Understanding your Burdened Labor Costs (BLC)

Your People Your Profit

There are articles out there on a daily basis about how society has been pushing bachelor’s degrees; leaving the United States with a shortage of tradespeople. A report published by NAHB shows increasing labor shortages over the last 5 years. In those 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 costs and cuts into profits.

So how do you deal with this? Well we know that cloning is not an option, so the path becomes clear. We need to become extremely diligent in labor productivity and efficiency. This is not something that has had to be a priority in the past. So where do you begin?

Understanding your Burdened Labor Costs (BLC) is a must. Calculating the hourly cost and responsibility for each direct labor employee creates an intricate labor tool to allow for better labor allocation on jobs. You may be thinking that all of this sounds like a lot of work and why would you bother doing it? To understand the cost differences for direct labor employees as a comparison between them and your subcontractors in regards to hourly rates. Who costs you more per hour? In some cases you might be surprised. Then there is the question “Am I having my top craftsperson doing tasks because they are there; instead of a lesser paid individual and move the higher paid employee to a task that pays more?”

Let’s look at an example:

Employee A has a 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 worker and does installs well with some guidance. Do you have them chasing materials or cleaning up? You not only want them but you need 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 them materials or clean up giving you the ability to move them off the project as soon as possible; saving on job costs.

Let’s put all of that into dollars and cents. At $110 BLC per hour Employee A will cost the company $4400 for 40 hours. Employee B at $61 BLC will cost $2440. That’s $1960 a week difference; multiplied by 4 weeks that’s $7840. Let’s take that one step further, the difference between Employee A and a $35 BLC employee is $3000 a week and $12,000 per month. If that doesn’t seem like much look at how many employees you have. Take a look at your last 6 bid jobs and the costs – ask yourself was the profit margin where I wanted it to be? Could you have been more efficient with your labor costs?

Many of you will say that while you might be more efficient with labor it takes too much time. And 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. If you could increase the profitability of a job by 15 to 20% and share some of that profit as a bonus to direct labor employees? Starting to reward them for profitability instead of them just doing what you hired them to do.

As a subcontractor, how often are you asked by the General Contractor to step up or make exceptions? By knowing your BLC you can truly understand what that will cost you; allowing you to make the right call for your business. Do you step up or will the cost be too great? Right now you make a gut decision based on rough numbers and hope that you can make payroll at the end. You need to know, right down to the penny!

Let’s take a look at what Burdened Labor Costing is and why it is such a great management tool. Most of you are familiar with loaded labor (hourly wages + taxes + benefits). Burdened Labor Costing goes 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’ve hired this employee to provide. Now you can compare true cost responsibilities to revenue generation to develop profitability benchmarks based on performance instead of tasks.

Other reasons for having an accurate BLC rate is hiring and training, providing you with the ability to create what-if scenarios for cost evaluations. Developing onboarding and training budgets, and creating competitive wage packages with realistic revenue numbers. And the list continues on.

While all this seems like a good idea and certainly worth considering you may still be asking – why waste time to do all this? In my experience I have seen not only the creation of usable profitability benchmarks but increased profit numbers in excess of 24% above current levels. If that isn’t enough, think of accurate job costing or proposals. You can create targeted labor efficiencies with results that can be tracked on a daily basis.

By now you understand the need to develop BLC business metrics. The last piece of advice I can give you is don’t waste your time trying to create an excel spreadsheet or having your CPA do one. The time is better spent applying the results. There are several programs available such as the Apex eSuite Burdened Labor Costing SaaS www.apexesuite.com that give you the reports you need quickly and accurately. Remember to update your numbers on a regular basis to ensure up to date metrics.

About Kelcey Thompson

Kelcey Thompson is a burdened labor costing expert, along with business mentor and trainer with a focus on accounting and customer service. She is the creator of the Apex eSuite (www.apexesuite.com) Burdened Labor Costing SaaS and blogs regularly on management accounting at Applied Management Group (www.appliedmg.com). She has more than two decades of experience in the service industries, where she has held many strategic positions and responsibilities. She has been successful in a diverse set of projects, including economic impact studies, ROI analysis, operation reviews and development of management accounting programs for service oriented businesses. If you have any questions about creating and implementing your BLC numbers Thompson would be happy to help. Feel free to reach out to her at info@appliedmg.com .

 

 

Labor and Parts Break-Even Price Calculator

How Much Do You Need to Charge for Labor, Parts, and Materials?

This pricing calculator will determine your breakeven point on parts, materials, equipment, sub-contractors, and labor charges. It will also breakout your overhead by department. Of course, this will indicate your actual net profit for that department. When you enter your desired net profit, your retail price markup on labor and material markup will be determined.

Do not use commas or currency symbols. Example: Enter $250,000 as 250000.

Don’t be intimidated by this calculator. It is very important. The information it offers is crucial to your management success. Please spend some time with it and post your questions.

Please Note: We are working on the formatting of this calculator. We know that the table spacing needs to be improved and we will get the formatting fixed.

Step Please Fill Out The Next Eight Items Answer
1 Total Department Sales (I.E.: Service or Installation). Example: 350000
 

 

 

2 Total Company Overhead. Example: 300000
 

 

 

3 Total MESO Purchases for the Department (not Company). Example: 75000
 

 

 

4 Total Direct Labor Purchases for the Company (not Department). Example: 250000
 

 

 

5 Total Direct Labor Purchases for the Department (not Company). Example: 115000
 

 

 

6 Average Hourly Wage Paid to Department Technicians. Example: 20.00
 

 

 

7 Desired Net Profit Percentage for Labor Sales (25% recommended). Example: 25


8 Desired Net Profit Percentage for MESO Sales (10% recommended). Example: 10
 

 

 


Calculated Values

 


Total Direct Costs for Dept.:


% of Sales


Gross Profit for Department:


% of Sales

Calculated Overhead for the Department:


Net Profit for Department:
 

% of Sales

 

 

Breakeven Labor Rate (per hour):

Hourly Labor Rate to Produce Desired Net Profit. This Is What You Should Be Charging:

Average Breakeven Multiplier for MESO:

Average MESO Multiplier to Produce Desired Net Profit:

How To Use This Break Even Calculator

All fields are required. It is best to use a full year (last twelve months) of financial data. Do not use a single month of financial data. Enter data in the fields according to the steps below. Be certain to read the Disclaimer. Click the Calculate button. Print the results if you wish. Do not use commas or currency symbols. Example: Enter $250,000 as 250000.
 

  • Step 1: What are your total sales for this department for the period? Not total company sales, just that department.
  • Step 2: The total overhead for your company. This is not the overhead for this department. The calculator will figure that.
  • Step 3: You need to enter the total amount of money paid for MESO (materials, equipment, sub-contractors, and other direct costs). Accuracy is important.  If you do not know the answer, do not guess. Please get this information.
  • Step 4: Total technician payroll for the company. You need to enter the total amount of money paid for Labor for the entire company (all departments). This is labor paid to people to perform billable work. Examples include service technicians, installers, and helpers. Accuracy is important. If you do not know the answer, do not guess. Please get this information.
  • Step 5: You need to enter the total amount of money paid for Labor in this department only (the department that you are calculating your selling price for). This is labor paid to people to perform billable work. Examples include service technicians, installers, and helpers. Accuracy is important. If you do not know the answer, do not guess. Please get this information.
  • Step 6: This is the average amount of money that you pay your technicians per hour. Do not consider overtime. Do not include payroll taxes, insurance etc. Those amounts should have already been included in your overhead (Step 2) or total direct labor costs (Step 4).
  • Step 7: How much do you wish to make on labor? You should have higher net profit requirements for labor than you do MESO. Labor is the most stressful, most difficult thing you provide. We generally recommend 25% for service, 15% for replacements, and 10% for commercial and new construction.
  • Step 8: How much do you wish to make on MESO? You should have lower net profit requirements for MESO than you do labor. MESO is much easier and more desirable to provide than Labor. What do you worry about more, your people or your inventory? We generally recommend 15% for service, 10% for replacements, and 5% for commercial and new construction.

Once you have completed all of the fields, double check your answers and click the Calculate button. For an explanation of what the answers mean, please see the Glossary of Terms below. Print the results if you wish. To try again, reenter information as needed and click the Calculate button. The ‘Reset Fields’ button clears all of the fields.

Glossary of Terms Used in this Price Calculator

Total Direct Costs (Expenses) for Department: Costs incurred that can be directly attributed to, and associated with, selling goods and services. They are sometimes broken down into two main categories; labor and MESO (materials, equipment, sub-contractors, and other). Examples may include sheet metal, furnaces, and installation labor.

Gross Profit for Department: This is the amount of money you profit on something you sell using direct cost only. This ignores the effect of other expenses in determining the markup rate. Sales reduced by Direct Costs.

Calculated Overhead for the Department: Expenses which cannot be attributed to an individual item of output, such as utilities, rent, etc. Also see variable and fixed overhead from the glossary section. Net Profit for Department: The excess of income over costs and expenses of a business. Sales reduced by Direct Costs reduced by Overhead.

Breakeven Labor Rate: The amount for which you must sell your labor for to make exactly zero dollars (no net profit).  In other words, you can pay all of your bills but you have nothing left over at the end of the year.

Hourly Labor Rate to Produce Desired Net Profit: This is the amount of money that you must charge for one hour of work to breakeven and produce the net profit you specified on labor.

Average Breakeven Multiplier for MESO: The multiplier that you must use to create a retail price that you must use to make exactly zero dollars (no net profit).  In other words, you can pay all of your bills but you have nothing left over at the end of the year.

Average MESO Multiplier to Produce Desired Net Profit: This is the multiplier that you must use to produce the net profit you specified on materials.

How the Price Calculator Works

This labor fee calculator gives you access to a powerful management tool which allows you to determine the proper percentage markups to achieve true break-even (no net profit but all overhead is covered). From this, you can determine exactly how much you must mark up a product or service to make a certain net profit margin.

The method used by this calculator is commonly referred to as the “Dual Overhead Allocation” method. This method has been used for many years by finance professionals with very good accuracy. However, it has been found to be somewhat inaccurate for businesses who sell jobs that are highly labor or MESO intensive.

Experts have overcome this deficiency through the use of a sophisticated algorithm. This correction is reflected in this calculator. The result is a far more accurate reflection of your true break-even than what the old dual rate system can provide.

The problem with most labor calculators is that they do not distinguish overhead by department or by product group. That is, they do not breakout overhead by department or by product group (labor or MESO). This methodology is highly flawed and dangerous to use. What makes this calculator highly unique and powerful is that it first calculates overhead for a specific department – even if you do not know the amount yourself. The labor calculator then determines overhead by product group prior to calculating breakeven. The result can be a highly accurate report of your breakeven point.

Here are a few points to keep in mind. This calculator is only as accurate as the information you enter into it. Please verify your numbers prior to using. Breakeven amount is based, among other things, on total annual sales. The calculator assumes your sales will be the same as the prior year. If your sales go up, your breakeven amount may go down. If your sales are lower than last year, it is possible that your breakeven amount will go up. If you have a budget, please use the numbers off your budget to perform the calculations. With a budget, you can price labor and MESO today, based on what you predict will happen in the future.

With this calculator, you are utilizing one of the most sophisticated mathematical formulas, for calculating breakeven, available to the contracting industry.

Why Other Pricing Calculators Don’t Work

We have examined dozens of “breakeven” calculators on the web. None of them, that we tested, were designed specifically for HVAC, plumbing, electrical, and appliance contractors.

While they seemed accurate with respect to the basic breakeven formula, they are largely useless to contractors for several reasons. In order to determine your breakeven with the traditional formula, you must have your overhead accurately broken out by department. Each department must have fixed and variable overhead separated. If you have all of this information available, you still cannot calculate breakeven on labor and MESO (materials, equipment, sub-contractors, and other direct costs) separately. As you know, you cannot markup labor and MESO the same way. Labor must have higher margins.

If you wish to price labor and MESO separately (you better!), you must have overhead separated by which product type it belongs to. For example, how much of your rent should be allocated to producing labor and how much for selling MESO. You must know this in order to use a traditional breakeven formula. Very few contractors will ever have access to this type of detailed information.

Why Is This Calculator Better

Through some fairly sophisticated and unique methods, we have overcome these challenges. Our calculator will first automatically create profit centers. In other words, it will calculate overhead based on department. Next, the calculator determines overhead based on the product type – labor or MESO. Currently, no other calculators can perform these functions. But eventually, some copycat will steal our stuff and create their own.

What Do I Charge If I Can’t Complete All of the Fields?

We recommend that you use the calculator, even if you have to spend some time getting the answers. However, while there is no substitute for a complete and proper analysis of your financial statements, here is a good rule of thumb. Take the amount that you pay your technicians (direct labor cost per hour), multiply it by 3.00 and divide by 75. This is your retail selling price. Example: Let’s assume you pay your technician $18.00 per hour (we hope it’ss not any less). $18.00 x 3.0 equals 54.00. Divide $54.00 by .75. This equals $72.00. $72.00 is your retail price of service per hour.

Where Can I Get More Information?

If you like this calculator and are interested in getting more detailed financial information about your company, you should check out Total Office Manager from Aptora Corporation. This field service management accounting and scheduling software program includes financial ratio analysis, departmentalized general ledger, and key performance indicators (KPI’). Please also see their Easy Labor Calculator. This is a desktop labor breakeven calculator that offers more features than our free labor rate calculator.

 

This labor breakeven calculator is written in Java Script. In order to use it, you need a Java capable browser and the “Allow Java Scripting” option activated.

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Free Standard to Metric Conversion Calculators by Mr. HVAC.

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Kilograms Pounds  

 

 

 

 

 


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Bar Kg/cm PSI  

 

 

 

 


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Ounces
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The Four Keys To Business Success

There is a lot to running a service construction business successfully. Thousands of books have been written on the subject and many more will be written. However, all of the successful service contracting companies (especially HVAC and plumbing) that I have either been associated with or studies have the following four attributes in common.

  1. Pricing For Profit (through accurate monthly financial statements).
  2. Effective Marketing & REAL Salesmanship (most of us are bidders).
  3. Recruiting & Coaching (have you become the “boss” you quit?).
  4. Organization & Strategic Planning (most make it up as they go along).