Ask any remodeler how much it costs for field labor and he or she will probably tell you it’s hourly rate plus payroll taxes. More knowledgeable contractors will add workers comp and benefits like health insurance and retirement). Sophisticated contractors will factor in the cost of supplying the worker with transportation (think mileage reimbursement if workers use their own vehicles, or the actual cost of company vehicles). Then there’s communication; (think paying for or reimbursing cell phone plans, the cost of smart phones, and the cost of subscription software to enable field workers to submit information to the office on a daily basis).
But there is another cost associated with employees that can severely impact profitability if it is not figured into pricing a proposal or job costing labor. This gotcha factor is the utilization rate of your fulltime production workers.
In simple terms, this refers to the percentage of total paid time that is billable—and equally important, the numbers of hours where person is on the clock but the hours incurred cannot be billed against a project.
Good remodelers track labor utilization rates for fulltimers and some even bonus employees who achieve a certain utilization rate. If you could pay the same total amount of wages and complete more work, you can improve your profitability.
Here’s an example. Assume you pay Dustin Dubree for eight hours per day, five days per week, and 52 weeks per year. This calculates to 2,080 hours.
Dustin is a long-time employee who has earned two weeks of vacation time, so subtract 80 hours from the total. Your company also pays for five holidays--another 40 hours. There is a one-hour production meeting each week, so that takes away another 52 hours. You have monthly meetings (safety, insurance options, etc.) that last about 1.5 hours each; assume you lose 18 hours over the course of the year. You also bring your crew to the Remodeling Show for two days each year; that's 16 hours. Assuming no additional paid time off, that leaves you with 1,874 hours that potentially could be billed. That's 90% of the original 2,080 hours.
Therefore, even if Dustin is very efficient, you can only bill 90% of his time to a job. This means that the upper limit of labor utilization is 90%. And this 90% is a best-case scenario, many field employees have more unbillable hours, including shop time, driving time, supply runs, etc. It is important to track this non-billable time because each hour of non-billable time increases the total cost per billable hour.
—Leslie Shiner, owner and principal of The Shiner Group, has more than 20 years experience as a financial and management consultant. Melanie Hodgdon, owner of Business Systems Management, works with clients to generate realistic solutions that reflect the resources and style of their companies. They co-authored A Simple Guide to Turning a Profit as a Contractor .