Labor Utilization Ratio

Labor costs are broken down into billable work that is charged to the customer, and unbillable work, which is part of overhead. Your profit picture will be adversely affected by dead time due to things like bad planning and scheduling, missing tools or materials, subcontractor delays, and daily tasks that may be an essential part of the job, but can’t be billed. There are many things that need to be done for a job that are not the responsibility of the customer, such as cleaning out the truck or returning unused materials. And then there are things that are completely out of your control like a breakdown, flat tire, or traffic jam. All of these come at a cost to you.

To be able to factor this cost into your business model you need to make it policy to track nonproductive hours. If you track the number of hours that you bill as compared to the total number of hours that you pay out in labor, not only will you be able to account for these costs on billing and estimates but you can also track your team to see if they're becoming more efficient.

Here's an example of a job that ran twenty man-hours over what could be billed because there was a problem with material delivery.

The billable labor for the job was 100 hours but 120 hours was paid out.

100 (billable) divided by 120 (actual paid out) = 83% efficient.

That's actually not too bad since the national averages are as low as 60%, according to NECA research, but that is still leaving 17% on the table. The best way to improve on these numbers is to constantly track time and allocate it to a specific area (shop time for example). Regular review of these records can be used to improve efficiency and can also be useful in negotiations with suppliers, and contractors to support extra billings or change orders when job changes are the reason for the labor inefficiency.

Purchasing, scheduling and supervisory personnel must be made aware of the importance of these numbers and encouraged to help the team improve them. Some companies offer incentives or bonuses if rates can be improved by a given percentage. Remember the old saying—that which is not measured will not be improved!

Teach your staff that anything that causes a delay or lost time should be tracked and listed on their time sheet with an explanation. Train them to be specific so that an invoice can be sent to the party that caused the loss or a solution can be in place before there is another incident of lost time. Descriptions such as no generator, no plans, no material, clean-up site after subcontractor (who worked before), will give you the information needed to improve the system and increase profits.

Let your employees know that time efficiency is important to you so that it becomes important to them. Make sure to review potential changes with your team before you implement them. The people on the ground will be invaluable help in determining if a change is cost-effective, or if the cure would be more expensive than the loss.

The above content is extracted from?Mike Holt's Business Management Skills?program.

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Mike Holt is an author, businessman, educator, speaker, publisher and?National Electrical Code? expert. He has written hundreds of electrical training books and articles, founded three successful businesses, and has taught thousands of electrical code seminars across the US and internationally. His company, Mike Holt Enterprises, has been serving the electrical industry for over 40 years, creating and publishing books, DVDs, online training and curriculum support for electrical trainers, students, organizations, and electrical professionals.?

Mike has devoted his career to studying and understanding the?National Electrical Code?and finding the easiest, most direct way to share that knowledge with others. He has taught over 1,000 classes on over 40 different electrical-related subjects to tens of thousands of students. His knowledge of the subject matter, coupled with his dynamic and animated teaching style, has made him sought after from companies like Generac, IAEI, IBEW, ICBO, NECA, and Fortune 500 companies such as IBM, Boeing, Motorola, and AT&T. He is a contributing Editor for?Electrical Construction and Maintenance?Magazine (EC&M) and formerly Construction Editor to?Electrical Design and Installation?Magazine (EDI). His articles have been seen in?CEE News,?Electrical Contractor?(EC)?International Association of Electrical Inspectors?(IAEI News),?The Electrical Distributor?(TED) and?Power Quality?Magazine (PQ).