{{first_name}}, Last month I met a plumbing company owner doing about $4M a year in revenue. Good business. Strong backlog. Booked out for months.
Then we started talking about the money side of the business.
He told me he ran the business at around a 12% margin, and he was pretty happy with it. So we opened the books and looked a little closer. The real number, year over year, was more like 4%.
The gap wasn't bad pricing. It wasn't slow collections either. The problem was actually the labour.
He was costing his jobs off a spreadsheet using his guys' hourly wage and almost nothing else. He thought a $38-an-hour technician cost him $38 an hour. In reality that technician was costing him north of $55. He'd been quoting work for three years on a number that was wrong from the start.
He's not careless, in fact he's one of the sharpest technicians I've met this year. He just never built the number properly into this spreadsheet. And it's one of the most common mistakes I see trade contractors make everyday.
So what is the true cost of labour?
Here's the simplest way I can explain it.
The wage you pay to your technicians is only one part of what an hour of field labour actually costs you. You need to add three layers on top of it.
Layer one is what the government and your insurer cost you, think of payroll taxes, workers' comp, CPP, EI, vacation and stat pay etc. That's typically 15 to 25 percent on top of the wage before you've done anything.
Layer two is what you choose to add. Think of benefits, the truck, fuel, tools, phone, training etc. Another 10 to 20 percent, depending on how you run the business.
Layer three (“This is the most important one”), is the one that quietly eats you alive. It’s the unproductive hours. You pay for 40 hours. You bill for maybe 30. Travel between sites, waiting on materials, rework, the morning that starts slow. Every non-billable hour you pay for gets spread across the hours you actually bill.
Add all three layers and a $38 wage becomes a $52 to $58 real cost per billable hour. If you've been pricing off $38 plus a markup that "feels" like enough, you're probably handing back 10 to 15 percent of your margin on every job and calling it overhead.
The number to know: “Your Burden Rate”
The burden rate is the multiplier that turns a wage into your true cost per productive hour.
Take everything you spend on a field employee in a year. The wages, taxes, workers' comp, benefits, truck, tools, training, downtime, all of it. Divide it by the hours you can actually bill, not the hours you pay for. That's your fully-loaded cost per field hour.
Most small trade contractors never calculate it. If you've never run yours, you're in good company, most owners would rather re-shingle a roof in July than open that spreadsheet.
After analyzing hundreds of construction company financial statements over past 25 years, I've found burden usually runs 40 to 50 percent on top of base wage, depending on how efficiently the business is run. If yours comes out below 30 percent, there's a good chance you're not counting something.
"But how could one of the best operators be wrong for years?"
Fair question. And here's the twist, “he was wrong, but he was also right.”
The 12 percent he thought he was earning was real, on paper. The gap came from what wasn't on the books. He wasn't paying himself a salary. His wife was working full time running the admin side of the business, and she wasn't being paid either.
So he was calculating profit while two full-time roles cost him nothing on the statement. And who wants to grind 60 to 70 hours a week running a business for no salary at all? The moment we factored in an arm's-length salary for his role and his wife's, that 12 percent dropped hard, right down toward the 4 percent.
The labour leak and the unpaid-owner blind spot were hiding the same truth from two different directions.
The question I want you to sit with
Do you know your fully-loaded cost per field hour including burden, overtime, and downtime?
Not the wage. The real number. The one you should know by heart.
Why am I writing this?
I have spent 20 years working alongside construction and trade business owners across Canada. My firm N3 Business Advisors Inc. has helped hundreds of contractors buy, grow, value, and sell their businesses.
I started by career as a teacher and that part of me never left. So once every week, I want to put one lesson in your inbox, for FREE; so you can build a construction company that buyers will line up to buy. No other motivation here, just passing on what I have learned from successful construction business owners.
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If it wasn't, reply and tell me why and also tell me what else would you like me to write about.
Nitin Khanna, CFA | Founder, N3 Business Advisors | Mastering the Business of Construction