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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 (.(JavaScript must be enabled to view this email address)) 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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About the Author

Steve Firszt
For 20 years, Steve Firszt was partner & president of an AV retail/installation company in Illinois. While growing that business to four stores and 75 employees, Steve developed many of the financial, marketing, and organizational skills used in his current work at Fast-Forward Business Coaching. Since 2004, Steve has served as a management coach and advisor to AV retailers, manufacturers, distributors, and integrators. Using his innovative Top-Line Management System as a foundation for improving financial strength, he works directly with company owners on business planning, marketing strategy, and organizational process. Steve shares his management philosophies and insights via a bi-weekly newsletter, monthly webinars, and frequent presentations on behalf of industry groups and vendors. Steve resides in St Louis and can be visited on the web at www.ffbizcoach.com.

4 Comments (displayed in order by date/time)

Posted by Jason Knott  on  12/16  at  10:46 AM

Feedback from readers on Steve’s point that your billable labor rate should equal 4X the rate you pay your techs. So a $15/hour tech should be billed at $60/hour. Thoughts? Realistic?

Posted by GH  on  12/16  at  12:37 PM

I think $60 for a $15/hour is realistic.  But I find it hard to bill $160 for my $40/hour wages.  I guess I just need to offset these people with lower cost employees and come up with a more “blended” rate?
In Canada, there’s really no such thing as a sub $18/hour person in this industry and I’d typically be sending out $25/hr plus on jobs and would have a tough time billing more than $80/hr for them.

Posted by Steve Firszt  on  12/16  at  01:44 PM

The 4X rate is suggested to maintain a 50% profit against a 50% utilization rate, (ie, billing 50% of all payroll hours). 

Techs who bill 75% of payroll hours need only a 2.67X rate to be at 50% margin. But I’ve seen only a handful of companies who actually maintain this kind of utilization, when calculated as described.

60% utilization would be 24 hours out of every 40 is billed. That’s pretty good, in my experience.

Techs who bill 60% of payroll hours need about a 3.4X rate.

Posted by Ray Casey  on  01/02  at  01:36 PM

Good stuff here.  This is a tried and true conversation that has ruled the business focus of IT service companies ever since the decoupling of hardware (now a commodity at low margin) from services (value added solutions and assistance - where you make money).  This is a “new” trend in the CePro world, but changing fast.  So this is good information, but really were the rubber meets the road is controlling/managing cost via careful inspection of EBIDTA.  Honestly in this industry business is given away and that used to be possible when the high margins from hardware offset the costs, but that is no longer the case.  And don’t believe the manufacturers about profitability on margins (they talk CapEX not OpEx).  The other way to soften that hard landing is the rebate black magic of getting money back and/or vendor subsidized training/help desk to lower support costs, but that has to be monitored very carefully, and the reality is the vendors require you to share or register information that could actually be used to support your competitors, like Best But and Verizon.  Again, all of this has been around for over 20 years in the IT industry and good to see the focus here, but not sure folks will be able to transition away for the expectations and habits set by high margins on product sales.  BTW, how come this site is not moderated vs. the linked.com group where I cannot post unless they approve?  Is it because here you can have your fake named poster so you bidding for you but on Linkedin.com you cannot.  You just have to deal with real discourse?  What a farce…  Cannot wait until the end of 2012 when this whole situation will change for the better…

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