“If you use only the number of productive hours to price your jobs, you’re not going to bring in the revenue to pay for those other hours,” McCadden says.
THE TRUTH COMES OUT To find the true cost of labor, then, you have to calculate how much it costs during an employee’s productive hours to pay that employee for the whole 2,080-hour year.
First, subtract each employee’s total number of nonproductive hours in a year from the total of paid hours in a year. You can include all holidays, vacation days, sick days, hours spent in training or education, regularly scheduled meetings, and an estimated total of miscellaneous lost time.
For example, if a carpenter takes six paid holidays for a total of 48 hours; uses 15 paid vacation days for a total of 120 hours; spends about 50 hours a year in regularly scheduled meetings; and spends 32 hours in company-sponsored education programs, that totals 250 paid hours in the year that he spent off the jobsite, and thus not producing revenue for the company.
Knowing that the carpenter worked just 1,830 productive hours, the annual cost of each component of his total compensation can be calculated as a cost per hour worked. “Workers’ comp, health insurance … you have to factor in each one as a percentage breakdown of the total compensation, then you break all those items down into an hour’s work,” says Russell Caldwell, owner of Caldwell Construction in Springfield, Mo.
To do that, divide each total cost by the total number of productive hours. For example, health insurance premiums for this carpenter cost $1,758.25 annually. So, $1,758.25 ÷ 1,830 = $0.96 per hour. Workers’ comp, at 7.5% of wages, is .075 x $37,440 = $2,808 per year ÷ 1,830 = $1.53 per hour.
Totalling all of these costs per hour worked produces a true hard labor cost of $30.09 per hour. Now this number can be applied to the number of nonproductive hours to determine how much the remodeler pays this carpenter for nonproductive time: $30.09 x 250 nonproductive hours = $7,523.11.
“The value of determining costs per hour,” McCadden says, “and understanding how much they get paid versus productive hours, is that the business owner sees the reality of that, but also the employee sees the reality of that. The employee can say, ‘Hey, there are 250 hours a year when they’re paying me but I’m not working.’”
WEB EXTRAS: Downloadable worksheets: Fully Loaded Cost for Field Employees , and one for Hard Cost of Labor .
— David Zuckerman is a freelance writer based in New York.