Many remodeling companies that employ their own in-house labor find a successful team of motivated and engaged craftsmen and women provide a significant advantage over companies that work with a primarily trade-based work force. One of the strongest arguments for in-house labor is the ability to better control schedules; another is the ability to develop a powerful team culture to provide an exceptional client experience. Develop this and the company can soar.
The potential downside is huge, though: Without exceptional management at every level, from sales to production to administration, field labor risks becoming less productive and more costly. Schedules not met, cost increases, unhappy clients and employee turnover all eat into profits and erode morale. Only through effective and efficient systems developed and maintained throughout the organization can your company reap the benefits of in-house labor.
However, the development of such systems which hire/train/manage and reward field employees is a costly and time-consuming endeavor. You need to hire the best, train and manage them well, and reward them at every step of the way. As all these costs relate to the work done in the field, they are part of the product your company sells. Thus, all these costs must be included in your estimate.
Total field labor costs consist of and are defined as:
* Gross wages. Whether salary or hourly, straight or overtime all wages on which payroll taxes are paid, PLUS
* Field labor burden. Any and all other costs related to keeping field employees gainfully employed on the job.
What goes into field labor burden? This area typically includes:
- Employer paid payroll taxes, both federal and state:
- FICA / Medicare / FUTA
- State unemployment taxes and any other employer-paid state tax
- Field related insurances:
- Workers Compensation--that portion related to work done by field employees
- General liability--that portion related to work performed in the field whether determined as a percent of income / trade contract work or field payroll
- Field benefits:
- Medical / dental insurances / life and disability
- Paid time off, including vacation / holiday / sick leave
- Retirement contributions such as 401(k) matching
- Bonuses, both year-end and job specific
- Indirect expenses. These relate to work done on the jobs but are difficult to tie to a specific job and typically include:
- Field cell phones
- Field education & training expense
- Field vehicle expenses
- Field uniforms
- Field related small tools and supplies
- Warranty expenses
- Non-billable field wages
Below is a calculation for a $40-an-hour employee with some standard benefits available to those good employees who can make a remodeling company great.
In other words, while you pay an employee $40 per hour, he COSTS you $65.11 per hour—63% above his hourly wage. And this is just the costs for this employee. If you also add in costs for managing this worker, the difference between hourly salary and what’s called the “burdened labor cost” can be as much as 150%.
Don’t worry about what your peers charge. The important thing is to know your total burdened labor rate and use that in every estimate. Start with that knowledge and build on it until you have gathered the best team of in-house employees in the area: well-trained and well-paid they will produce the customer satisfaction and gross profits that reflect the GREAT company together you have built!
The Importance of Good Estimating
Use a labor burden calculator to predict the standard cost for field employees by job title and then put that rate in your estimate. It will take some research and experimentation on your part to develop the best labor rate to use as your standard estimated labor rate, but once you’ve set up the system in your job cost system you’ll be able to review the true labor costs in job reports and update the estimated rate accordingly.
Remember, the ESTIMATED labor rate should be very close to the ACTUAL labor rate in job costing to produce a reliable estimated to actual cost report AND to produce an accurate over/under billings job cost report. Both of these will be incorrect if your estimated labor rate is not close to actual. See the following example of what might happen if you use the retail labor rate--the rate you CHARGE you clients--in your estimate.
Here is an example:
|
Retail Labor Rate
|
Number of Hours
|
Estimated $$$
|
|
$65.00
|
100
|
$6,500
|
|
|
|
|
|
Actual Burdened Labor Rate
|
|
|
|
$37.50
|
100
|
$3,750
|
|
|
|
|
|
$$$ Difference
|
|
|
|
$27.50
|
|
$2,750
|
|
|
|
|
|
% Difference
|
|
|
|
73%
|
0^
|
73%
|
In other words, if you completed the task in 100 hours your accounts would suggest you still had $2,750 that needed to be spent on the job. And in that case, you’d be wrong.
Accounting for All This in QuickBooks
For QuickBooks users, the components of labor burden are set up as payroll Items with all non-wage or tax components set up as company contributions. A single-letter designation defines the related department; for instance: A = Admin, F = Field, D = Design, S = Sales and O = Owner. Although many possible combinations and permutations exist, should keep the list as simple as possible.
Here is an example:
Align all compensation expense accounts as follows:
§ A = Admin. Use this when you post to overhead accounts and cases that contain no customer/job information
§ F = Field. Use this when you post to Cost of Goods Sold (COGS) accounts and can include customer/job information
§ F = Field NON BILLABLE. Use this when field employees don’t work on individual jobs or instead attend safety/company meetings, work in the shop, or do warranty work
§ D = Design. Use this when you post to COG) accounts and can include customer/job information.
§ S = Sales. Use this when you post to COGS accounts and can include customer/job details.
§ O = Owner. Post the owner’s salary to overhead accounts.
