Hourly wages as a job cost

[A.P.G.C.]

I'm about halfway through "Markup And Profit" by Stone (and why didn't I read this two years ago) ... and have a couple questions.

I believe I have my fixed overhead accounted for.

My question is on labor as a job cost. If an employee gets paid $10/hr, but the payroll check for me to pay him $10/hr is really $520 (30% in taxes, I'm making this up)... do I figure it really costs me $13/hr assuming no health insurance, 401k stuff like that - and then apply my markup to the job cost using the $13/hr number?

I already plan to start this book over again as soon as I finish. My eyes are now wide open!

[Lavrans]

I'm about halfway through "Markup And Profit" by Stone (and why didn't I read this two years ago) ... and have a couple questions.

I believe I have my fixed overhead accounted for.

My question is on labor as a job cost. If an employee gets paid $10/hr, but the payroll check for me to pay him $10/hr is really $520 (30% in taxes, I'm making this up)... do I figure it really costs me $13/hr assuming no health insurance, 401k stuff like that - and then apply my markup to the job cost using the $13/hr number?

I already plan to start this book over again as soon as I finish. My eyes are now wide open!

Yes- at the minimum you have to charge what the employee actually costs you, which is wages plus taxes. That's one of the reasons people weight the employees wage- payroll taxes aren't all of your costs, there are also the increases in insurance, workers comp & benefits. Those can be covered by mark-up & profit, but it's better to figure in at least the insurance & workers comp into the wage- workers comp alone can easily be more than your overhead markup, and even more than both overhead and profit.

The basic rule of thumb my accountant told me was that an employee costs twice what their wage is. IOW, a $10/hour guy costs $20, a $40/hour guy costs around $80.

[David Meiland]

Use Jerrald's worksheet to figure out what hourly wages really cost you. It may be more than you think.

http://360difference.com/Shareware/PILAOExcel.cfm

[Jerrald Hayes]

Sean, I concur with Lavrans' response that YES the "minimum you have to charge [is] what the employee actually costs you".

There is an excellent (and free) Feb 2002 JLC article by Shawn McCadden entitled Calculating Labor Costs which very thoroughly explains what goes into calculating your labor costs.

I might have take issue with Lavrans however when he says that "the basic rule of thumb his accountant told him was an employee costs twice what their wage is" because years ago my accountant at the time told me the rule of thumb was 25% of the wage you were paying the employee. I've often found it to be in the range of 30-35% with a lot of the contractors I've worked with. That's the problem with rules of thumb. Just who's thumb is it? I heartily recommend that instead of using rules of thumb take the time to figure out just what your real costs are.

As David says "It may be more than you think". And who knows there is always the chance it might even be less. The rules and technique that Shawn McCadden talks about is built into the Capacity Based Markup Worksheet and in fact were one of the inspirations in it's design all those years ago.

That said before you set yourself down to re-read Markup & Profit you might want to read a couple of articles I written regrading the intrinsic problems built into the Uniform Percentage Across-the Board markup methodology he advocates:

• One of the Potential Problems in Using a Traditional Volume Based Markup and...
• Comparing Markup Methodologies In Real Some World Pricing Scenarios.

You can also read about the problem with his method in the sidebar via the Google Books Excerpt from David Gerstel's Running a Successful Construction Company. Gerstel instead suggests a Capacity Based markup method which he describes on Chapter 5 Estimating and Bidding on pgs 167 through 168 and that is the same method described in Ellen Rohr's How Much Should I Charge?: Pricing Basics for Making Money Doing What You Love which I think provides far better safer and more robust guidance regarding markup.

A Uniform Percentage Across-the Board markup methodology is certainly better than no method at all but as I've illustrated in my critical articles it's financially risky and inconsistent. I highly recommend adopting a Capacity Based markup methodology instead.

[Lavrans]

I might have take issue with Lavrans however when he says that "the basic rule of thumb his accountant told him was an employee costs twice what their wage is" because years ago my accountant at the time told me the rule of thumb was 25% of the wage you were paying the employee. I've often found it to be in the range of 30-35% with a lot of the contractors I've worked with. That's the problem with rules of thumb. Just who's thumb is it? I heartily recommend that instead of using rules of thumb take the time to figure out just what your real costs are.

Sorry, Jerrald- and anyone else- I don't really like any of the "rules of thumb" out there. I brought that up as an example of just how much an employee can cost- I find that the less a person is paid, the closer to that 2x figure you get (especially in construction). And, at least here in Oregon, 30% often barely covers workers comp. As soon as you start working in benefits, efficiency, vacation, well- that's where your PILAO sheet comes in.

I should have brought up your worksheet, which is how I figure out employee costs, also. David beat me to it, and why edit just to steal his thunder? :-)

[Jerrald Hayes]

Sorry, Jerrald- and anyone else- I don't really like any of the "rules of thumb" out there. I brought that up as an example of just how much an employee can cost- I find that the less a person is paid, the closer to that 2x figure you get (especially in construction). And, at least here in Oregon, 30% often barely covers workers comp.

Hey Lavrans there's really no need to apologize. My complaint is probably with your accountant (or accountants in general) who don't tell us to look at our own cases more specifically and precisely. And while I do try and avoid it I know I am also guilty of bringing up "general rules of thumb" myself too. This is all just good healthy discussion on the topics of markup and costing.

[Unforgiven]

I haven't heard anyone refer to the total cost of the employee by name yet. We always refer to the total cost of the employee, with wages, comp, benefits, etc., as the Labor Burden, and yes, we mark up the labor burden. Otherwise your markup isn't profit, it just covers expenses normally incurred.

[Total-Home]

For us the rule of thumb works reasonably well

we add wages, taxes, insurance vehicle, benefits etc to determine what a guy costs us each year

We then look at actual, billable hours (roughly paid hours less holidays, vacations, training, etc) and find the actual rate to use in estimating

Our foremen/ leads make 27 to 35/ hr and ultimately we bill them at 55 to 60/ hr as our cost. Any profit and overhead are on top of this. The multiplier is actually higher for lower pay guys as some of the non-wage costs don't vary directly with wages or are fixed.

You do need to know your costs and have an idea of how much of the typical 2080 hrs is really revenue generating.

[TSJHD1]

I've found that cost of employees as a factor of their wage has been about 1/3 more than their wage. That's historically that's been a tight average, that includes nothing more than the basics: Unemployment Ins, W/C Ins, G/L Ins, and matching FICA.

But, you have to include other non-tangible costs that are harder to pin down, such as costs to acquire an employee: advertising and training for example.

When you hire someone, do you hire them at a rate they would be when they are completely up to speed with your methods, but for some time they are not producing at that rate? Then you need to account for that in their cost to you, or just be willing to eat it for a while in terms of less profit.

The cost of advertising and training: Let's say you run an ad that costs $200, and you get one guy at $20/hr. You have to amortize the cost of that ad, and the cost of your time for training, over so many weeks. Decide how many weeks, and how much your training time is worth, add it up, and divide it by the # of weeks. Let's say it takes 6 months to get him up to speed. 1% added to a $20/hr guy for that many weeks would give you $208, barely covering the cost of the ad.

The hard part of this is predicting how long he'll last, and how much of your time it will take to train him.

Assuming you hire well, figure on a full year to recoup the costs of acquiring an employee, then amortize those costs over that year, and add that to his base pay as a %.

Tom