Have You Ever Overrun Your Labor Estimate on a Project?
In this issue…
How To Track Labor Overage by Project
444 words, less than a 3-minute read
We’ve heard that it happens. We think, in some companies, it happens a lot. We know that it is the #1 reason for achieving less labor productivity than you should.
We also know that, without tracking the incidence and quantity of “labor over” in your company, you’re not likely to be able to define a strategy for fixing it.
It Starts with a Guess
Estimating labor on any project is more art than science. Even design software, programmed to attach an adequate amount of labor to each item and task, is as much guesswork as it is precision. In fact, we strongly recommend that the pricing produced by the design software be put thru a final pricing check. If it doesn’t seem to have guessed a high-enough labor allowance…
Guess higher before you present the project to the client.
Now, if you do only do T&M projects, you might think you wouldn’t have this problem. But time & again we’ve seen fixed bid as a MUCH more profitable way to conduct business – IF the company has learned to guess & measure properly.
The Tracking Set-Up
You need a minimum of two labor items in your project database, one for tracking the quantity of hours invoiced on projects, the other for tracking the quantity of hours over on a project. Let’s call these two items Labor, and Labor Over. (These items don’t work if other charges are included in the items, and/or labor charges are included in other items. If you want to manage labor, you MUST track labor separately from goods & materials.)
We recommend you track labor on a project by invoicing Labor hours as they are provided to the project (daily, weekly, or bi-weekly). And, once you’ve invoiced all the hours you’d allocated, that you immediately implement…
The Labor Over Procedure
Start a new invoice in QB, enter the first batch of Labor hours over allocation, and then mark the invoice as pending. Keep the invoice pending and keep adding Labor hours until the project is completed.
Once completed, open the pending invoice. Add a negative quantity of Labor Over hours and dollars to net the invoice to zero. Now you can mark the invoice as final. The client won’t get charged for the extra hours, and you’ll have a record of hours & dollars that you had to “eat” because your labor estimate was too low.
Honing Your Guesswork
As you begin to understand how much Labor Over you “eat”, you’ll want to implement a strategy for consistently guessing higher (but not too high) on future bids. We’ll look at such a strategy in next week’s Tuesday Morning Coffee. Until then…