The Design Builder's Blog

Remodelers: I Bet You Don’t Know Your True Burdened Labor Costs

Labor cost is one of the most difficult costs to predict in an estimate. Basically, this cost is determined by calculating the hours required to complete a task or project and then factoring those estimated hours by what it costs your business per hour to compensate and support your field employees.  The cost per hour to compensate and support your field employees is commonly called burdened labor costs or your burdened hourly rate. 

If you’re not sure which employee you’ll assign to the project you are estimating, it might be wise to use the burdened labor cost of the highest-cost employee and then also estimate the work hours based on his or her abilities and performance. If you are using my Free Excel Estimating Template, this would be the rate you would enter into the top section of the template as shown below.  (Note, depending on your company’s situation, other options for which rate to use might make more sense.)

Don’t use another contractor’s labor rates

Because no other company is exactly like yours, it’s important to know precisely how much it costs your company to do business. The burdened labor cost used inside your estimates must reflect your company’s actual expenses. If you don’t know your true labor costs and or how to determine them, and you fail to account for a couple of dollars per employee per hour, your loss could quickly become significant.   To make matters worse, also consider that the if the costs are missing from your estimate, those missing costs will not be marked up and included in your selling price to help contribute to required overhead and profit.

Burden and benefits

The hard cost of labor includes not only the hourly wage of the employee, but also all employer-paid taxes, Social Security, insurance, vehicle expenses, and any employee benefits. Workmen’s Compensation, liability insurance, auto insurance, paid holidays, vacations, medical benefits, education, employee meetings, cell phones, pagers, and every other labor-related expense must be factored into your hourly rates. 

Keep in mind, if and when the new Obama Health Care Law comes into effect, you will need to add this cost to your burdened labor rates for each employee.

Also, be aware that Workers Compensation rates are expected to increase in many areas around the country.   You might want to budget early for this increase.

The burdened cost of labor will be different for each employee

To calculate the burdened labor cost you should use when job costing employee time cards, you’ll need to collect the expenses specific to each employee. For example, one employee may have a company vehicle; another may get a vehicle allowance. This consideration alone will result in different costs for each, even if the two employees are paid the same basic hourly rate.

Are you paying for non-productive time?

In my next blog I will discuss how missing or improperly accounting for the cost of non-productive time may be eating away at your bottom line.  I will also share how to build the cost of non-productive time into your burdened labor costs and how you can down load a free Excel Labor Burden Calculator.

Don’t Confuse Bad Cash Flow With Under-Pricing

First, it’s important to define what cash flow is. 

Good cash flow is the ability to pay your bills on time because you have collected enough money from your customers in advance of having to pay those bills.    

It’s called cash flow because the money flows in to cover bills and only flows out if and when you can pay them.  Therefore, to have good cash flow, you need to know how much you need to collect and by when.

Bad cash flow or cash flow problems happen when the business fails to collect enough money at each progress payment and or doesn’t bill and or collect the money from customers ahead of when it is needed. The key here is that the money used to pay those bills comes from your customers, not from other sources.

Good cash flow for remodelers happens on purpose

If you don’t charge enough money for the jobs you sell you will experience what seems like cash flow problems.  The difference in this case is that you will never be able to pay your bills using just the money collected from customers because you have under priced your work and there will never be enough money coming in to cover what needs to go out. 

When this happens, it should not be referred to as bad cash flow.  The problem isn’t with flow.  It should be referred to as buying rather than selling jobs.

Paying the bills for yesterday’s project using the deposit money from a job you haven’t started yet may seem to solve the cash flow problem; however it only temporarily puts off the eventual reality that you are buying jobs instead of selling them.  Due to the recession many contractors discovered this reality when the new job deposits dried up and there was no money in the bank to pay the bills for work already completed.

To avoid under pricing what you sell you need to know what it costs your business to do business.   First, you must properly estimate what it costs to produce a project.  Second, you need to know what your business’ overhead and profit costs are (I assume profit as a cost of doing business) for a certain volume of sales so you can determine what markup to use on estimated costs so you can get to the right selling price.  Without knowing this information, when you quote a price to a prospect, you are probably using what is referred to as a WAG, a Wild Ass Guess! 

Bad cash flow is sure to follow.