Understanding Labor Cost

Day 2- Understanding Labor Cost

“Do you know your labor cost?” Standing in front of a group of 80 like-minded contractors at a business conference, I answered “yes.” The tone in my voice gave way to the real answer of – “I’m not sure.” I already knew what the follow up question would be… “What is your labor burden?” I was at the point of being honest or turning to run for the door. My answer – “I am not really 100% sure.” To my surprise, 75% of the group was also unsure. Instantly relieved, I was not alone in this subject. I was also deflated knowing I was about to learn that I had been bidding incorrectly for years. 

The seminar taught me that labor cost is one of the most important costs a contractor must know. It also taught me that figuring labor costs isn’t just for large contractors. At the time, my 6 man shop was 80% residential and 20% small commercial. I used ‘per opening’ prices for most of my bidding. This method seemed to work, as we were so busy we could barely keep up. However, once I factored my labor cost I realized why we were so busy. We were cheap. I was leaving money on the table with about every job I bid. My excuse for not changing what I was doing was that if I raise my prices I will lose jobs and make less money. What happened was the opposite. We did lose a few bids but, the jobs we won were much more fruitful. I focused my energy on becoming a more accurate estimator and chose to bid jobs that were a better fit for our company. 

Over time my company grew and we transitioned to 65% commercial and 35% residential. Our residential projects yielded higher profit and in the commercial sector we were as competitive as companies 3 times our size.

Finding our labor cost helped us in 3 simple ways.

  1. The ability to find gross profit margin: In order to find an accurate gross profit margin, you must first have an accurate picture of your labor cost. Being able to find your gross margin will help you become more profitable overall.
  2. The ability to bid more work: Having an accurate picture of your labor cost will give you the confidence to bid work you might not typically bid. Understanding your costs affords you the luxury of bidding projects in a competing market with everyone else.
  3. Acquiring more manpower: Knowing labor cost gives you an accurate look at every benefit that an employee receives. Having an accurate labor package allows you to entice potential employees by advertising that you may have a better labor package than your competitor. 

The calculation to find your labor burden is comprised of several steps. One of the most important pieces to remember is to include all benefits, insurances and taxes when calculating burden. Every item that is considered part of employee pay should be calculated into their burden. You also must consider the maximum productive hours an employee will work. Productive hours are the hours your employee works that will result in income for the company. Remember, burden will be unique to your company. It is something a contractor should hold close to them. Finehomebuilding.com does a nice job breaking out the calculation to find labor burden.