These 5 Actions Improve Labor Margins

By Paul Starkey
Published on: September 28, 2018

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Ultimately, Labor Margin is the resounding best measure of productivity, since it combines all factors of productivity, pricing, cost and utilization.

But Labor Margins can be very illusive (even tricky) since they vary based on productivity or the ability to bill hours against cost. In a fixed bid model, which most companies in CI use, there is tremendous upside.

So here are the actions for getting greater productivity:

1   PRICE IT Your Billing Rate relative to your Wage Cost (it should be more than four times the average wage).

2   ESTIMATE IT Your Labor Allocation assumptions (often hidden deep inside your proposal software) determine total hours you bid. The trap is they do not always represent what it takes to hang a TV or speaker or install a controller or remote. There are many activities beyond just the on-site doing-of-the-task. These assumptions will trigger the Labor Revenue mix in every proposal. The mix needs to be in the 30 percent to 45 percent range of total revenue to provide the profitability you need to sustain and grow operations.

3   INCLUDE IT What you bill for, including how you do it. Is it attached to the hardware you deliver? Or do you report time and bill for time on the job? Because staging, delivery, project planning, rack building, programming, project management and other things happen off site, this can skew the productivity numbers.

4    VERIFY IT Accuracy of billing estimating versus actual is critical to margin, since overrun hours and costs hurt margins, while beating the estimate improves them.

5    ELIMINATE THEM Defeating hour killers is critical to consistently getting the work done on time. Click here for our list of Time Killers.

Golden Rule: Is that you pay for 40 hours or more a week per tech and you should overall be able to charge for all of them. This requires beating estimates every time and for knowing what your costs really are.

Caution: If you have different billing rates and costs for sub-contractors, and if service techs have different billing and cost rates, your overall utilization and productivity can appear lower.

Labor Margins should be considerably higher than Equipment Margins. All the time!

Equipment Margins (all in) over 45 percent are great. Labor Margins of 55 percent and hopefully over 60 percent are the benchmark target for well-run, productive companies.

Local market dynamics will dictate the rate you charge and if you give labor hours away by not bidding properly, you are letting the weakest competitor control the marketplace. Sell the value of your firm and your ability to support customers’ needs long term.

Get these five factors of labor operations right and you are on your way to having a healthy CI company.

Keep it Vital.

 

Paul Starkey

Paul Starkey

Paul Starkey is a 23 year CI industry veteran who led control manufacturer ELAN from infancy to a 150 person company. He is a visionary, keen on innovation, pioneer of on-line training, and numerous product innovations. He is co-founder of Vital Management and Executive Director of BRAVAS Group.

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