When remodelers fall short of planned margins, it's usually caused by labor overages. Some of the problem can be traced to things like having to replace work that wasn't done right the first time, or employees who take 45 minutes for a 30-minute lunch. But underestimating the cost of labor is the major culprit.
I like to think that my employees carry a knapsack filled with benefits, such as health insurance and tool or gas allowances. For other benefits, such as vacations and holidays, we pay people to stay home. This creates non-billable hours — time we are paying for but that we can't charge anyone for. Other non-billable hours are spent in training or attending The Remodeling Show; some are for sales work, such as estimating change orders, that doesn't result in a sale; still others are for travel between jobs.
Non-billable hours are the biggest contributor to slippage — the difference between projected and produced gross margin — which is more than 6% according to multiple industry sources. If you do $2 million a year in revenue, you're paying $120,000 to a silent partner you have never met. It's time to end that.
Each employee has a unique set of benefits, requirements, and work habits, so you need to do a labor burden calculation for each employee. The goal is to calculate an accurate cost per billable hour.
There's one more problem: How many billable hours does an employee work each year? To find out, you need to take an honest look at how much down-time occurs that is not captured and added to estimates.
For instance, if you work your people 8½ hours, it is a good guess that that half hour is lost to coffee, bathroom breaks, a long lunch conversation, a good joke, and the like.
What is less obvious is the loss of production caused by activities such as setting up and breaking down tools and worktables each day; a daily brooming or vacuuming of the area; time lost to second-floor work; and parking issues. Time spent ordering materials, supervising trade contractors, checking deliveries for damage, and many other functions that don't quantify easily could add another half-hour.
All of these are non-billable if they are not in the estimate; if they are included they need to have a code and must be placed on timecards. If you do not plan for an expense, no matter the cause or its value, it is slippage.
Now the painful part: The carpenter you're paying $20 per hour is actually costing you almost $40. If you're not accounting for all labor burden and non-billable time, a crew of 10, each losing 1 hour per day for 250 days per year, is costing you $100,000 (2,500 hours x $40 per hour). Surprise! —Alan Hanbury is partner with his brother, Bob, in House of Hanbury, a third-generation Newington, Ct., remodeling company.
REMODELING WebXtra: Common Labor Burden Costs
Each employee has a unique set of benefits, requirements, and work habits, so you need to do a labor burden calculation for each employee. Federal and state tax rates are calculated up to either a maximum salary or a maximum amount -- check your tax instructions each year to see if the maximums or percentages have changed. Insurance payments are typically calculated as a percentage of base wage; it's easiest to enter health insurance as a lump sum. Dollar amounts for vacation, holidays, sick and personal days are based on formulas that used billable hours.
You can add more lines to this list to break out other perks you provide your employees. The important thing is to cover all of your costs. If there is a perk, such as a bonus, that you give every year but the amount varies, be sure to put down something. It's better to be off by a little than to miss the expense altogether.
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