Words: Corey Adams
Everyone agrees that the base labor rate is an important number to figure out and know. We must know what to charge, and our base labor rate is the fundamental building block of our labor estimates. There is, however, a flip side. After the job is completed, there is a number ignored by many, but has its place among one of the most telling metrics you can use to structure your company. I call it profit turned per hour.
What is profit turned per hour? At the end of a project, we run our profit margins. Actual material, equipment, incidentals, subcontractor, and labor costs are added up and subtracted from the job total. This gives us our GROSS profit. Once we get there, we take our overhead expense, often figured as a percentage, off of the GROSS profit. Now we have arrived at the real bottom line, NET profit. After getting to NET profit, we divide the NET profit by the total number of labor hours worked on the project. This gives us a baseline, profit turned per hour figure.
I get the question often, “Why in the world do I need to know this? If we made money, we made money!” Well, there is a reason for wanting, and knowing the profit turned per hour number. Here are a couple of ways we use it.
- Efficiency. If we track this number from job to job, we can find out which jobs are working efficiently, and which ones are not. We then can find lose less efficient projects and have discussions on why. Did we underbid it? Did we have site issues? Labor issues? Really, anything that has an impact on the bottom line.
- Profit-sharing. We know that the profit turned per hour is a metric of efficiency. What a perfect tie-in for profit sharing. If our numbers hit certain marks, then profit sharing can increase. This allows the job team to focus on efficiency more than just cutting corners to get done faster. It is a specific metric, so I caution to understand it fully before tying employee compensation to it.
- Advertising. Wait, what? Yes, we can use the profit turned per hour number to address what projects we should be targeting in our marketing efforts. Remember this is an efficiency metric. Focusing your company on the projects that your teams are most efficient on is key to maximizing return on effort, and time. Make the most you can per working hour.
- Historical estimating. Once we have the number, and the reasons why it fluctuates from job to job, we can start to see a trend in what typical issues affect profit turned per hour. Then we have an efficiency comparison for similar jobs and can help us bid accurately, and with more confidence.
It is hard to believe that a number that can be used in multiple ways to track efficiency is ignored by a vast majority of contractors. I agree that NET profit is the proverbial bottom line, but there is great value in looking beyond the numbers and finding ways to track productivity and efficiency.
For small owner-operated companies, this number has another great use. Delegation. If you know how much profit per hour you are turning in when you are working, you will find that there is plenty of activities that you are self-performing that can be hired out for a fraction of what you are actually turning. If you are turning $100 per hour on your labor, why not hire out a part-time bookkeeper for $25 per hour?
Years ago, someone told me, “Do what you do best; hire out the rest.”