When it comes to managing financial health of your company, one valuable data point to calculate and improve is your labor percentage. While increasing revenue is always beneficial, regulating your labor costs simultaneously is the way to increase your Gross Margin and Net Profit. Let’s look at how to calculate your labor percentage and ways to improve it.
Calculating Labor %
Labor percentage is a simple calculation of total labor costs divided by total revenue. In Aspire, you can easily capture these numbers through the End of Month report. Labor costs and Revenue can both be found at their associated tabs (Revenue and Labor). Within each of these tabs you can filter date ranges and identify labor costs and revenue by Branch, Division, or as a whole.
If you are on SAS (Simplified Accounting) you will want to utilize the Invoiced $ to pull your Revenue. If you are on SAAS (Standard Accounting) you will utilize the Revenue $ to pull your revenue.
Improving Labor %
At a high level, the lower your labor percentage is, the more profitable you should be. Many factors come into doing this successfully. Below we will dig into multiple considerations which when systemized, will decrease your labor % and increase your profits.
System Set Up
It all starts with your sales and estimation. You must be estimating enough hours at an accurate labor rate, and at a high enough price. With Aspire, you can set up your system to do this automatically. This requires ensuring your labor items correctly reflect what you are paying your employees. Keep in mind, if you are continually giving your employees raises, you must update your labor items to be correct. Even when you update this regularly, remember that anything estimated before this change will not be adjusted to the new labor rate. You will not earn the estimated gross margin.
In addition to accurate labor rates, you should ensure your markups are set up correctly. This ensures your estimates are pushing out the desired gross margin based on the estimated hours and materials.
Estimation
When your labor rates and mark ups are set up correctly, correct estimation is the next step. This means taking full consideration of the required labor and materials and estimating with accurate production rates. By this we mean, if a construction job is being estimated for a backyard renovation it is the estimator’s responsibility to consider how the machines and materials will be brought into the backyard. Is there a tight fence? If additional hours will be necessary, they need to be estimated. Otherwise, the job will go overbudget on hours, meanwhile the revenue stays the same. This will result in the job having a high labor percentage.
Selling
Now that the job is estimated, it is time to sell. It is critical to ensure that jobs are not being sold for a lower price unless the scope has been reduced accordingly. Aspire is populating a price based on the markups you set to generate the gross margin your company needs to achieve to be profitable. By reducing the price, you are guaranteed to see a high labor percentage as an outcome.
This is important – as long as you have your system set up correctly, it is estimating a sale price which will help you generate your desired profits. If the number seems outrageous, first confirm your system is set up correctly. If it is, you can trust this dollar value is what will support your company’s profitability. Don’t be emotional with your client’s money before your own! In order to stay in business, you have to sell at a price that covers your costs and leaves room for profit.
Frontline Team
We’ve been focused on how to set up your system in a way to produce a desired labor percentage. Once a job is sold, it is our frontline team’s responsibility to perform within those estimated quantities.
For contracted work, (maintenance) we suggest encouraging your team to approach their jobs with the intent to make as big an impact on the property within the estimated visit hours. Since they are servicing the property week after week, if something needs to be prioritized one week, something else can be prioritized the next week.
With project or enhancement work, the team should be trained to perform most efficiently, without cutting corners. They are only budgeted a certain number of hours to achieve the projects results. If they go overbudget or have to come back to make fixes, it is at your companies cost.
If you are looking for ways to increase your profits, managing your labor percentage is a great place to focus. There are several areas that impact this number, and each of them is important. If you are interested in discussing what processes you might implement to systemize generating a low labor %, reach out!
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