In CI, equipment margins are pretty easy to manage (if you don’t allow discounting). And parts (consumables) can be managed without too much effort. But when it comes to Labor Margins, it’s a totally different ball game.
There are many moving parts. First your billing rate, and then your labor costs (wages & fringe). Then your bidding accuracy. How good is your quoting hours on projects versus actual? And then comes time keeping; what you bill for and what you don’t. Then, how good are your people at being productive and finally how many gotchas will creep into any project (unforeseen productivity zappers)? In the end, project deficits and surplus play a major role in the Labor Margin outcome.
We do know this. If you cannot achieve margins of 50 percent to 65 percent on Labor Revenue you will find it difficult to make 20 percent net operating profit.
Labor Margin being defined as Labor Revenue less Labor Direct Costs divided by Labor Revenue. A related currency for this: billed hours divided by 40 hours a week payroll hours (adjusted for overtime and sub-contracting); most often referred to as utilization. Most businesses struggle to get above 20 hours a week for a 40-hour pay week.
We have a metric, which is expressed as the Labor Revenue Per Tech Per Month. This is easily derived from Labor Revenue Dollars on your income statement and divided by the number of 40 hour equivalents in that month (Billable Employee Equivalents). $10,000 a month is a great goal.
Now, here is the reality. Most companies we encounter are between $4,000 to $7,000 a month on this measurement. Imagine having 5 to 10 techs and missing out on $3K to $6K of profit every month; that’s $15K to $60K a month!
So what to do, you say!
Make sure your billing rate is at least 4X your average wage rate.
Bid hours to be more than 30 percent of the project revenue on every project over $15K.
Bill for all 8 hours every day for each tech. They must be working on somebody’s project.
Consider travel time and delivery charges; do you really want this to be free (paid by you)?
Have one-man trucks and dispatch to the job, not the office.
Have clear written work instructions and have parts on the site (even if someone else has to run parts at minimum wage).
Review every project after its close for performance-to-estimate.
Review for consistent time zappers that can be avoided in the future.
Adjust next bids based on actual performance.
EXCEEDING $10K/MO SETS EXCEPTIONAL PERFORMERS APART FROM THE RUN OF THE MILL CI COMPANY.
Invest in managing this part of the business and you will have projects that complete faster, on time, and inside of budget.
Keep it Vital.