state.  Your workers comp rate, their ability to get liability all you do is you take your canned cost, insurance like a 12-month period if your liability is not a calendar year. Just take that 12-month period divided by annual payroll, that’s going to give you a little percentage figure.

Then, your annual cost for benefits, vehicle and so forth, other costs relevant to your company – whatever that might be.

And of course, you’re going to have to have a handle on non-productive time.  

How will you get a handle on non-productive time unless you have a strategy within your company that provides for a distinction between productive and non-productive time.

So if your timesheet says what job did you work on, how many hours were you there and that’s it.

Then at the end of the year, it’s going to look like hopefully the employee is 100% efficient. 

Whereas, if you have 2 categories minimally for time: productive time and non-productive time. Then you can start to see this particular employee’s ratios right in your time tracking software.

So we went to the calculator already. I’m going to skip right on pass that to talk about using the numbers. 

Now that we got it, what do we do with it?

Use the same labor burden cost when estimating and job costing. 

So if you have estimated that the labor cost will make the numbers round, to make it easy – $60 an hour. 

Because maybe you’re working with very experienced finish carpenters who’ve been in your company for 30 years and maybe you’re paying him $30 an hour. Then we need to look at keeping things apples to apples.

So if this apple is the cost when you’re estimating, then we want to have the same apple be the number used when we do job costing.

Don’t mix and match burdened and partially burdened figures. When you got apples and oranges, you got a salad. You do not have good numbers.

So if this is your estimating figure and this is your job costing figure, you’re probably going to be in trouble.

Most of my clients are. They are being led to the rosy path, thinking that they are more profitable on their labor than they actually are.

So let’s look at an example.

So let’s say your burden cost is $60 an hour. And you estimate 10 hours of work. This is pretty easy. We have some task, we estimate it’s going to take 10 hours. And our calculated burdened cost per hour is $60, therefore, we estimate that the cost of the task is $600. Easy-peasy!

Let’s say you are job costing using a partially burdened cost of $50 an hour. Why the heck would you do that?

If you know it’s $60, why would you be using a partially burdened not a fully burdened cost? 

Probably because you have absolutely no clue about how your accounting software or whatever else you’re using.

If you are using a piece of canned software for accounting purposes as supposed to an Excel spreadsheet where you can control the numbers better, then it maybe that your software is only allowing for $50 an hour.

So let’s assume that in your accounting software, you are looking at a job cost report and we’re looking at task X. and we see that it costs you $550 an hour. That’s great!

We though it’s going to be $600 an hour. We are $50 under budget. Yey!

Or are we?

If your software is calculating the burdened cost at only $50 an hour, then in fact, what happened is that the task cost you 11 hours.

It took 11 hours. And now you’re over time and over budget by an hour.

It’s only supposed to be 10 but they took 11. So you’re actually an hour over your needed time in terms of that particular task. 

Then, if it took you 11 and your burdened cost per hour is really $60, then the actual cost of the task is $660. 

So instead of being under by $50 from the estimated $600, you are over budget by $60 and over time by 10%.

If you don’t know that you have apples to oranges situation, will you continue to be misled?

Well, yeah.

If you don’t know that there’s a problem, then have no reason to try and fix it. 

So we’ve looked at using the strategy, how to calculate the burden, how the productivity and efficiency affect the burdened calculation. 

We’ve looked at how to use the information about the cost to crunch the numbers and come up with a reasonable figure, a calculated figure per paid hour and for productive hour.

And we’ve looked at how using the numbers correctly is the only way that you’ll get good numbers in your estimating and job-cost analysis. So that when you see that, go back to this.

When you achieve that task under time and under budget, next time would your tendencies be say, “Oh gosh! If we did it in 10 hours, maybe we can do it in 9 hours next time or maybe I can fiddle the numbers and not allow as much cost for that.”

And that begins the death spiral downward, wherein you are underestimating the actual cost.

You are believing erroneous figures and then you are actually adjusting your estimating process to account for what you believe are accurate figures and are not.  

And that’s where you start to perpetuate the error and in fact, even get worse which actually affects your profit.

So in summary, know what your labor cost you.  Estimate and sell based on cost, job cost based on the same numbers.

Constantly review and update. What happens for example when your workers comp increases or your health insurance increases? 

Then if you have not as I’ve suggested earlier in this session, tied your health insurance coverage to a specific dollar value, if you’ve said, “Yeah, we’ll cover you but not your wife or husband and children”, then you will be stuck with escalating costs.

So do whatever you can to minimize the potential for escalating labor cost by tying your benefits to dollar values.

Be sure that you have your workers comp updated. You go back to the calculator, you put in the new numbers. If you want a copy of the labor calculator, email me for it.

My address is on the last slide. And simply put “PME360 Free Labor Calculator” I the subject lie when you email me and I’ll send it back to you and it will be in an Excel file.

If you have an older version of Excel, please let me know. The current version that you just saw is in Excel 2010. If you have 2010 or higher than that, then you’re fine. But if you have an earlier version, please stipulate the version and I’ll save to that version and send it out to you.

Ron: Thank you. Fantastic Melanie! That was very helpful.

Ryan: That was excellent.

Melanie, do you find that most remodelers just kind of get too busy to pay attention to this stuff and they are assuming that the bookkeeper and the accountant they hired, that they are the professionals. That they are just going to take care of it.
Melanie: Absolutely true!  When contractors are first starting to set up a file in their accounting software. 

I happen to be a Certified Quickbook Pro adviser. So I work with a lot of contractors setting up Quickbooks and what I often find is that, I don’t make my money setting up these people’s files.

I make 90% of my money fixing what somebody else had set up wrong.

It’s logical to assume that accountants are the best resource for setting up a file. However, what you have to consider is that even the best accountant in the world unless they specialize in your industry, their finest, highest priority is going to produce a tax return for you as quickly and accurately as possible.

So they’re going to structure your file to make it easy for them to file your taxes. And that’s great!

For one day a year, that’s exactly what you want. But for the other 364 days a year, when you’re actually using your file as a management tool, then it’s not very helpful if it has been set up for a different purpose.

So, what I suggest to people is that they go to an industry-specific expert when they are starting with their accounting software. 

So that it can be structured for their needs. And if things like what I already mentioned, are you tracking time by productive and non-productive time?

Well, why would anybody think about that unless they are looking ahead at a strategy that non-productive time is built into the estimate process, whether it’s by putting in a burdened rate per productive hour as the base labor cost to which mark up would be added or they are looking at a Lead Carpenter System in which the Lead’s time is not being broken out so we never get to see what proportion or what percentage of time is he being paid for but he is actually performing those administrative Lead Carpenter tasks.  

It’s all about strategy. And I’m a strategist. I want to say not what you need today, not what you need to keep your accountants happy. 

I want to say what numbers are you going to have a year from now so that you can constantly retune and zero-in on what it is that you need to do to make your company as profitable as possible.

And there are sort of things that need to be in place. If you don’t think about it, then you won’t have the answers.

 And a year from now, you’d say, “Geez! I wonder how many hours of …“

If you have not been tracking, it’s gone. You have to wait for another year or another 6 months before you can get that figure.

And meanwhile, your calculated burdened rate per productive hour us going to be off to the tune of that productivity figure until you really nail it down.

Ryan: And one of the big takeaways that I hope everyone listening to this webinar can get is that I’m not picking on accountants, I don’t want it to come across like that but they are not strategists.

Not the way you think about this, in the way someone that we look at the business. 

It’s just a different mindset. Like what you said they’re job is to get your taxes filed as quickly and efficiently as possible. 

But they’re really not looking at 95% of the things you are talking about which are being more profitable, making sure you’re charging the right amount of money.

And I’ve never come across an accountant that ever looked at a remodeling business the way that you do.

So it’s really important to differentiate and distinguish that. Make sure that you have somebody like yourself. That you can look at the strategy. I just find it so important.

Melanie: Well you don’t ask your plumber to do wiring. And you don’t ask your electrician to do dry wall.

We all have specialty areas. We are working on the house. The plumber, the electrician, the dry wall guy – they’re all working in the same project, they are members of the team and the objective is to make sure that each part, each component of the project is done with the highest degree of professionalism.

And I look at the company the same way. The production workers out on the field, they are part of the team. The strategists in terms of setting things up, the strategists and analysts and that could be an in-house person or that could be a Chief Financial Officer, it could be somebody who comes in monthly or quarterly and reviews the books from the stand point of strategy and not tax preparation.

And of course, your tax preparation, your CPA is a very important part of the team.  But it doesn’t mean that he should be cross-trained in analysis of the special needs of a remodeling company because a lot of these things got nothing to do with money directly.

How good any accountant necessarily think about and say, “You should be structuring your timesheet to categorize the labor, the time that is being paid for into compartments that will later allow you to get key numbers that will tie into your estimating process.”
That’s not the way they think.

Ryan: No. Absolutely.

Ron: Melanie, thanks so much again for preparing this and for joining us. We hope to have you again sometime in the future.

Ryan, thank you for your time.

And for the PME360 Powering Growth Show, we will see you next time.

Ryan: Thank you Melanie. We appreciate it.

Melanie: Thank you. My pleasure.


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