Last month we calculated that the three leads at our hypothetical company need to produce $40,000 each per month to meet our yearly projected sales volume of $1.5 million. Is this monthly goal realistic? To decide, you need to find out how much a lead must produce per month to reach your profit goals.
To do this, we need to know four variables.
1. Average cost of labor/hour. Add the cost/hour of all field employees and divide by the number of employees. (3 leads x $35/hour) + (2 carpenters x $25/hour) + (1 helper x $15/hour) = $170/hour ÷ 6 = $29/hour
2. Labor costs as a percentage of total production costs. Total labor cost ÷ total production cost x 100 = % labor. $297,000/$900,000 = 33%
3. Reciprocal of desired gross profit percentage. In this example we are using a 40% GP (30% overhead and 10% net profit). The reciprocal is 100% - 40%= 60% = 0.6.
4. Average number of people expected to be used on each type of job. If you do large jobs, you may average 2.5 people working each hour throughout the job. Small jobs may be 1.5 or even 1.
With these variables we can fill in the following spreadsheet.
|# of people on crew/hour||3||2.5||2||1.5||1|
|Average cost per person||$29||$29||$29||$29||$35|
|Average crew cost per hour||$87||$73||$58||$44||$35|
|# of hours per month||166||166||166||166||166|
|Labor cost per month||$14,442||$12,035||$9,628||$7,221||$5,810|
|Labor as % of prod. costs||33||33||33||33||33|
|Total production costs||$43,764||$36,470||$29,176||$21,882||$17,606|
|Reciprocal of Gross Profit||0.6||0.6||0.6||0.6||0.6|
|Produced volume per month||$72,939||$60,783||$48,626||$36,470||$29,343|
|Produced volume per year||$875,273||$729,394||$583,515||$437,636||$352,121|
The spreadsheet tells us the following:
* If you use larger crews, they must produce more work to sustain a profit.
* For the average remodeling job, such as an addition with some interior remodeling that uses one lead carpenter and some additional help, the $40,000/month is reasonable and necessary to sustain profits.
* If the average job described above costs the client $80,000, it must be completed in two months to achieve a profit.
* If a larger job, one that costs, say, $600,000, requires an average of 2.5 people on the job, it must be produced in 10 months to produce a profit. --Tim Faller, Field Training Services, www.leadcarpenter.com.