Your People Are the Secret to a Higher Profit Margin

One of the greatest challenges business owners face in the current economy is finding and hiring quality employees. When the construction markets crashed in 2008, many workers in the skilled trades left to pursue employment in an industry with a more stable outlook. When the construction market started gaining ground, most workers did not return with it.

A report published by the National Association of Home Builders (NAHB) shows increasing labor shortages over the last 5 years. Paul Emrath, an economist for NAHB, said, “The share of builders reporting either some or a serious shortage has skyrocketed from a low of 21 percent in 2012 to 46 percent in 2014, 52 percent in 2015 and to 56 percent in 2016.”

Most likely, this comes as no surprise to most of you. In the areas showing the greatest growth, companies are struggling to find and hire good tradespeople. This causes employers to pay more to find and retain better workers, which, in turn, drives up construction costs and cuts into profits. How should the industry deal with this? We need to become diligent in labor productivity, efficiency and allocation. This is not something that was a priority in the past. So where do you start?

Understanding your total burdened labor costing (BLC) is a must. Calculating the hourly cost and responsibility for each direct labor employee creates a useful management tool to allow for better labor allocation on jobs. A great place to start is understanding the cost differences for direct labor employees as a comparison between them and your subcontractors in regard to hourly rates. Ask yourself who costs you more per hour. In some cases, you may be surprised. Then there is the question, “Am I having my top craftsmen doing tasks because they are on the job; instead of assigning that task to a lesser paid individual and moving the higher paid employee to a task that pays more?”

For example, Employee A has a burdened labor rate (BLC) of $110 an hour. Employee B has a BLC of $61. Employee A has the skillset to deliver more productivity per hour than Employee B. Employee B is a good, steady employee and does rough-ins well, with some guidance. Who do you have chasing materials or cleaning up? You want them to be as efficient as they can be.

In fact, it may be worth your time to hire a $35 (BLC) employee to feed both of the other employees materials, or to move them off the project as soon as possible in order to save on job costs.

Let’s put that into dollars and cents. At $110 an hour (BLC), Employee A will cost the company $4,400 for 40 hours. At $61 per hour, Employee B will cost $2,440. That’s a difference of $1,960 a week; and when multiplied by 4 weeks, it equals $7,840.

If that doesn’t seem like much, look at how many employees you have. Take a look at your last six bid jobs and the costs, and ask yourself whether it was the profit margin you wanted it to be. Could you have been more efficient with your labor costs?

Many of you will say that while you could be more efficient with labor, it takes too much time. Additionally, how does this have anything to do with hiring and retaining employees? What about setting cost benchmarks for each employee based on their BLC and productivity? What if you could increase the profitability on a job by 15 to 20 percent, and share some of that profit as a bonus to the direct labor employees? This gives you the opportunity to reward them for profitability, instead of just doing what you hired them to do. You could also tie it to every employee on the jobsite.

If you are a subcontractor, how often are you asked by the general contractor to step up or make exceptions? By knowing your BLC, you can better understand what that will cost you and have all of the information necessary to make the right call. Currently, you make a gut decision based on rough numbers, and hope that you can make payroll at the end. But you need to know, right down to the penny!

Anyone in the skilled trades is familiar with loaded labor (hourly wages + taxes + benefits). Burdened labor costing goes a bit further and applies responsibility for indirect labor (those employees in support positions to your direct labor), a percentage of your overhead costs and vehicle or equipment costs (if applicable). By assigning portions of overhead and indirect labor costs, you create a true responsibility for the portion of revenue generation that you have hired the employee to provide. Now, you can compare true cost responsibilities to revenue generation to develop profitability benchmarks based on performance, instead of task completion.

Other reasons for having an accurate BLC rate is for hiring and training. Having a correct rate will allow you to create “what if” scenarios for cost evaluations, such as developing onboarding and training budgets and creating competitive wage packages with realistic revenue numbers.

While all this seems like a good idea and is certainly worth considering, you may still be asking why you should waste time to do this. Think of accurate job costing or proposals. You can create targeted labor efficiencies with results that can be tracked on a daily basis.

Finally, note that you do not have to create an excel spreadsheet yourself or have your CPA complete this task. Your time is better spent applying the results. There are several software programs available that can give you the reports you need quickly and accurately. You should also consider updating your numbers on a regular basis to ensure up to date metrics.