As we continue from Part One, Part Two reviews the numbers that are primarily labor in nature. Remember we are hoping you will take a few minutes to review the questions we discuss and we recommend spending a few minutes with your boss and the accounting department to get the most bang for your reading time.
True Labor Cost
Do any of these sayings sound familiar?
- We just include what the database shows.
- The senior estimator deals with that.
- Our vice president of accounting is in charge of that.
- I’m just an estimator.
- Easy, it’s their base wage plus 26 percent.
Have you ever stopped for a moment to consider what really makes up true labor cost? We are not just speaking of the actual labor burden, taxes, or insurance but really taken the time to meet with others in your company to understand the true details behind labor rates fully. If you can find a few minutes, invest them with your accounting department, and then share those thoughts and observations with project management, the entire company will benefit from a true understanding of the labor cost.
True Labor Burden
Labor burden is the actual cost for a company to have an employee, aside from the salary. Labor burden costs include benefits that a company pays for the employees that are included on its payroll. These costs include, but are not limited to, payroll taxes, pension costs, health insurance, dental insurance, short term disability, long term disability, life insurance, key person insurance and any other benefits that a company provides to an employee.
Labor burden is important to compute and understand because it includes a variety of significant costs that are often viewed as company overhead, but in fact are costs related to employment. Many businesses fail because they focus simply on payroll and payroll taxes, and neglect to consider the entire actual cost required to enable an employee to perform the work he or she was hired to do.
Do you have a place in your estimate to include the costs for those long-term staffers that you keep busy, whether they are out on a jobsite being productive or not? Do you include their costs as a factor of the total number of working hours in a year divided by their total yearly costs?
Fully burdened costs for individual employees can be expressed as a yearly total to provide an estimate of how much the company will spend that year on a single employee. It can also be expressed as an hourly cost by dividing the total yearly cost by the number of hours the employee will work. This number is often 50 to 150 percent higher than the gross hourly wage. As costs are often used as the basis for pricing services or products, this is why it is so critical to obtain an in-depth understanding of the true cost of an employee.1
Source: Labor Burden, Wikipedia, the free encyclopedia.
How do you deal with foreman productivity? Do you include the working foreman as a full member of the crew? How do you account for the job box talks and morning push/pull meetings? Do you account for the times they are arguing with the electrician? How many times have you been called on the carpet for missing crew productivity when you try to include the working foreman as a part of the crew? Have you ever looked at this job cost?
Do you have a general foreman/superintendent? How do you classify them in your estimate? Do you assign them for 10 hours per week? Who makes that assignment and why? Similar to other questions we have brought to your attention, this one is a sleeper for many companies. Many times this position was included as a job cost, but when the last lead estimator retired and the bookkeeper retired a year later, over the next two years, this person was not included in either category and it took the firm months to find the error. Since it was something each department thought the other was “dealing with,” it didn’t come to light for quite some time.
What is a project manager? The definition is as widely varied as most things; however one of the overlapping descriptions is the person who manages the financial accounting and progress of a project. The smaller firm might have a single person wearing many hats, such as the estimator, who is also the project manager and general foreman. The larger firm might have layers of project management staff from an operations management leader to the project-specific project manager. The point here is to truly understand what your firm considers as the project manager and correctly allocate their costs to your estimate.
Do you include the project manager cost in your overhead? Is it included in the actual cost of the project? What about the cost of supporting the project manager? Do you allocate a percentage of the operations/project management staff to the project? Is the expense of their laptop computer included as an allowance in your field costs or is it just overhead?
So your company considers that the project manager is also the general foreman?
We should probably close Part Two with a different ending. However, the concept is what we are trying to impart to you, so pardon us for being repetitive.
Imagine if you and your company spent the time, not in one day, but methodically over six-months to develop and document the true meaning and costs of these numbers? What impact might that have on your bid at bid time? You would have developed an estimate of your true costs showing real productivity rates.
Imagine the power to truly affix a markup or profit on top of your real costs, giving your firm the confidence of accurate numbers. What impact would that have at bid time? On your bid/hit ratio? How about your profitability?
Stay tuned for Part Three in W&C. We hope that we have garnered a few minutes of your time from your busy schedule and look forward to hearing your thoughts as we close our series next month, concluding with overhead and profit.
Now, we made it easy for you with a toolkit that provides a checklist to quantify correctly those takeoff numbers that, when you assign true costs, generate accurate bids without any fluff. Get the free Estimator’s Tookit at On Center Software’s site.