The Design Builder's Blog

3 Simple Steps To Covering A Carpenter's Non Productive Time

If your business pays a carpenter or other hourly employee for non productive time you better know how to build it into your labor charges so your customers are paying for it, not your profits.   The theory for how to do it is actually very simple.

What is nonproductive time?

Nonproductive time is the hours you must pay an employee for, when he or she is not producing income for the business.   Basically it’s what is typically referred to as non-billable time.   Non productive time can fall into a variety of categories for a construction company.  Here is a brief list of common examples:

Examples of nonproductive time for carpenters

• Attending weekly meetings
• Shop, tool  and vehicle maintenance
• Commuting to/from projects
• Attending educational events and training
• Vacations, Holidays, Sick Days
• Attending company social functions

How to include nonproductive time in your labor rates in 3 steps

In order to pay an employee for his or her nonproductive time a contractor must charge enough for that employee’s annual billable hours to also cover the non-billable hours.  To figure out how much to charge follow these simple steps.

1. Add up the total annual cost to the business to compensate and support the employee.   In addition to hourly wages, here is a partial list to help you out.   Add any others specific to your business.

• Employer paid taxes and Social Security
• Vehicle expenses
• Vehicle replacement
• Workmen’s Comp
• Liability Insurance
• Medical benefits
• Education and Training
• Employee raises during the year
• 401K or similar

2. Add up the total annual non-billable hours for that employee and subtract them from total paid hours to determine that employee’s total available billable hours.
3. Divide the total annual cost to compensate and support the employee by the total annual billable hours for that employee.

The resulting number is what you need to charge for each billable hour so it will, over the course of a year, bring in the money needed to pay that employee for all billable and non-billable hours.

Below is an example to help show how the math works

The example assumes an annual cost of $60,000 to compensate and support the employee.  It also assumes the employee will be paid for 2080 hours but can only be billed out for 1900 hours.

$60,000.00 ÷ 1900 billable hours = $31.58/Hr billable hourly rate

To prove the example above works simply multiply the billable rate by the number of billable hours to prove it will produce the total amount of money you will need to cover the cost of the employee for the entire year. 

1900 Billable hours X $31.58/Hr = $60,002.00

It’s that simple! Kinda...

Figuring out what to charge to cover your carpenter’s nonproductive time is simple to do, but here are a few caveats to keep in mind so you don’t come up short on the money you need.

• If the employee doesn’t work all of the assumed billable hours you will not collect enough money.   So, if you have an employee who is constantly sick or is unreliable, realize that even though you may not be paying the employee for the missed time, that missed time is not contributing to the dollars you need to cover the total annual cost of the assumed non-productive time.
• And, if in your billable hourly rate you included the costs of items required to support the employee, you will also come up short on the money you need to pay for those items as well.
  

Need help figuring out your Labor Costs?

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"Estimating, Pricing and Producing Successful Projects"

February 7th, 2014 at Brockway Smith Company in Andover MA

February 11th, 2014 at Brockway Smith Company in Hatfield MA

February 12th, 2014 at Sterritt Lumber in Watertown MA

Rather work one-on-one?

Call or  Email Shawn today. 

Do it now so you can be confident you are pricing your spring and summer projects correctly!

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.

Who's Paying For Your Carpenter's Non Productive Time?

I was discussing the cost of labor the other day with a client, and he told me he really had a handle on what his costs were. “No kidding? That’s great,” I said. I then quizzed him on what factors he’d included, and was impressed that he’d gotten so many: wages; company-paid payroll taxes; Worker’s Comp; liability insurance; vehicles, cell phones, and small tools used by production workers; health insurance; retirement. “And what about non-productive time?” I asked. Puzzled, he asked me what I meant.

The fact is that while it’s relatively simple to calculate what it costs to pay a production worker for an hour of time, you have to remember that he’s not going to be available to perform the work that you estimated for 100% of that time.

Let’s do the math.

Assuming no overtime, a worker is typically paid for 8 hours/day, 5 days/week, 52 weeks/year. This adds up to 2,080 hours. So you’re paying him for 2,080 hours a year.

But for how many hours will he actually be available to you to perform the work you’ve included in your estimate for labor?  Subtracting for some common events, we see the number of hours available for producing the estimated work starts to evaporate.

What else cuts into that productive time? How about those weekly production meetings? OSHA safety meetings? Meetings about the new health insurance or retirement options? What about training and education? How about the requirement that they clean out the vans every Friday afternoon? Do they help clean up the shop? Maintain tools? Are they paid for commuting time?

How might this affect estimating the cost of labor for a job?

Let’s say that you pay Will $20/hr. After adding all the burdens to that hourly rate, you discover that his total annual cost is $63,500.

You can look at this annual total in two ways: how much does Will cost you per paid hour, and how much does Will cost you per productive hour: the hours that he’s actually available to perform those labor tasks you included in the estimate when calculating the job’s sale price?

From the chart, you can see it costs over $5/hour more for Will’s time when you base the cost on his productive time.

So what does this mean in terms of pricing jobs?

Using the wrong labor cost can be devastating, particularly in jobs where there is a high proportion of labor.

Let’s see how it would play out in jobs with varying amount of labor.

For a 100 hour job, based on the burdened cost per paid hour, the estimated cost would be $3,053.

Those same 100 hours, based on the burdened cost per productive hour, costs $3,553. So the cost difference between using the paid vs. productive hr cost figure would be $500. For a 1,000 hour job, the cost difference would be $5,000.

Now let’s look at the selling price of the job, assuming a 50% markup.

For a 100 hour job, the difference in selling price would be $750.

For a 1,000 hour job, you’d be underpricing by $7,500!

So next time you estimate work, be sure you’re working from realistic costs. Labor is tricky to estimate anyway; getting a handle on what it really costs for that hour of nail banging will bring you closer to costing and pricing your jobs accurately.

Need help with figuring out your labor costs?

Call or Email Shawn today. 

Do it now so you can be confident you are pricing your spring and summer projects correctly!

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

How Contractors Can Make More Money, Faster and By Doing Less

With only so much time in a day, contractors need to maximize the revenue and or gross profit they earn each day in order to cover business overhead costs and contribute to their desired net profit goals.   Selling and producing more work is certainly one option to consider.  However, why not implement ways to increase the selling price and earn more gross profit without having to do any more work in the field or add anymore labor costs at the job site.

Options to consider

If you want to increase your sales volume and earned gross profit you can either produce more work or increase the selling price of your projects.  Here are a few things to consider:

• Producing more work at the job site means you will need more labor and the project will take longer.  Finding and keeping more employees busy can be challenging.    
• Increasing your selling price doesn’t have to be limited to raising the prices of what you sell.  Increasing your selling price can also be accomplished by increasing what is included in the selling price.
• Assuming you mark up everything you sell, if you find the right prospects and sell them higher price point products than you have used in the past, your average sell price goes up and the gross profit earned on each job goes up as well, without adding more labor or days to the project schedule.
• Also, consider that selling product options can be another way of increasing the sell price and earned gross profit, again without having to add any more time, do any more work or add any more labor to get the work done.

Here’s one example of what I am talking about 

At a recent Remodeler Summit event I participated in for Marvin Windows and Doors at their Warroad MN manufacturing facility, contractors learned about Marvin’s new option of prefinishing the interiors of their window and door products.   By selling this option to their customers, contractors can increase the cost of each window they sell by offering an additional service to their customers.  And, they can do so without increasing the production time of a window project and without having to add any additional on site labor to their projects.   The windows are prefinished at the factory, under controlled conditions and can either be prepainted or have a clear finish applied.   Because the prefinishing is done off site, all the mess of prepping and finishing is avoided, no extra job labor is needed and the smell of any finishing products is avoided at the job site.  Selling prefinished construction products can be a win-win, both of the contractor as well as the homeowner.  Selling prefinished products means more gross profit earned for the contractor without doing any more work.  The home owner benefits because more work is done in less time, with less mess and disturbance to their home and their daily lives.

Here’s one more example

At a tour of Reliable Truss and Components Inc., a division of National Lumber in Mansfield MA, I found out they offer prefabricated custom structures and components.  Using this service contractors can have components of their projects prebuilt and even prefinished in a controlled factory environment.  The components are then delivered to the contractor’s job site ready to install.   Partnering with a vendor who can offer this type of service helps the contractor earn more money by doing less work in several ways.  

• The contractor can earn gross profit on the labor as well as the product being provided by the vendor.
• At the same time, the contractor can be earning gross profit on the labor and the products being installed by his own crews while they get the project ready for installation of what is being built off site.
• Some vendors, including Reliable Truss, will also come prepared with the equipment needed and help your crew install the prefabricated and prefinished items at the jobsite.

It just keeps getting better!

Both examples above can help contractors earn more money in less time.   Both examples offer ways contractors can get more work done without having to add any additional talents or skills to their crews.  Both examples also eliminate or reduce the need to find and bring in sub contractors to do work the contractor’s own crews either don’t have the talents for or might not be cost effective at doing.

I bet more and more contractors will be thinking this way as the increasing costs of labor and the lack of available skilled labor puts pressures on their businesses and their profits.

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.

Don’t Underestimate Your Estimating System’s Potential

Knowing what to charge clients for the work you do is often the difference between long term success and eventual failure for the business. Many contractors look at estimating simply as a way to determine the cost of a project. In the traditional design-bid model of project delivery, this simplistic approach may work, assuming your sell price generates enough gross profit to cover your overhead and profit requirements. However, if you’re doing design/build, and your current estimating system is limited to only producing the number you charge clients for a project, you may be missing out on many other possible benefits.

Your Estimating System Should Support Your Business in Several Ways

If you think of Design/Build as a way of doing business, your estimating system must become a tool that facilitates how you do business, not just a way to get to the price.   Here are several ways a Design/Builder or a remodeler can maximize the potential of the method and system used to do estimating:

• A design/builder’s estimating system should be fast and easy to use.
• A computerized system should be used that allows the estimator to concentrate on estimating, not adding up numbers.
• All estimating cost assumptions for labor must be accurate in terms of time per task.
• The system used for estimating should have the ability to use your company’s actual burdened labor cost per hour to determine total labor cost per task.
• The system should also allow for on the spot “what-if” adjustments to quickly estimate the effects of any changes or suggested alternatives to the project during design.
• To increase accuracy, estimating should be done so it is comparable to the company’s job costing system and job costing categories.
• Information within the estimate, and job costing, should be broken down to a level of detail that allows the insight you need to make future estimating adjustments.
• The estimate should also help you or your lead carpenter produce an accurate materials list, not just a materials cost allowance.

Below is screen shot of a simple estimating spreadsheet template used to estimate a deck project. 

Request a free working copy of the template for your own use.

Read more about the potential benefits of your estimating system

Workers Comp Rates Likely To Increase; Budget Now For The Increase

Workers compensation insurance rates have already increased in many states and are expected to increase soon in others.   Often, increased medical costs are cited as a main cause.  Be sure to understand how rate increases will affect your overhead costs and estimating assumptions for labor costs.

Rate increases may be out of your control; but you do have some options to control your total cost.

• Proactively control your claims history
• Provide safety raining relevant to the work your employees perform
• Maintain a safe working environment for employees and subs
• Make sure to report and handle claims in a timely manner
• Create return-to-work programs where practical.
• Make sure your subs have their own coverage

The following information was found in an e-newsletter from Tom Messier at Mason and Mason Insurance.  

Many expect Workers Compensation rates to increase significantly this year. The MA Workers Comp Rating and Inspection Bureau has recently applied for an average rate increase of 19.3%. According to the Insurance Journal, Commissioner Joseph Murphy will be holding a public meeting on March 30th on this request.

Whatever rate increase is approved by the insurance commissioner will be effective September 1st, with the negotiations for the final rates continuing through most of the summer. We believe the final rate increase this year will be in excess of 10%. The rate for residential carpentry is currently 8.68. If the commissioner approves the increase of 19.3% the new rate would be $10.30. This is significant. If you have a payroll of $100,000 this will increase your cost by more than $1,500.  

You might wonder, "Is it possible to avoid these rate increases?" The answer is "yes." There are some insurance programs that are available today that will guarantee your maximum rate for three years. This program is not available to all employers in MA. It is available to the best contractors that have had good experience. So long as your losses are under control and you have premium of over $5000, you may qualify. By making the switch today, you can avoid the increased rates, at least for the next few years. You do not need to wait until your policy comes up for renewal, you can start saving now. 

Remember, Workers Comp costs are controllable, and every dollar you save in Workers Comp premium goes straight to your bottom line as profit.

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The full article can be found here

Email Tom to see if he can help you control your Workers Compensation costs.

Read more about the proposed increase here

Need help understanding workers comp costs and how to budget for them?  Contact Shawn to discuss how he can help