What Is Your Real Labor Cost?
What do your employees really cost you? More than likely, it’s more than you think. What makes it even worse is that your employees probably don’t know what they really cost you either. And yet, he is one of your most important resources. Not only do we need to know his true cost, but we also need to learn how to best develop him so he can produce more for you and earn more for himself. It’s the holy grail of managing people, but in this chapter, we will focus on determining the true hourly cost of our direct labor-employees on the job site.
Most contractors have it in mind that the hourly wage is the cost of one hour of labor, and as there is variation within the group pay scale, a ball park labor rate is the average of all direct hourly wage rate. Not so.
Burdening the hourly wage
In reality, to put an employee out in the field and producing revenue for the company has many other costs associated with that effort. We call those additional costs directly associated with the direct labor cost as “Labor Burden”. Most contractors carry these costs in G&A because many of these costs such as insurances are paid on a regular basis regardless of the ongoing jobs in the field. But it a simple truth is that if you didn’t need the employees you wouldn’t need the additional costs. So, many construction companies prefer to use the burdened labor rate in their direct cost of labor rather than carry it in overhead (G&A).
The following is a list of typical labor burden costs.
• Company portion of Social Security
• Workers compensation
• Company portion of private insurances
• Company pension fund matching
• Vacation pay
• Paid sick leave pay
• Training costs
• Paid breaks
• Uniform service
• Company provided tools
Indeed, it is not uncommon that a burdened labor rate can be as much as 30% higher than a straight hourly contract wage. For this reason, the additional costs of burdened labor have been forcing many construction owners to not hire company employees; rather it is cheaper to contract the work out at a straight hourly wage. However, a vast majority of contract labor is not covered by required insurance and can cause some major liability if injured on the job. In addition, contract labor may not have the skills a trained employee would have and as a result poor workmanship can affect the contracting company in many ways; after all the customer is their client and not the contract employees’.
There is little doubt, in most construction jobs, using contract labor can be less effective than using well trained company employees; it has to do with building a competent workforce with training and a sense of company identification. But, if competitors use cheaper contract labor, it can really force the issue. Besides, most illegal aliens use this form of sub- contracting relationship to relieve their clients (the contractor) from most liabilities and themselves from paying U.S. taxes.