The economic crash of 2008 led many contractors to downsize their workforce, and only recently have they begun rebuilding their field staff. As construction often suffers from feast or famine, it’s nice to see the feast has begun. But with that, many employees have started to ask for raises. It’s time to think about the kinds of incentives that will keep those field workers motivated to stay with the company and not search for greener pastures. Since this article is focused on the financial side of things, discussion will be limited to those factors affecting the hourly cost of labor.
First, let’s review the sources of labor cost increases:
- Performance bonuses
- Increased overtime
- Health insurance
- Increased Paid Time Off (PTO)
- Retirement plan contributions
- Mileage reimbursement (for employees using personal vehicles)
- Communication costs (enhanced cell phone plans, tablet subscriptions when required for on-site connectivity)
- Education (such as certifications)
- Addition or expansion of company and production meetings (reducing the Employee Utilization Rate, or ratio of productive time to paid time)
And don’t forget Insurance and taxes
- Accidents and injuries may raise Worker’s Comp rate
- Layoffs (when former employees apply for state unemployment insurance) may raise your state unemployment rate
Labor cost increases are like unpaid change orders
If you think of your labor budget like a project budget, you’ve already calculated what you expect it will cost you to cover labor costs for the duration of the project. So these increases can be compared with change orders: You think you have a handle on the costs, but a decision made during the production process requires recalculating the costs. Unfortunately, while costs for changing work on a project may be charged to the customer, changes to the cost of labor must be covered by the company. In fact, potential cost increases must be anticipated and built into the budget long before the costs actually hit. Here’s why.
The Need to Plan
If you want your customers to pay for labor cost increases, you need to remember that there can be a significant delay between the effect of the cost change (such as a raise) and recouping that cost through revised job pricing.
Let’s look at the timeline for estimating, selling, producing, and analyzing a job, remembering that this timeline will vary depending on the average duration of your projects. Here is an example:
In this example, there are 210 days between estimating a current job with current prices and starting the estimate for a new job with additional costs. Thus, if you estimate and sell this job at the old labor rate and then give out raises, it will be 210 days before your next job (presumably estimated at the increased labor rate) will start to cover those costs.
Beware when giving raises, bonuses, or adding benefits. If you want to have those costs covered by your customers, you’ll need to start including those costs in your budget well beforehand, or else delay awarding them. So plan ahead for any increases and make sure to incorporate them into your estimating process long before actually giving out raises.