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During the three plus years I was on the road as a small business consultant, I had the privilege of working with 130 clients on profit and expense control and on organization for management jobs. I learned a lot in the process of evaluating my clients' operations in order to write cost savings recommendations. One of the most common areas to find savings was in eliminating labor waste.
Reasons Small Business Owners and Managers Miss the Cost of Wasted Labor
What was especially interesting was that clients rarely appreciated how expensive this waste was. I found several reasons for this:
- They did not know how frequently their employees were wasting time.
- They did not realize that the true cost of wasted labor was much higher than the employee's pay rate
- They failed to add up the number of times it occurred a year
- They failed to add up the number of crews it happened on
- Because they personally are organized and plan ahead, they did not realize how rarely their employees used organization or planning to do their jobs and how that impacted the amount of time they waste
Example of Electrical Contractor's Unrealized Labor Waste
With subcontractors and builders, I commonly found savings from identifying wasted labor. In one case that I remember, this electrical contractor was actually a sharp small businessman. He just failed to appreciate this one sizable leak in his profits.
Though not a union shop, he paid union wages. He also organized his crews after the union structure. On his government jobs, he definitely had to follow the union rules. He told me this meant his apprentices had to be supervised by a journeyman physically working with them on the job.
Any time the journeyman needed a part to complete some phase of a job, if he left to get it from the building supply store, three people were idle. His two apprentices were prohibited from working unsupervised.
To show you the potential impact, I'm creating this fictitious example based on real life experiences. Start your calculations with the basic labor rate, which is what most people think of when they talk about what they make or what they pay.
Hard Labor Costs besides the Hourly Wage
To that basic rate, as an employer, you need to determine what you actually pay out. Add in taxes such as FICA, Medicare, unemployment insurance, state disability, Workers Compensation, plus benefits like medical insurance, 401K matching, and retirement plans. The total paid out can easily amount to 60% of the hourly pay rate. I have seen Workers Compensation really cause labor burden to soar.
Effective Labor Rate
Finally, you need to calculate the effective labor rate, which includes all of the time that you pay the employee for time which is unproductive, like breaks, vacations, holidays, training, and travel time. I had one client whose effective labor rate for their field crew members averaged over 160% largely because of their Workers Compensation and how generous they were with both benefits and holidays.
Calculation for an Electrical Crew with a Daily Trip to the Building Supply Store
Here is how much the impact wasted time can have:
- One journeyman at $16.00 per hour became an effective labor rate of $26.91 per hour*
- Apprentice 1's $11.25 became an effective labor rate of $19.23 per hour.
- Apprentice 1's $10.75 became an effective labor rate of $18.38 per hour
- The combined hourly effective labor rate: $64.52 per hour
- 45 minutes = .75 hours**
- Cost of that one trip $48.39
- Trips per week: 5
- Cost per week: $241.96
- Number of work weeks, allowing for holidays and vacation week: 50
- Total effective cost per year: $12,097.91***
*These labor burden rates are fictitious though close to real rates for a client several years ago.
**Estimated time to drive to building supply store, locate part, purchase it and return to the job
***Remember that this is for only one crew and that travel times can vary
I developed solutions for him to choose from or to adapt to better fit his business and crews. One suggestion was to develop a basic inventory for each truck based on most often needed parts - and to get a daily sign off on that inventory from the journeyman.
As the economy recovers and small businesses start hiring again, it's important to pay attention to the impact on your profits from wasted labor. I gave five reasons clients often miss the amount of non-productive payroll. The above example is taken from a real client but tweaked a bit to not use their numbers so that you can see how quickly little things can add up. Profit is in the details.
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