Articles written by guest contributors

Weston Zimmerman

Labor overruns really, really hurt

By Weston Zimmerman

Job overruns of any kind hurt your profit. But there’s one particular overrun that stands head and shoulders above the rest. Labor.

Why do labor overruns on jobs crush you more than any other overrun? Guess which kind of overrun is more common and harder to eradicate? Yup, you got it. Labor.

First let’s cover why it is more common and harder to eradicate. Then let’s dive into why it crushes your profit far more than any other overrun.

Labor is harder to estimate accurately. Labor is harder to get dialed in on your estimates. It’s pretty simple to calculate how much material you need on a job. It’s just running a few calculations and you got your quantity of stone, pavers, etc pretty much nailed.

Labor, ha ha … that’s another matter, especially if you are building an estimate for work you’ve never done before. It’s the million dollar question: How long will this take us to complete? And if you get it wrong… well, we’ll dig into that in the next points.

Some simple tips

If you’re estimating work you’ve never done before, break it down into smaller steps in your mind. How much work could your crew get done in day 1, day 2, and so on. Run that thought experiment in your mind’s eye until you “complete” the job.

How many days did it take? Multiply that by your man-hours consumed per day. There you have your estimated man-hours. If in doubt, always round up, especially when estimating work you’ve never done before.

What makes labor overruns especially painful

Let’s say you bid a job for 5 days with a 3-man crew averaging 30 man-hours per day, so 150 man-hours total. But, it took you an extra 3 days, 90 man-hours, to get the job done for [fill-in-the-blank] reason.

Not only do you need to pay the crew for those 90 hours of work they did on your payroll, but you also got delayed on the next job and generating that revenue.

It gets worse.

Not only do you have the unexpected cost of those extra hours on payroll, and got delayed from completing the next job on your schedule, but you also did not recover your company’s overhead expenses on those 3 lost days.

So adding that all up, having labor overruns costs you 3 times.

The direct cost of the payroll.
Opportunity cost of not working on the next job and competing that one on time.
Lost overhead recovery.

That, I don’t need to tell you, hurts.

Compare that with needing 20% more material than you had estimated. Ah, not that big of a deal. Your cost went up by 20%. Hurts, yes. But it’s not killing you.

An example

Let’s run a quick example for a labor cost overrun.

Direct cost: Let’s say my average cost for payroll is $30 per man-hour.
Opportunity cost: Let’s say I have a $1 million sales goal for the year, and I can work 200 revenue-generating days a year in my business. That means I need to produce $5,000 a day to meet that goal.
Overhead recovery cost: Let’s say I have $250,000 of overhead expenses in a year. With my 200 revenue generating days a year, this means it costs my business $1,250 per day just to keep the lights on and operate.

So, that job I estimated for 5 days, but took me 8 days (3 days of overruns) will cost me:

Direct cost: $2,700 ($30/hr at an average of 30 man-hours per day = $900 per day x 3 days).
Opportunity cost: This is the cost of not working on the next job that I now have to make up elsewhere: $15,000 ($5,000/day x 3 days).
Overhead recovery cost: $3,750 ($1,250/day x 3 days).
Total: $21,450

That makes my head (and my heart) hurt. Over TWENTY GRAND! just for going 3 days over on a single job! That’s the cold hard truth.

Now granted, you’re not going to see a debit out of your bank account for $21,450.
You’ll only see the $2,700 in labor costs. But now you have to hustle to overcome the $15,000 revenue deficit on your $1,000,000 sales goal. Otherwise you won’t hit it and won’t make the profit you are shooting for.

Overhead costs usually hit you when you’re heading into winter and you check your bank balance, and, “Where’s all the cash we should have in there?” I hate to break it to you, but it went to pay for those overhead expenses that you didn’t recover.

The revenue you generated on that job you had overruns on did not increase, but your costs increased massively. Some of those costs just took longer to make themselves painfully aware to your bank account. And that, my friends, is why labor overruns are far more painful than any other overrun.

And, the worst part? The worst part occurs if you aren’t tracking your time, and you aren’t aware of the labor overruns. Then you’re doomed to repeat the same mistake again and again.

And that is how you can work incredibly hard, produce beautiful work, but make no money. And that…. is why tracking every stinking minute of time worked is absolutely essential to actually making money. You can’t fix a leak when you don’t know where the leak is, or why it’s happening.

So with that, if you felt a jolt go through your entire being reading this, get on a call with our team, and we’ll show you how easy it is to track time in SynkedUP so you can see every time you are running over, and immediately work to overcome and address the situation. At the very minimum, don’t repeat the same mistake the next time you do a similar job.

For help with your company, email Weston@SynkedUP.com, follow on IG at @synkedup, call (814) 383-1901 or visit SynkedUP.com. Weston Zimmerman is CEO & co-founder of SynkedUP project management software and app. SynkedUP helps contractors know and track their numbers, estimate and job-cost jobs, and manage their jobs efficiently. Check out his podcast "The Cost of Doing Business."