Labor Management - Doing the Math: Part 8

You sell hours! Yes, you - in the Snow and Landscape Management industries – are in the business of selling HOURS. You “buy” those hours at one price, and then we try to sell them at another price. And, to the extent that you can, you strive to sell every hour that you buy.

Yes, you also sell materials and equipment, but those are not your primary businesses. Those are “pass through” items and are the primary businesses of the good people at John Deere, Toro, Gravely, Lesco and others. You simply attach these items to the labor you buy to deliver a desirable product and service to your customers. So, it is not an exaggeration to say that you make and lose money PRIMARILY on labor management decisions.

Managing labor requires you to focus on hours utilization (billed versus non-billed hours) and the hourly cost (average wage rate bid versus paid). Both must be monitored because the price of every service is, in effect, a function of hours bid (billable hours) and labor cost (a.k.a average wage rate).

To make money we must sell every hour at the best or correct price. The “correct” selling price is simply determined by the proper application of markups to recover overhead and margins to ensure a profit on top of the average wage rate. Profit is that pile of money that ultimately:

  • pays your taxes
  • pays for re-investment
  • goes into your pocket as a return on capital invested

Let’s look at an example of how to be maximally efficient in managing labor, and therefore, making money so we can pay the government, pay John Deere, and pay for your kid’s braces. (NOTE: How is it that every kid wears braces today? But I digress…)

Let’s Do The Math!

The following is used to calculate sales price in relation to average wage rate, overhead and gross margins bid on your jobs:

 Labor sales chart

In this example you employ five (5) crew members and pay them 2,000 hours in a year at $15 per hour. This equals a total annual payroll cost of $150,000. But, not every hour will be billed - in fact, maybe only 85%.

The other hours are spent on non-billable work – training, yard, drive time etc. Those non-billable hours are an OVERHEAD cost along with all your other business costs. In this example let’s say that your other business overhead costs are $122,500. The two overhead costs must be recovered by burdening the billed hours. When you do that – adding the burden to the wage rate and add a 15% profit margin – you must “sell” your labor in at $34.60.

Now, for the real world. Let’s say you bid a job for five (5) hours of work. In doing this per our pricing model, we would expect you to make a 57% gross margin.

Now let’s go further. The crew takes 30 minutes longer than estimated to do the job and the crew wage cost was $0.25/hour cents higher than the bid rate. What’s the result? A profit loss to the tune of almost 10% - not good, but it can happen if you are not managing the details. And you have to manage both the hours and the rate in both the estimate and the schedule if you want to get the gross profit you planned.

Now consider that this job we just discussed is one small job among thousands in a year. How are you going to stay on top of this information? More importantly, how will you create reports that alert you to problems and opportunities? You need a solid reporting structure.

Labor Efficiency Management

First, let’s start with a high-level KPI tracking the hours bid, scheduled and actually worked. From there, we can drill down to labor hour efficiency (bid hours vs. actual hours on jobs) and labor cost efficiency (bid wage rate vs. paid wage rate). These provide information that allow you to (1) fix the bidding process as required (to update production rates and average wage rates), and to (2) assess operations management in terms of crew performance and distribution of crew hours (billable vs. non-billable time).

Once we know what’s happening with hours and costs, you need to connect them to the actual jobs. I like to look at some broad indicators first when it comes to this, like the top ten/bottom ten jobs or properties. And I like to know by crew and service type where labor hours are distributed (for example, to the jobs, in the yard, driving on the road, etc.).

The reporting cascade (drill down) below does precisely that.

Labor reporting cascade.png

 

Labor KPI

Labor KPI.png

The labor KPI provides details (when you drill in) on Estimated Budget hours (blue) to Actual Worked hours (red) and to Scheduled hours (green). The KPI provides a basis for comparisons. In this case, we are looking at and comparing the work tickets (and portions thereof) that have been worked or are in progress for what was bid, scheduled and worked. It’s important to remember that tickets scheduled can be different from those bid.

May’s numbers tell us, for example, that you allowed more scheduled time than the estimate time and the crews did even better than that. May is a good-looking month. But looking back to March, we see almost the opposite.

I like to use this KPI report as a snapshot to analyze labor performance by company, branch, division, service type, crew and property. This is powerful, and the variances can be easily drilled into to get even better information.

Because that’s not the entire story – managing hours is only one element in making money – we need to manage the wage rate or cost per hour too. So let’s look at a report that can assist us in doing just that:

Hours and Wage Efficiency Report

 Hours and Wage Efficiency Report.png

What’s the goal in drilling down to this level?  Simple: to assess where the responsibility for the success or the fix lies – whether it is a person or a property. Knowing this, we can begin to understand and build processes to prevent recurrence, and at the same, time reinforce and validate what works. In short, we can confirm (in the right circumstances) what we think or know is right or wrong.

 

The Final Drill-Downs

The top and bottom ten reports combined with the operational services and crew scorecards provide the details about where and who.

Top Ten / Bottom Ten Property Reports

Use these reports to work on properties that are costing you money (and fix the work) and to review the pricing on the very high profit ones because they may be ripe for a competitor to steal them. Often, your most profitable properties may be over-bid, opening the door for a lower price competitor to bid lower and take them without sacrificing quality – at least from the customer’s point of view.

Top Ten

Top Ten Properties.png

 

Bottom Ten

Bottom Ten Properties.png

 

Operations / Crew Scorecard

This report provides information on crew efficiency – are they billing enough hours and are they getting the work done as scheduled for the time period in question?

 Operations Crew Scorecard.png

That’s it – managing labor. Start with the KPI and drill down to get everyone focused on the same things – hours and cost per hour. 

Labor is your single biggest cost and demands your attention every day. Setting up a reporting system like this and engaging everyone in the management of these two important aspects of labor is essential to making money.

Yes, by all means Do The Math to create and reinforce a culture of accountability, and in the process, make your job at least a little easier.

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