Employee Cost

Travis

I have a small General Contracting Company(mainly use subs) and with the recent hailstorm, started doing siding work. I pay my lead guy $20.00 per hour as an employee. In determing cost for an employee in a job cost, do you figure $20. per hour or $20. per hour plus what all cost per man hour like taxes,w.comp.,general liability? Is there a percentage that can be multiplied by the hourly rate to accurately determine actual cost per employee with all the extras included like w.comp,g.liability,taxes,fuel, misc. and do you use that rate as a job cost.(salesman are paid percentage of profit, so are arguing that $20. per hour is all they cost.(they don't quite understand) Any feedback would be appreciated. Thanks!

Pearce Services

The way I have seen this, is that you treat your sales person like a customer, they pay you a certain amount per hour for the work you do, what ever is left over is profit. So your sales price to your sales person needs to include all your costs, including a percentage for warrantee work so that when you need to go back for free to fix a problem on a job that he has been paid his commission on, you are covered.

The company I am with now, just takes the hourly wage that the end user pays, and figures a 10% profit from that figure. So a $ 5,000 would show a $500 profit. They can sell for higher than that amount, and should. This same project sold at $6k would show $1500 profit.

This plan gives a real incentive to sell at higher numbers, because it is a pure profit when sold over the minimum.

PressurePros

You factor all direct and indirect costs. Your G.L. is not a part of your employment overhead but WC, vacation/sick pay, bonuses, commissions, health benefits,taxes and recruitment expenses (running an ad, drug screening etc) are. Other indirects can include cell phone billing if you supply him/her one. Anything that costs you $$ to keep an employee working should be included. Turnover rate is a factor that many companies underestimate. It takes awhile to get a guy up to speed of the person he replaced. That can cost you deadlines and missed revenue.

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Ken Fenner
Pressure Washing PA
Roof Cleaning Services PA

Grumpy

You factor in ALL your costs. You don't eat anything. The cost is always passed along to the customer.

If I pay a worker $20 an hour I have to bill out $75 an hour for that worker. This is not a number I plucked from air, but is a number that takes into account the base pay, the unemployment tax, the general liability insurance, workmans compensation insurance, my share of his Fica tax, and the overhead I encrue as a result of running a business.

The above answer applies to determining what you have to BILL a customer. When it comes to paying for sales there are two ways of doign this, net sale or gross profit. Who cares how much it costs per hour, since their pay is fixed and worked into the contract?

What I am saying is figuring a salesman's pay into a bid is the easiest cost to figure in! If it is based on net sale, after you figure your costs and your necessary markup, you mark it up a further x% to cover his commission. If it is based on gross profit it's a little more complex, but I feel more fair to both parties (employer and employee). After you figure youc osts, you need to know what portion is your markup. Let's say you pay a sales rep 50% of gross profit with gross profit being determined as what is left over after labor and material... So you take your markup and multiply it by his percentage.

Ok let me simplify, if I were paying 50% of gross profit, my daily markup is $750 per day, so if a job were a one day job I would need to mark it up $750 + $750, where the 2nd $750 is 50% of gross profit. This way I am earnign what I need ($750) and he is also getting his 50% of the gross...

Obviously if he is paid less, say 25%, the formula still applies. I'd have to markup $1,000 instead of $750 to cover my markup and the salesman's pay.

Make sense?



If he still wants to know how much he is earning per hour ask him how many hours he worked last week and compare it to what youa re paying him. Simple... Then tell him to stop wasting your time and get out there, and sell something!

PressurePros

Grumpy, yes it makes perfect sense. I want to clarify. I eat nothing. I just don't factor in liability insurance when figuring out labor costs. Its a separate category that gets built into job cost. My jobs are based upon a s/f rate with percentages tacked on for individual variables. I keep these numbers separated so when it comes time to evaluate percentages of direct and indirect costs on a job I can assign a cost to my labor force and a separate one to indirect costs. I hope I am explaining that correctly.

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Ken Fenner
Pressure Washing PA
Roof Cleaning Services PA

Grumpy

Yes I too use a square foot variable for bidding the average job. But I can't bid by the square foot until I know how long it takes to install said square foot and know how much it costs me to operate for that period of time.

For an experienced pro, using a square foot system with modifiers for difficulty is the easiest. For someone less experienced or trying somethign new it's better to do it the loooong hard way.

Really it doesn't matter how you document your number, so long as you do document your numbers accurately.

Travis

Ok. Job Is bid at $10,000.00. $5,000.00 for all the material. Labor is 20 hours for 1 employee at $20.00 per hour and 1 at $15.00 per hour. What is the true profit for this job?

Material - $5,000.00
Labor -$35 x 20hrs= $700.00 (what percentage do you multiply this by
to get a true cost of employees for this
job to determine accurate profit?)


$4,300.00 profit?????

If you pay $20.00 per hour. What does this employee truly cost you per hour? $27-$35.00 per hour????

Teetorbilt

For bidding purposes, add 30%.

In a nutshell, every single business is a different entity. Everything is different for each. WC, liabilty/health/vehicle ins., office staff, paid holidays, rent/motrgage/capitol improvements, vehicle expenses, et al. will vary with geography and demographics. YOU are the only one that knows this.

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You can't solve you're problems with the same level of thinking that created the problems.

Albert Einstein

PressurePros

Tbeson, you wouldn't make anywhere near $4300. Tee is right, every company will have differing overhead. Lets say I pay my employees bonuses, provide vacation/sick time and pay medical benefits. I also have to carry workman's comp. A worker that makes $13/hr would cost me more like $20/hr. Here is a formula that you can back in and out of to see there are so many lowballers out there. They don't know their numbers.

• Hourly wage (true cost) (x) man hours = Payroll expense for job
• Payroll + Materials + Direct and Indirect expenses (see bottom of page for explaination) = Job cost
• Job Cost (x) Profit markup % = Final cost to customer (remember, markup and margin are different. If you want to make a margin of 33% you need to markup the cost by 50%)
• Final cost / hours to completion = your hourly rate for that job

Example:
Okay, I have a job that I want to make 25% on and it is going to take two guys 8 hours. Material cost is $250.

$50 (x) 8 = $200
$200 (+) $250 (+) $50 (expenses per year/# of jobs per year) = $500
$500 (x) 50% = $750
$750 (/) 8 hours = $93.75 per hour
My company profited $247.50 on that crew's job or $30/hr if you break it down.

If the customer prices junk materials at Blowe's or Cheapo they may add up $200 in material, subtract that from $750 and think we are making $500 profit. A customer's mind does not wrap around that concept when they may make $200 per day and they have a college degree. This is why they balk. "Why should I pay a company $500 labor? I'll go on the internet and figure out how to do it myself." Meanwhile they tell their friends, PressurePros is a ripoff. Never mind that we show up in uniforms, use contractor grade materials, have a reputation for courtesy and professionalism and complete jobs on time.

The guy that comes in and bids the job at $500 may believe he is making some nice change because he is not analyzing true cost to sustain and grow business. The way he sees it, it cost him $200 in materials from Blowe's, he paid a guy $75 and profited $225. When he left the other "ripoff" company to go on his own he was making $600 a week. Now he is making over $1100/wk and he undercuts the big boys. Sounds great on paper.

He may even do nice work. Invariably, we get the call next year or the year after because he is out of business. We bid $750 and customers jaw drops. "The last guy did it for $500 and he did a nice job. Why are you so expensive?" This is what kills all the trades. If the guy didn't go out of business, he is scraping by and half the time does jobs by himself because he cannot afford to hire labor. If he is young and persistent, he'll go a few more years and never be more than a one man show with part time labor.


Note from 2nd paragraph. Direct costs include everything directly relevant to the job outside of materials from equipment maintenance and depreciation, truck wear and tear, fuel cost, wasted material, estimate expenses, etc. Indirect costs to the job would be company GL policy, legal expense, accounting, office expense, utlitiies, rent, marketing expense, time and gas wasted on missed proposals, etc. Anything that costs you to do business. One needs to analyze these costs constantly. The more jobs you do, the more you can divide these expenses to get a lower per job cost. This is the area low bid/small operation guys get in trouble. They may think they are making more per job because of lower overhead but they perform 50 jobs per season whereas we may do $200. The money they think they are saving the customer comes right out of their pocket in the way of increased amortized expense.

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Ken Fenner
Pressure Washing PA
Roof Cleaning Services PA

Grumpy

I figure payroll at dollar for dollar. Add it up, WC is 37% alone, thus if I pay a roofing employee $1.00 I am paying my insurance company $0.37 As I said, after I factor in all my labor burdens to do it the right way, I am paying dollar for dollar in taxes and insurance. Then add in my overhead which costs me $750 a day. What's that $750 include? Trucks, equipment, office, phones, advertising, my salary (I pay myself salary plus bonuses for profit), paperclips, tolls etc... This is called overhead.

Now keep in mind that overhead is a 365 day a year thing, but you don't work 365 days a year. You will work between 200-250 days per year on average thus you take 365 days of overhead and divide by 200 days and you know your true working daily overhead.

Teetor using a magic number of 30% is a flawed system. It only works if your company can operate on 30%. I can not, 30% is actually a loss for me on an average job. We markup 40% because we have to. It's not a magic number plucked from air but rather a complex formula based on profit loss statements and budget projections. Basically after spending hours upon hours examining numbers we determined we can work for no less than 35% and that extra 5% is a buffer for margin of error and/or negotiation.

Teetor, I know you know this, based on your disclaimer but I wanted to make it more clear that there is no magic number that can be applied across the board... but each busienss markup is different and only they know what it is.

Ed the Roofer

All good points and principles lumped together from everyone, but there is one potentially very substantial cost that I have not seen included yet.

The liability for the following: If the salesman would like to argue about the true cost per hour per employee, then maybe they would like to share in the financial burden if any of the following occurs---I Think Not!

What about budgeting for shortages, by theft or vandalism, repair-maintenance or warranty costs, and mostly---What if you get stiffed from a customer? Your total operating budget MUST include for that possibility, and although some may not agree that this is a direct per job cost, it does definitely affect the entire picture.

I have not been blessed to have every customer pay the entire amount due upon completion. Although it is not a common experience if you did your bid properly, qualified the customer with the proper knowledge of contract costs and potential additional work required, things still happen unexpectedly. In the residential roofing trade, wood replacement costs can catch even the most prepared client off guard. If 100 % decking is required, that can change the final cost of the job substantially.

Remember, You Run the business, not them. They may be an asset to you, but the buck stops with you. Make a reasonable policy, then see if it would be liveable if the shoe were on the other foot. Use that as your litmus test. They always have the option to start their own business or work elsewhere. You can share additional profit if they achieve various reasonable goals set by you, but it is your company to run as you see fit, not theirs.

Ed