Let’s make more money right now. Grab your P&L statement for the last twelve months and compare your labor income and your direct expense for labor. Your labor revenue are the charges for all the people you provide in order to stage an event or production or complete an installation. Your labor expense is the corresponding cost for those people (hint: your staff folks are an expense even if you don’t track them by job). Include all of their compensation including non-billable time. You will end up with all labor income compared to all direct labor both inside and outside. Go ahead, I can wait a minute.
Got it? Great. What is your profit margin on labor? If you are not earning a respectable profit (more than 20%) on labor, then you are not compensating yourself for the inherent risk and necessary overhead to provide that labor. In fact, I consider 20% merely breaking even. Before reading on, please select your excuse(s) for losing money on labor:
- We provide a lot of labor for free. It’s baked into the equipment cost.
- We designate warehouse labor as COGS but there is no corresponding revenue.
- We sell what the customer will pay for, but we send whatever is needed.
- My guys are on salary, so we don’t track them as direct expense.
- We can’t make money on freelancers, the market won’t let us charge that much.
- My staff guys do a lot of other things besides work on shows.
Many of you have heard me talk about the importance of the wholesale market in determining your retail pricing. The short version is that the wholesale price to you for any product or service represents your de facto cost. Even if you choose to buy your own equipment or keep a staff of employees, their true cost on a per job basis is the price of replacement on the wholesale market (or your actual cost – if it is higher than wholesale. Yikes!).
Let’s suppose that you are upside down on direct labor (ie: you spend more than you take in as revenue). One assumption is that you are paying too much for your labor, which I sometimes find. However, I am much more likely to discover that my clients are grossly under-charging for personnel. A quick analysis will show that pay rates, freelance rates, and costs in general have grown faster than what companies are willing to charge the customer.
Your company may be great at buying labor. You have some awesome freelancers that charge you below market rates and (for some reason I cannot fathom) you pass that savings on to your customers. Great. What happens when you need to hire someone else? Do you try to get them to work for less than their day rate? Really? Or do you pay market rates (better money for better talent)? How do you know what market rates are?
The good folks at Lasso have put together some data that should get you started:
What are the best practices? Making money on labor would be a good start. Setting a 40-50% direct margin on most labor categories will help cover a lot of the incidental direct labor you need to actually run your business. Of course your customer will push back if you spring the pricing change without weaving it into the total project value. But then that would mean you also need to reconsider margins on products, which are inherently less risky. The first step: run the report on labor cost to revenue and see if you are happy with the results.
Tom Stimson MBA, CTS helps owners and management teams rediscover the fun and profit that comes from making better decisions about smarter goals. He is an expert on project-based selling and a thought leader for innovative business processes. Since 2006, Tom has successfully advised over two hundred companies and organizations on business strategy, process, marketing, and sales. Learn More at TRSTIMSON.COM