With almost every new client we setup with our estimating system, we run into the question of labor costs and labor rates. Nine times out of ten it seems that most shop work is charged a just one or two labor rates.
While I made a vow not to be “too preachy” here in my new blog, I have to say that I think this is real mistake. Let me tell you why ..
First, let’s imagine that you pay all your shop staff the same .. the sander, edgebander, the saw guy, the master craftsman .. imagine you pay them all the same wage.
Now imagine that you charge the same rate for all of them as well.
Do you make as much money from selling edgebanding time as you do sanding time? I would have to say no. Your edgebander uses glue, electricity, machinery cost, cutting heads, etc. So even in this simple example using a single labor rate only serves to obscure your costs and perhaps simplify your pricing.
So there’s that .. different departments have different operating costs aside from the labor cost.
But of course it goes deeper .. let’s set aside the example where you pay everyone the same .. it’s not ever gonna happen that your master bench man works for a rate that is not commensurate with his or her skills.
So you tie down an excellent job with lots of high end work. Did you sell it at the “averaged” labor rate of all departments? If so you might be kidding yourself that it will make you money. It may in fact be the setup for the big loser month(s) of the year even though it all looks good heading out the door and your top guys are doing their absolute best with it.
Why? It’s a question of balance. High end craftsmen don’t grow on trees and this is not your only job demanding their services. Meanwhile many of your other departments are left short of work while the shop is pushing thru all this custom work. The invisible hand work load imbalance has cost you much more than you charged for. Because you couldn’t effectively work the entire plant your labor efficiency has dropped and it’s you that is gonna pay the price.
So there’s that work load balance.
Now let’s look at the same scenario .. you know the other side of the plant that wasn’t busy? You know why they weren’t busy? Because when you had an opportunity to win that simple casework job across town your averaged labor rate made you artificially high on the job. Why artificially? I say that because you undercharged your high end craftsmen and orvercharged for your other workers at the same time.
So there’s that .. averaged labor rates can distort your selling prices, but it will not distort your costs, which in the end is what you the business owner will pay .. the cost doesn’t change just because you adapt an averaged sell price scenario.
It goes on, but hopefully you’re starting to see some of the invisible ways you might not be making the money to think you’re gonna make. Ouuuuch!