Predicting in-house labor costs for a remodeling project is essentially a guess. With remodeling experience (or what I refer to as “schema”) we get increasingly better at estimating these costs, but it’s still a guess at how long it will take a given worker to complete a task or project. What really puzzles me is why, with this inherent risk, the majority of remodelers literally guess on what it costs to put an employee in the field.
Many remodelers guess the number of hours a project or task will take. Then they guess what to charge for labor inside their estimated costs. This alone puts their financial success at great risk in an industry and business already full of risks. To add to the risk, many also guess on which markup to use on their costs to cover overhead and profit.
There’s much to know in order to accurately determine your true burdened labor costs. Consider this article a starting point to help bring you some clarity on this topic. I hope this information also helps you see the incredible value of using your real burdened labor costs to help cause and protect profitability at your business. In this tight labor market, this information can help you calculate what you will need to charge in order to afford the compensation and benefits needed to attract and keep good employees.
Knowing Your Costs
When you estimate the cost of a job, you need to be sure all job-specific expenses are in your estimate. From there, mark up these costs to cover overhead and profit. Lastly, determine the best price for that job.
If you underguess by $2 per hour, that mistake will not only cost you over $4,000 per year for just one employee, you will also be missing out on the gross profit that would be earned on that money if it had been part of the marked-up price of your jobs. At a 50 percent markup, that means your business is potentially undercharging by around $6,000 per field employee. That money either comes out of your profit or out of your pocket.
To properly determine your real burdened labor cost—the breakeven cost per hour for each field employee your company employs—you need to gather real costs and know how those costs are assessed. For example, payroll taxes and workers’ compensation insurance are not fixed costs. Both costs will go up or down depending on how many dollars you pay your field employees (The same can be true for liability insurance if its premium is determined based on payroll dollars.)
However, some liability insurance premiums are instead based on gross receipts (the amount of money your business collects during the policy period). If that is the case, you would treat liability insurance as an overhead expense, covered by your markup, not as a burden to labor.
Knowing your real costs is necessary in comparing your estimated costs to your actual costs, with apples-to-apples accuracy. That’s easy when we are talking about a two-by-four. But when it comes to labor, think of the risk you take if you are comparing a guessed-at labor rate to a guessed-at actual cost of labor. Because most remodeling business owners don’t know how to determine labor costs, they also don’t know how to job-cost their labor.
How Burdened Labor Works
The cost of burdened labor includes the costs to both compensate and support field workers as they perform their duties. In addition to payroll-related costs like taxes and insurance, the cost of labor is burdened to cover the cost of many other field-employee-related costs. These costs can include vehicle-related costs, health insurance, retirement funding, uniforms and cellphones.
One common mistake is calculating hourly burdened-labor cost by dividing the cost by the number of hours the employee is paid, rather than the number of hours the employee is billable at job sites. Instead, these remodelers need to burden their labor rate to cover that non-billable time.
Examples include vacations, sick days, time spent commuting between job sites, shop maintenance, attending safety meetings and so on. So, if an employee is paid for 2,080 full-time hours, but is only billable for 1,900 of those hours, the business needs to charge enough during the 1,900 hours to generate the money needed to pay all burdens, including the 180 non-billable hours. It’s not enough to just know the labor rate, you need to know how it’s calculated, so when things change, you can adjust.
If You Make It Accurate, You Can Use It
If you know how burdened labor rates are determined, estimating and job costing can be very accurate. Once they are accurate, you can start using the information to predict and track costs relating to job labor.
Here are a few things you’ll be able to do: You can include accurate project and resource scheduling. You can determine how many workers you’ll need to put onsite to be ready for the plumber when he or she is actually available. Also, you can know when to tell the plumber you’ll actually be ready, which tasks were estimated accurately and which you should adjust.
Imagine having the ability to tell employees how many dollars of work you assigned and the cost to have them do it. This can eliminate subjectivity and make getting or giving a raise an objective discussion. QR
Shawn’s QR webinar on this topic will be Feb. 18 at 1 p.m. EST. To register go to tinyurl.com/McCaddenLaborCost.
McCadden is a speaker, business trainer, columnist and award-winning remodeler with more than 35 years of experience. He can be reached at shawnmccadden.com.