How to Calculate Key Labor Metrics
Your client labor rate should be 4-times what you pay your staff to earn 50% labor margin. Total labor revenues, total labor wages, average hourly billing rate and average hourly labor wage will provide all the info you need.
A long time ago, I learned all I ever wanted to know about calculating profitable labor rates. The “scientific” methodology includes an analysis of all the burden costs associated with providing labor-based services: trucks, fuel, insurance, maintenance, mileage, etc.
I even developed a spreadsheet model for doing all math. E-mail me ([email protected]) and I’ll gladly send you a copy.
But you don’t need it. You simply need to measure the two labor numbers that matter most: Labor revenues and labor cost (gross wages only, unburdened).
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Hopefully you’re already tracking labor revenues separately from other revenues. If not, then you don’t know for sure what percentage of your total revenues come from labor and services. That’s an essential metric for integrators, one I have watched increase from as low as 20 percent six years ago to the mid-30s in 2011, and probably into the low-40s in the near future.
But that’s just one metric that comes from knowing your labor revenues. Here’s another: Divide your labor revenues by your company’s average hourly billing rate. Boom! You’ve just calculated the number of net billed hours your company delivers, which is another important measure.
Which brings us to labor wages. Most companies I’ve encountered track all salaries and wages in a single account. But if you track the gross wages of installers, techs, and programmers separately, you can do a quick calculation of labor payroll hours: Divide total labor wages by the average hourly wage of your billable people.
Boom! You’ve just calculated payroll hours, which you can compare with billed hours, which gives you your utilization rate. This should be at least 50 percent.
Here’s another simple calculation: labor revenues minus labor wages equals labor profit. This should also be at least 50 percent.
This is powerful stuff. Four numbers – total labor revenues, total labor wages (including subcontractors), average hourly billing rate and average hourly labor wage – provide all the info you need to manage three really important labor metrics:
- Labor Mix (Percent of total revenues) – should be 30 percent or higher
- Labor Margin (revenues minus wages) – should be 50 percent or higher
- Labor Utilization (billed hours as a percent of payroll hours) – should be 50 percent or higher.
As for that profitable labor rate? That’s easy. It should be about four times your average hourly labor wage. That kind of rate, coupled with 50 percent+ efficiency, will get you a 50 percent+ margin on labor, every time.
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