The Design Builder's Blog

Tips For Contractors On Ball Park Pricing and Charging For Estimates

 

 

Any contractor who has been in business for any length of time has probably had to deal with Ball Park pricing and charging for estimates.  Home owners always seem to want one but not the other.  Rather than risk letting a Ball Park price make them look bad, savvy contractors can use the request for one to help cause the other to happen.  If interested in how to do this, read on.

 

 

Let’s start with Ball Park Pricing

How many times in your career has a homeowners asked you for a “Ball Park” price for their project.   And, how many times did your Ball Park price end up being nowhere close to the actual price of the project? 

I find the whole idea of Ball Park pricing comical. I’m not saying it doesn’t have value in some selling scenarios.  I am saying however that when contractors offer a Ball Park price more times than not they strike out rather than hit a home run.

So, when I was selling remodeling and a prospect asked me for a ball park number, I would respond by asking them which ball park they preferred; Fenway Park or Yankee Stadium. That usually stopped them right there in their tracks and helped them think about what they just asked for.  And, by asking that question, I was able to get them into a much more meaningful conversation about their project.  Let’s face it; a "ball park number" really doesn't have much value unless there are some specifications to help give it any relevance.

Try asking them about which Ball Park they are looking for.  Feel free to substitute the parks you use. I think you will find doing so to be a great conversation starter. 

 

Then there’s the whole idea about charging for estimates

As contractors we know estimates are not free.  Somehow the cost of creating an estimate must be recouped by the contractor. 

Some contractors may say they don’t charge for estimating.  If that is true they are working for free and the cost of estimating is not included in the price quoted to the prospect.  I don’t know about you, but in my opinion if you do estimates for free you are undervaluing your worth and might also be putting your professionalism in doubt.  If you are not charging for estimates, and you also are not accumulating enough money to someday retire, working for free might be a good part of why.  And, contractors who do so are making things challenging for those who do charge by helping consumers think they should get estimates for free. 

On the other hand many contractors who tell their prospects they do not charge for estimates are actually not charging for the estimate in advance, they recoup the cost of estimating through their markup; but only if they sell the job.  

 

It’s OK if they don't want to pay, but why get offended? 

So why do prospects get offended when you tell them you charge for estimates?  Did they expect you to work for free?   Do they work for free at their jobs?  I doubt it. 

When I was selling remodeling and homeowners asked if I would do free estimates I would say yes and give them an estimate right then and there.  I would say something like “I estimate the bathroom project will cost somewhere between $15 and 25, 000”.   Then I would just wait.   When they asked why such a big range I would simply ask them why they thought I had to give such a big range.  It usually led to meaningful conversations about the fact that an estimate is really just a guess and may not have any relevance to the true cost of what they would actually want to buy.  And, as a result, having this conversation helped them discover the need for plans and or specification so I could give them a fixed price in place of the “estimate”. 

After all, that’s what most remodeling consumers really want; a fixed price for what they actually want. 

 

One option you can try if the Home Owner can’t understand why you charge for estimates

Next time a homeowner wants a free estimate, or is upset about charging for one, why not suggest bartering?

"If I spend the time to collect all the info about your project, seek pricing from my vendors, meet with my subs to get accurate pricing for their work, and then assemble an accurate cost and proposal; how about we do a trade? Maybe while I'm doing that stuff you could either babysit my kids or cut my lawn? What to do think Mr. Home Owner, would that be a fair trade?"

 

A point of clarification which should already be obvious

If you choose to go down the “Which Ball Park” or “Let’s barter” path make sure you do it in a respectful manner and your purpose for using this analogy is appreciated by your prospect. 

How you say it can make the difference between being the contractor of choice and being shown the door!

 

 

Need help with estimating? 

Checkout this Estimating Workshop for Contractors

 

Tips For Reducing And Controlling The Effects Of Construction Allowances

 

 

If you are building custom homes or doing high end remodeling it is your responsibility to help prospects and clients understand what their project will really cost. Don’t give or let your customers use inadequate budget allowances.

 

Isn’t it easier for a customer to accept a credit rather than an additional cost?  

Think about it. If a prospect or client has selected a granite counter, how often will that same client choose a $5.00/ft tile backsplash? Why not set the allowances for items not yet selected to a cost consistent with what other clients have spent in the past on similar projects? Applying this strategy will help protect your margin, and could actually increase your margin, assuming that you only credit back any difference in your direct cost.

 

One sure way to protect your mark-up is to eliminate allowances. However, depending upon the project or client, eliminating all allowances may not always be possible. But, reducing the number of allowances may be.  

Here are some ways contractors can improve results when working with allowances

• Try to get your clients to make their selections during the design phase.
• Identify what selections must be made and provide the clients with a list. 
• To help them complete the list make showroom and or vendor suggestions. 
• To motivate them to get the list done establish the date(s) by which they must complete the list and advise you of their choices.

 

To start or not to start, that is the question…

Persuade the client that it is in their best interest that you not schedule the start of their project until you know the availability or lead-time of all required products. You can even blame it on company policy. “Based on past experiences, our own and those reported by other contractors and homeowners, we have made it our company policy not to start any project unless we are sure we can complete the project on time, as agreed, with the least amount of disruption for our customers.”

 

Make that list and work it!

When you assemble the list of allowance items include the related dollar value included for each item and a total cost allowance value for all of the items to be selected. Make sure you include a column where the client can write in their actual selections.  Then, add one more column to the list where the clients will fill out the actual cost of their individual selections and can tally up the total for comparison to your list and total cost. If you’re comfortable doing so, this is the place to include what mark-up will be added on any additional cost over the allowance total.

 

Many builders and remodelers report that creating and using a list often times provides the client with a sort of psychological goal of not exceeding the total allowance. Assuming you have established realistic allowances, clients will usually try to avoid any additional costs and or mark-up cost; spending more on one item only if they can save on another. 

 

The Five Biggest Financial Related Mistakes Contractors Make

Having worked with hundreds of remodelers to help them improve their businesses and achieve their goals has exposed me to the common reasons their businesses run into financial problems.   Here my list of the five biggest mistakes I see contractors make that lead to money problems, and some suggestions on how to avoid or prevent them.

1. Guessing at the markup used to determine selling price

Pricing your work without knowing the true cost of being in business is referred to as using the "WAG" method, or “Wild Ass Guess” method.  Unless a business knows what markup to use to determine the right selling price it puts itself at risk of actually buying jobs instead of selling them.   Unless you know your minimum required markup to cover overhead, how do you know how low you can go when the prospect wants to negotiate?

Don't Put Your Business at Risk by Guessing At What Markup to Use

 

2. Using different markups on different cost categories without knowing the impact on required gross profit.

This is like a Super-Sized WAG!  Unless you use a single across the board markup on all estimated costs, you will need to be very accurate when anticipating how much you will sell of, and how much you will markup, each category of costs your business includes in estimates throughout the course of the year.  Most contractors who do this have no idea how to do so.  Keep in mind that if you do drop the markup on one item you will need to increase the markup on another to make up for the drop in gross profit dollars on the first one.  One contractor I know said he believed contractors who use this method have what he called “Head Trash” about money.  He went on to say they should “get over it” and should learn how to sell.

 

3. Not factoring for the cost of non productive time in the labor rate used when estimating.

Most contractors have no idea how to handle this one.   Using the wrong labor rate can have a double negative effect.  Not only will you not charge enough to cover labor costs, you will also lose the markup on the missing labor dollars! To bring in the money you need to pay your employees when they are not producing work you need to include that money in the billable hours they do work. 

How to Cover the Cost of Non-Productive Time in Your Estimates

 

4. Not estimating and job costing apples to apples.

First, this assumes the contractor even does job costing, most don’t.  As one example I estimate that fewer than 10% of contractors can job cost their labor costs the same way they estimate them.   If you use a burdened labor rate to estimate the dollar cost of task hours, your total labor cost will include things like workers comp insurance, non-productive time and employee benefits.   If you use QuickBooks for job costing, and you enter employee time card information into QuickBooks, typically only the employees wage and employer paid payroll taxes are expensed against the job budget in job cost reports.   This will falsely make the actual labor cost appear much lower than the labor budget from your estimate.   To solve this, use my free labor cost worksheet to calculate your true burdened labor rates for each employee and then work with a QuickBooks expert who knows how to set up the software to include labor burden assumptions in job cost reports without affecting the accuracy of your P&L.

 

5. Not factoring for actual costs at time of production when estimating

If you sell work that you won’t be starting for some time, in your estimates you will needed to include the actual costs you will incur at the time you produce the work.   If you don’t do so the extra costs will eat away at your planned net profit until it’s gone.  If the extra costs exceed your anticipated net profit you will need to use your own money to finish that customer’s job.  Keep in mind that some reports anticipate many construction materials will increase in cost as much as 25% this year.

 

Anticipate increases and include them in estimates before jobs are sold

 

 

To Be Successful In 2013 Create a Business Plan And Do An Estimate

 

 

For me, when I still owned my remodeling business, getting ready for business growth meant I would first need to do two things; make a plan and create a budget. 

 

 

Create your plan

First was to create a plan for what I wanted to do and how I would do it.  I considered what projects I would specialize in, who I would work for, where I wanted to work, and how I would market my business so the right people would find me.  I determined how many employees I would need as the business grew and what skills they would need now and later so I could delegate some of my current responsibilities and include the money needed to do so in my selling prices.  After determining the how, I needed to predict how much.

A business budget is kind of like a project estimate

The first budget I created was very simple.  By looking at the end of year profit and loss report, the financial history of my business from the previous year, I was able to list the majority of the expense categories I would need to consider to predict the costs of my new plan.  For anything I wasn’t sure about, I would call my accountant or another remodeler I knew at my NARI Chapter for advice.  Just like a remodeling project estimate, I listed the related expenses and then got current prices for each of them.

The Numbers Game

Creating that first budget for my plan to grow the business seemed very overwhelming.  After all, I had never done one before.  Looking back, the hardest part about doing it was actually sitting down to do it.  

Once I had become clear on the financial definitions and formulas used, the budget actually went together fairly easily.   I admit it was very time consuming that first time.  However, because I kept notes on how I had determined certain expenses and where I got the information, the second budget I did was a breeze.  I did not have to completely recreate or try to remember the entire thought process.

Planning and budgeting assumptions

As a result of living through the experience, I developed four simple assumptions, in addition to keeping notes, which helped organize the way I looked at the process.  They should be completed in the following order as well.

1. Commit to making a real profit, establish how much, and think of it as an expense that must be paid.  You only need a budget if you plan to make a profit.  
2. Be clear on how you will define and separate direct and indirect costs.   Once you identify which is which, recast your current accounting software's account list.   This requires moving misplaced accounts and costs to their proper locations as either cost of goods sold or overhead expenses.
3. Look at the big picture.  Consider your annual budget as just one project, like a whole house project that takes a year to complete.  Use your profit and loss report for the previous year as a start to estimate the coming year’s budget. Then start making adjustments for each account to reflect any price changes and or your new plans for the coming year.
4. Be sure all of your direct costs will somehow show up in your individual project estimates.   Pay particular attention to labor costs, equipment purchases and repair, and general miscellaneous supplies.  Make sure the hourly labor cost you use is burdened over and above the wage you pay employees to include all labor-related expenses and benefits.  If you own and repair your equipment, and or you use assorted hardware and supplies that do not end up as line items in your estimate, establish a percentage to add to your estimated direct costs so you will cover and include these costs before you add your markup.

 

Using this simple process year after year, I came to learn how important it was to my business’ success that I planned ahead for what I wanted to accomplish.  With a plan in hand, and a budget for what it would cost, I had the confidence and motivation I needed to make success a planned reality.  I also had full confidence in asking for the real price I needed to sell each project.

 

Purpose of Accounting and Financial Management For Contractors

 

A fundamental goal of any growing business is to maximize and protect the profits.  By understanding the profit process - that is how to define it, create it, and measure it - a business owner or manager will come to better understand how fragile profits can be and the importance financial management plays in protecting it.   For many Remodelers first getting into the business, myself included, financial management skills were not necessarily part of our educational background.   However, our lack of knowledge on the subject would be a weak excuse to give our family for not being financially successful.

Try This Self Quiz To See If A Properly Setup Financial System Can Help You

Profitability is ultimately the responsibility of the business owner

There is way too much to learn about accounting and financing to cover or explain in this short blog article.  I suppose that is why it is actually a career for some people.  That’s why there are accountants, business consultants and financial advisors. For a business owner though, understanding and overseeing the process are the bare minimums.  The ultimate success and profitability of your company is typically not left to someone else; it’s the owner’s responsibility.  In order to identify what business owners need to do, I find have found it helpful to show my consulting and coaching clients a path for how it should happen. 

 

A simple path could be as follows

1. Make a plan for what you want to do and how you expect to do it.
2. Create a realistic budget for your plan so you will know what it will cost in total and how it breaks down into direct costs, indirect costs and profit.
3. Determine the markup percentage to add to your estimated costs, and what gross profit margin that represents so you will know if you’re on track as you complete projects.
4. Estimate your projects using qualified information for pricing assumptions, and then do job costing to track your actual results.
5. Use financial reports to monitor your actual gross margin, overhead costs and profitability.
6. Take advantage of the information you collect to make changes to your plan and or to create your next plan.

 

Is your accountant a historian?

With much to be learned, be sure you find the right accountant to partner with.  Do you want a historian who will collect your information and report to the government what happened while you were working?   Or, do you want a proactive partner helping you to create and protect your profits?  I tell my clients to seek referrals for someone who can answer their many questions and perhaps helps them create and understand the accounting reports needed to track business performance. 

 

Keep in mind this harsh truth...

If you still have a historian, it’s not his or her fault!

 

 

 

 

Guest Blogger: Judith Miller has worked with remodelers nearly 30 years; she writes for Remodeling Magazine, facilitates for Remodelers Advantage and consults with remodelers around the country with particular focus on the importance of good financials!  Visit her website at www.remodelservices.com

 

Two Ways To Predict and Measure Good Cash Flow

In his excellent blog post on cash flow, Shawn mentioned direct costs, overhead and net profit as all potentially contributing to good cash flow.  And, as he so rightly pointed out, the potential for good cash flow begins with accurate pricing for the job.  Shawn also mentioned the importance of working on ‘accrual’ accounting rather than cash.  When you’ve got these important elements of good construction accounting in place, you can lay out a couple metrics which will be useful in understanding cash flow.

First, get all your costs in the right place on the Profit/Loss:

Income = revenue from construction projects

Direct Costs = expenses, including ALL labor (even that production manager who doesn’t keep a time card) AND associated labor burden, related to jobs for which you receive the income.  Don’t include work on your own house or you Mom’s in this category because you’ll skew (and screw) the numbers.

Overhead = all costs it takes to run an office, including a construction office, but not related to jobs – those costs go into Direct.  This includes marketing expenses, rent, office supplies, professional fees, owner and admin salaries and related burden, general insurance – not liability or workers comp which go into Direct.

(List of Typical Accounting Terms and Definitions)

 

Second, establish a good system for job cost analysis

 A good system for job cost analysis lays out the true estimated cost of the job – no SWAGs or ‘guesstimates’ – and allows you to post costs against the estimate as they are incurred.  Remember that a cost is incurred WHEN THE WORK IS DONE not when the bill is received.

 

Third, reliable reports are accurate, complete and timely

Prior to calculating these metrics, be sure to review all reports for reliability. 

 

Now you’re ready to develop these two useful metrics:

1: Slippage/Grippage:  this metric calculates the difference between your estimated gross profit and the produced gross profit.  Slippage is negative, grippage is positive.    This is of critical importance because if you’ve got slippage either your estimating is wrong or your production is not working up to expected efficiency.  And if you’ve got grippage, you might be leaving money on the table from estimating too high.  Control of production allows for profits which can then be managed to ensure good cash flow.

• The calculation is: Estimated gross profit margin MINUS Produced gross profit margin
• The goal should be no more than 2 percentage points slippage – or grippage.

2: AR/AP Turnover Net: this metric calculates the difference between the number of days it takes to RECEIVE your cash from customer’s invoices (AR Turnover) and to PAY your customer’s expenses (AP Turnover).  If you receive money from your customers in 10 days and pay your expenses in 15, you’d have 5 days “float” – a good thing!  However, if the reverse is true, you might have to borrow to pay the bills.

The calculation is three part:

 

Once your accounting system is set up correctly, information is entered accurately, timely and consistently, you’ll be able to see where the money comes from, where it goes and how to control the all important cash flow!  This is a set of gears which all work together to produce profits and protects cash!

 

The Most Common Reason For Construction Business Failure

There are many reason construction businesses fail.   A read of a 2007 report by the Joint Center for Housing Studies at Harvard University titled “The Performance of Remodeling Contractors in an Era of Industry Growth and Specialization” offers an in depth analysis of the reasons for failure across a variety of residential construction industry segments.  The report is further broken down by business sizes within those segments.   One glaring observation is that smaller construction businesses fail at much higher rates than larger firms.   According to the report twenty-two percent of contractors that had payrolls of less than $30,000 in 2003 were no longer operating in 2004, a failure rate almost ten times higher than contractors with payrolls of $350,000 or more.  I think it's safe to assume the failure right is even higher these days due to the current recession.

But why do the businesses fail? 

After further analysis of the report, along with my experience and observations over many years of assessing and consulting with remodeling businesses of various sizes, one big picture fact jumps out to answer why they fail.   The most common reason is that the businesses grow faster than the business systems required to support the growth.  The fact that larger businesses have a better survival rate backs up this observation.   Simply put, the business needed efficient systems to grow and without them they never would have achieved the growth.

So what does this mean to the smaller remodeler and his or her business? 

First, if you don’t put efficient business systems in place as a small business your likelihood of failure will be very high even if your business remains small in size.   Also, even with modest growth, unless you put systems in place your business is more likely to fail.  Also consider, without efficient systems, it will be you the business owner who will have to work harder and longer to get things done due to the lack of those systems.   If that is the case then burn out and or the typical resulting health problems might lead to failure.  But remember, that burnout happened because of a lack of systems.

 

So here’s my advice if your business lacks adequate systems:

Start with your financial system first.  Here are four reasons I suggest you do so.  These suggestions assume you have and use a properly setup financial tracking software like QuickBooks or something similar.

1. First, unless you can determine the cost of being in business you won’t know what to charge for your services over and above the direct job costs of labor and materials.   If you don’t know what to charge you literally won’t know whether you are buying or selling jobs.  Plus, every contractor I have helped do a budget goes forward with confidence and success selling at the price they now know they need to get to be profitable.
2. Second, if you have predicted the costs of being in business you have established a reference (budget) against which you can measure your efforts.  This budget can then be entered into your financial software.  By measuring (budget to actual report) you will know if you are selling enough work and bringing in enough gross profit on all the jobs you complete to bring in enough gross profit to cover your overhead and planned net profit. 
3. Third, if you know whether or not your earning enough gross profit you can prioritize how and what overhead expenses you can afford.  Having that budget can also help you shop around for better pricing when and where appropriate.
4. Fourth, all other systems within your business might not matter if you don’t have the money you need to pay for them and know if you will have the money you need when you need it (cash flow)!

 

Have you used a Marvin Product in one of your projects?

• Submit your before and after project photos to the Marvin Remodelers Gallery

• If your project gets added to the gallery you can link to it from your own web site!

 

 

 

 

Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the author of A Simple Guide to Turning a Profit as a Contractor.  Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.

Benefits of Rethinking Your Estimating and Job Costing Approach 

What functions should an estimate serve on a fixed/contract price job?

 

Pricing
The cost of the job determines the price of the job, so knowing the costs allows you to generate a sale price.

Job Costing
The estimate can function like a budget for both time and costs.

In order to price and job cost accurately, the estimate needs a lot of detail. If you (oops!) forget to include windows or a toilet, your only choices are (a) go back to the customer, admit your mistake, and hope he accepts the revised price or (b) eat the cost.

Also, sharing a highly detailed estimate with the project’s lead carpenter can help limit questions from the field back to the office.

But the same high level of detail that can save you when pricing and producing the job can get in your way if you attempt to job cost at that same level of detail. As a QuickBooks ProAdvisor working with literally hundreds of contractors, I have seen two common categories of errors:

 

Job costing at too high a level of detail can be a problem

Contractors who try to job cost inside QuickBooks at the level of 2x6’s and specific products (Kohler faucet K-13490-CP) produce three problems:

1. Your project manager and bookkeeper will waste time coding out every little line item on a vendor’s bill.
2. The more opportunity for choice, the more likelihood of misclassifying things. Highly detailed job cost reports actually have a greater chance of being inaccurate on a category-by-category basis.
3. Your job cost reports will be so lengthy and complex that you’ll lose the forest for the trees.

 

Job costing using apples and oranges?

Contractors who continually add job-specific line items in QuickBooks invoices (ex: “repair Jones front porch step”, “Replace damaged shower tile”, “Add backsplash”) produce these two problems:

1. They create a disconnect between the categories used for estimating (apples) and those use for job costing (oranges), making it virtually impossible to compare common estimated and actual categories
2. They create an ever-increasing list of job-specific categories inside QuickBooks with single-use history   

 

How to do it right

Instead, estimate at a high level of detail but create a way to subtotal these into categories that you use consistently, will be relatively simple to code, and will produce reports that allow you to perform a side-by-side comparison of estimated and actual costs.

For those using a customized spreadsheet for estimating, the process might look like this:

The summarized categories with costs can then be entered in your accounting software and job costed using the same categories. Doing this will keep your cost categories consistent and provide apples to apples comparison.

 

How to Cover the Cost of Non-Productive Time in Your Remodeling Estimates

 

As a remodeler you need to know what your labor costs are if you want to price your work properly and for profitability.  Inside estimates, your estimated labor costs for any project must include everything required to compensate and support field employees.  This labor rate is called the burdened cost of labor or your burdened labor rate.   Of course, the total estimated cost is then marked up by a predetermined factor so the selling price also covers your overhead and planned profit.

If you have been guessing at the markup you use, you might want to read this article.

 

Non-Productive time

Check out the Labor Worksheet below.  An important consideration when determining the burdened cost of labor is the difference between the hourly pay you give an employee and the hours that they actually work producing income. When you add up all of the hours for paid vacations (one week, 40 hours), holidays (five days, 40 hours), paid time while attending training programs or trade events (10 hours total), as well as attending company meetings (2 hours, every other week, or 50 hours annually), where will that money come from if you’re not charging for it in your estimated labor costs? 

 

Request a FREE copy of Shawn McCadden’s Burdened Cost of Labor Worksheet

 

How much is non-productive time costing your business?

Many remodelers I’ve worked with never even realize that they’re making this mistake. With the standard fifty-two weeks in a year and a 40-hour work week, your company pays each full time employee for 2080 hours. The time paid for non-productive hours, as listed above, totals 140 hours, or 3 ½ weeks.   Look at row 54 of the worksheet.  The wages alone to be paid to the employee total $2800.00.   That doesn't even include other related costs paid by the business like payroll taxes,  liability insurance and and workers compensation insurance!

 

No more guessing!

So, when you determine the burdened hourly rate to use in your estimates and for job costing you can't be guessing. To get the accurate rate you must divide the total annual cost to compensate and support each employee by the number of hours he or she will be working producing income. For the example above, you must collect enough money in 1940 hours of productive time so you will have enough money to pay the employee for 2080 hours.  Non-productive time and other labor related expenses are easily calculated into a burdened labor rate using a spreadsheet like the one shown above.

 

Request a FREE copy of Shawn McCadden’s Burdened Cost of Labor Worksheet

 

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.