In this issue ....
How Labor Margin Works and Why It Is the #1 profit leak in most Ci companies.
382 words, about a two minute read.
Labor pricing is a challenging aspect of custom integration. Unlike the equipment you sell and get a price and know the cost, labor gets its price and for most, the cost is yet to be determined.
So, what is a fair price for labor? We think it is as valuable as the gear you sell. And, a 50% margin on gear is well, pretty darn good. So, why not 50% on Labor. Seems easy? But if you pay $20 an hour to a tech then $40 would be far? Far from it.
Well, here we go:
Usually that $20 employee costs another 20% for benefits, etc. So that’s $24. But then vacations, PTO, and training, will cost you 4 to 6 weeks a year or 10% of his available time. Now that’s more like $26.40. What if, you knew that you were able to bill for only about 60% his time? [Actually, that is better than 70% of the Ci companies]. Now, that $20 is beginning to look like $44.00 an hour. Now, we are getting closer to the real answer. $88 could get you to the 50% margin we spoke of earlier. $88 divided by $20 is 4.4x markup.
But, wage rates vary all around the country. So, we distilled the formula down to take your average wage rate and multiple by 4.4 times. You still need to manage productivity and output; and don’t let drive time and other unpaid clock time creep into the costs.
The amount of the Bill Rate is not absolute, the relationship to your costs is. If you arrive at a $125 or more billing rate, don’t be discouraged, many companies charge that and more.
Now, the other side of this is making sure you have enough hours in every bid to not run over the estimate. All paid to employee hours that go unbilled to clients, are direct losses of Labor Margin. Having enough work to keep your tech team fully engaged is another element to be mindful.
We hope this is helpful. Consistency in maintain your labor margin is always the biggest contributor to your bottom line not matter how much it moves around.