Your True Cost of Labor Is ... ? Prepare to be Shocked!
When you calculate in benefits and your employee utilization rate, paying an installation technician $25 per hour really costs you a mind-blowing $92.02 per hour … and that is to break even! Here’s how it adds up.
“The old days of making profit solely on equipment are over. You have to make money on labor, but unfortunately, labor is where most integrators lose the most money!” emphatically stated Leslie Shiner of The Shiner Group during her CEDIA Expo 2015 session entitled “Understanding Labor Cost, Productivity and Efficiency.”
To prove her point, she used an eye-opening example of the real costs for a full-time employee: A technician earning $25 per hour (in the state of California) has a tax and benefits burden that calculates out to $50.61 per hour to break even. What?
Here’s how we get there: That includes:
- A vehicle (adds between $3 and $5 per hour for the employee)
- Health insurance (adds $2.50 per hour)
- Vacation (adds $3.13 per hour … even unpaid vacation adds costs because you are still paying for insurance during the employee’s vacation)
- Liability insurance (adds $1.75 per hour)
- FICA (Social Security and Medicare adds $1.90 per hour)
- Worker’s compensation insurance (adds another $0.87 cents per hour)
- State Unemployment Tax adds $0.37 cents to $1.55 per hour
- Employment Training Tax = $0.25 cents/hour
- State Disability Insurance is another $0.22 cents per hour
- Lost tools (yes, lost tools, will cost about $0.50 cents per hour during the year, etc.)
When all those benefits and tax liabilities and other costs are added up, it adds up to $50.61 per hour as the true cost for a $25/hour employee … that is more than double!
But guess what? It gets worse.
Remember that most employees’ time is not fully billed, but they are still being paid for an eight-hour day. Indeed, a custom integration company is lucky if it has an Employee Utilization Rate of 55 percent, says Shiner. That includes paying a person for all that unbillable time loading and unloading the vehicle, travel time, training time, etc.
On average only four hours and 24 minutes per day of an employee’s time is actually billed to a project. So so that means when it is all finally tallied, the true cost burden of a $25 an hour technician is a staggering $92.02, according to Shiner.
"If you don't charge clients for drive time, then your labor rates need to be higher," she says.
One tip from an integrator attending the session was to eliminate the word "labor" from his proposals. He uses the term "project management" instead, noting that no customer can say that they don't want the project managed.
Now, let's take it one step further. What if you want to actually earn a profit on your labor. Some integrators target to pocket 35 percent profit on their labor. So if that is the case, you will need to charge $124.22 per hour to your clients for a technician you are paying $25 per hour.
By the way, according to the CE Pro Labor Rates Study conducted in May 2015, the average billable rate nationwide for an installation technician is $85.16. That means if that technician is earning $25 per hour, you are losing $39.06 per hour on that employee.
So do you still think your hourly rates are too high?
Jason has covered low-voltage electronics as an editor since 1990. He joined EH Publishing in 2000, and before that served as publisher and editor of Security Sales, a leading magazine for the security industry. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He is currently a member of the CEDIA Education Action Team for Electronic Systems Business. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at [email protected]
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