In this week’s issue…
Your Labor cost Budget, Made Simple
428 words less than 3minutes reading time
Installers are revenue producers. But before we can figure out what to pay them, we first need to determine the amount of revenues they bring to the company. Not per-tech totals, but a grand total that allows you to answer this question:
What percentage are labor revenues of TOTAL revenues?
If you can answer that question, please skip the next paragraph and continue reading!
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If you can’t – if you don’t track labor revenues in their own account, completely separate from all other charges – get thee to your chart of accounts and item list and set things up so you can see labor on its own! This includes companies where some labor billings are combined with gear & parts (eg, many companies have pre-wire/trim packages that show a single dollar total for the wire, plates, parts & speakers). These items need to be fixed so, at least in the background, they record labor revenues separate from all others.
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OK, you know what your labor mix is, i.e., its percentage of total revenues. Let’s say it’s 30%.
Now you know how much you should pay your technicians – 40% of labor mix. In this case, 12% of total revenues (40% of 30%).
Why 40% of Labor Mix?
In our previous coffee we discussed the potential ambiguities of labor margins. But under the VITAL System, there is no ambiguity: labor margin is the difference between labor revenues, and the gross earnings of the personnel whose services generate those revenues. These gross earnings are “direct labor cost” in our system, and we know that in high-performing companies these costs are +/- 40% of labor revenues. Meaning, for every dollar of labor revenues received, technical employees and subcontractors receive +/- 40 cents. The remaining 60 cents is the company’s profit on labor.
While a simple calculation, VITAL’s margin on labor reflects the impacts of project pricing, labor skills, company efficiencies, and labor costs. Two of these 4 factors are easily quantified: labor as a % of the total project price (mix), and labor costs. Both are in control of company ownership.
Controlling both leads to the labor profit integrators need, to enjoy the kind of bottom line integrators should have.
Your job? Start measuring & take control.