The Cost of Field Employees

Understanding the true cost of sending an employee out into the field has the ability to generate benefits across multiple facets of a homebuilding operation.

Construction is a labor intensive industry. Despite new tools and advances in technology a skilled labor force is still the centerpiece of every successful project.

Yet the true cost of that labor force might be more than you realize. It is crucial for contractors to understand and measure the true costs of sending an employee out in the field. That cost rate can be used to help estimators create better estimates and accounting professionals establish accurate job costing.

Fully Burdened Labor Rate
A fully burdened labor rate represents the total costs an employer will incur when paying an employee. This rate may be 1.5 to 2.5 times the gross hourly rate paid to that employee.

For example, if an employee makes $25 per hour, he/she often takes home much less after taxes. Many field employees do not even consider their gross wage; they just look at how much money is in their paycheck every week. That same employee costs the employer more than $25 per hour. With the added payroll taxes and other “burdens” the cost to the employer may be $50 per hour; thus representing the fully burdened rate. The contractor may charge out the employee at a billing rate of $85 per hour to cover all the costs and include a markup for overhead and profit. 

Often, when employees learn they are billed out at the billing rate (for example, $85 per hour), they assume their boss is keeping the difference as profit. But that is far from the truth!

Distinguishing Burdens
Most contractors are aware of the typical burdens and add these to the gross wage to determine the cost per hour of the field employees. These burdens include:

  • Payroll taxes such as employer Social Security and Medicare, FUTA, state disability or state unemployment (depending on your state’s requirements). 
  • Workers compensation (combined with workers comp experience modification factor).
  • Liability insurance.
  • Paid-time-off, such as vacation, holiday, sick, and/or floating personal days. 
  • Health and/or dental insurance (paid by the employer).
  • Union benefits.

While many contractors are aware of the typical burdens above, they may not take into account the additional costs directly associated with carrying payroll; costs they often classify as overhead. However, ask yourself the following question: If I hired three more field employees, what costs would also increase? Some things to consider:
 
Cellphones and Communication Equipment: While you cannot break out every cellphone bill to charge to each job, you can create an allocation so the cellphone costs are burdened to the job. For example, if you typically spend $1,500 per month on communication equipment, and have gross field wages of $75,000 per month, this represents another 2% burden.

Small Tools: Measure the total costs of small tools last year and divide by the total cost of field labor to determine the percentage burden. For example, if you spent a total of $8,000 last year, with $800,000 in direct labor, that represents another 1%. However, since lower paid employees require as many tools as higher paid employees, it is better to create this burden as a per hour burden instead of a percentage of gross wage burden. For example, if the above $8,000 in small tools is spent by ten field employees, that represents a total of 20,000 field hours. Therefore, if you divide the cost per tools by the number of hours spent in the field, it represents an additional burden of $0.40 per hour worked. You may find an additional $0.50 or $1 per hour is a fair burden.

Vehicle costs: Too many contractors consider all vehicle expenses (gas, maintenance, insurance, fees, deprecation, interest, etc.) simply as overhead costs. But again, to know the true costs of sending an employee out into the field, it is important to include all the costs that go with that employee or crew, including the vehicle costs.

Automating the Process
Prior to the widespread use of integrated payroll, project management, and accounting software, these sophisticated allocations were tedious and time consuming. However, many accounting and payroll applications easily allow you to create these calculations to allocate labor burdens automatically. You can create a burden to add the costs to the job (in the same way you add employer FICA to the job costs) but, the difference is that the offset is no longer a credit account (such as payroll taxes payable), but a reduction in an overhead account. 

Given the example of small tools above, you would continue to code the costs of the tools to an overhead account called ‘small tools.’ Think of the ‘small tools’ account in overhead as a bucket. All costs spent on tools go into the bucket and are not allocated to any job.

Then, when you prepare your payroll, $0.40 per hour worked will be added to the job costs and the total additional costs will then be subtracted from that same ‘small tools’ overhead account. The costs allocated to the job are pulled on a per hour basis out of the bucket and applied to the job. At the end of the quarter or year, you can evaluate whether the $0.40 per hour was enough.

If the balance in the ‘small tools’ account still has dollars at the end of the year, you have spent more than you allocated and the rate is too low. If there is a negative balance in the ‘small tools’ account, the rate was too high and you allocated more to the jobs than you actually spent on the tools. 

The advantage to this method above is that it evenly distributes the cost of the small tools across all jobs based on the job payroll. Once set up in your payroll system, it becomes automatic. Your software is automatically burdening your jobs with the costs of the small tools. 

In the above example, the offset account was the same account used to code expenses. You can also create a separate overhead offset account.

For example, if you determine that the vehicle burden should be an additional 10% burden, you create a payroll burden that adds this percentage as a cost and uses (or credits) an offsetting overhead account called ‘applied vehicle burden.’ Continue to code the actual costs to the different vehicle overhead accounts, such as maintenance, fees, and insurance, in order to keep track of the total of all costs associated with the vehicles. 

Upon processing payroll, your software will apply the burden to the jobs and create a negative balance in ‘applied vehicle burden.’ At the end of the year, add up all the vehicle costs and deduct the amount in ‘applied vehicle burden’ account. If the net of all the vehicle-related accounts is a negative number, then you’ve allocated too much to the jobs; if the net is positive, your allocation rate is too low.

Notice the two companies in the sidebar, one which allocates vehicles to the jobs and one which doesn’t. Company B has used software to automatically pull costs from below the line to above the line, and allocate across all jobs based on total payroll. The total net profit of the two sample companies is identical, while company B has a lower gross margin. This means company B has a greater understanding of the total variable costs for each job and has a better handle of the true fixed overhead costs.

The True Advantage
The advantages of allocating all the costs associated with a field employee are significant.

Better determining what tasks you perform in-house vs. tasks you may choose to sub out. 

As volume increases, you will charge the correct amount for labor to cover the increased costs in communication, vehicles, and other burdens that you may have considered part of overhead and not included in your estimating process.

The ability to demonstrate to employees that even though they are earning $25 per hour, your $85 per  hour billing rate is not all profit!

Knowing how much it truly costs to send an employee to a job can be an important part of your financial management and planning for additional growth without loss of profits. Automated accounting and project management applications are helping homebuilders track these costs in a more reliable and highly efficient manner.  •

Leslie Shiner is owner and principal of The ShinerGroup,  www.shinergroup.com, Mill Valley, Calif., which helps construction companies better understand their business practices and maximize their profits. She can be reached at L_Shiner@ShinerGroup.com.