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Put that extra labor on the shelf and sell it tomorrow: How to account for wasted labor.

February 6, 2018

 

That’s crazy, you can’t put labor on a shelf. You can however, put material back into the warehouse to reduce your waste.

 

Since you can’t “inventory” your labor for later use, service business have a lot of “wasted” labor. That’s one reason labor is so expensive. You can’t inventory it. It has to be used right now or it's gone.

 

Unsold labor is an expense that we must account for when deciding how much to charge for services. Sure, we can try to reduce wasted labor by employing best practices, but we must charge sufficiently to cover the unsold labor that’s impossible to inventory.

 

You might be wondering, “How do I know how much labor is being wasted and how much is that costing me?”.

 

See below for an example calculation:

 

In the service business, take your upper midrange technician and multiple his hourly rate equivalent times 1.3 for payroll burden. Now, to ensure that labor is only 20% of sales, multiple that number times 5.

 

For example: $20 per hour x 1.3 = $26 dollar per hour cost with payroll burden. $26 x 5 = $130 hourly rate to charge the customer.

 

Now if a technician gets paid for 8 hours but sells only 3.5 hours per day, it changes how much you have to charge.

 

Here’s the math:

Daily Labor Sales requirements = 8 hours times $130 = $1040 in required labor sales each day.

 

But since you are only are selling 3.5 hours in a day in this example. Your hourly rate is calculated like this:

 

$1040 / 3.5 Hours = $297 dollars per hour required to earn the needed $1040 per day.

 

WOW - $297 per hour that sounds expensive!! But, remember that’s only accounting for the 3.5 sold hours. Not the entire 8 hours that the technician was working. Since we cannot inventory labor, it needs to be accounted for it regardless if the job is quoted using time and material or flat rate. And, to be able to accurately account for the job cost, it’s important to track technicians’ sold hours to be able to set up your pay system.

 

Tracking sold hours and time worked can all be very difficult and time consuming unless you have a good service management software. Zip Solutions has a great dispatch software that seamlessly integrates with plumbing software, hvac software, and electrician software for your technicians out in the field. So, setting your effective hourly rate (for time and material or flat rate pricing) and compensation package becomes simple.

 

Contact us to talk with one of our experts on pricing and payroll.

 

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