How Do You Measure Labor Productivity? and… How Much is Enough?
The VITAL System uses three key metrics for measuring labor productivity:
1) Gross margin (labor revenues minus the gross wages you pay to your installers & other Billable Employee or Equivalents (“BEE’s”)
2) Labor Revenues per BEE
3) Labor utilization (total billed hours ÷ total BEE payroll hours)
Over the years we have learned that “50/100/50” represents profitable baseline labor productivity:
• 50% GM on labor: total labor revenues = 2X total BEE wages
• $100K annual revs/BEE: monthly labor revenues average $8333 per BEE
• 50% utilization: one billed hour for every 2 paid BEE hours
Many of our clients have been surprised that 50% utilization is acceptable. But understand, we’re talking hours that turn into labor revenues on your monthly P&L – un-billable warranty work and be-backs don’t count.
When you factor in un-billable office/warehouse time, drive time, holidays, vacation, training time, etc… you begin to see how challenging it is to get more than 1040 billed hours/year out of each of your billable employees. The math is simple enough… at $100/hour, 1040 annual billed hours (50% of 2080 payroll hours) equals $104,000 labor revenues. The technician could be getting paid up to $52,000 and you’d be realizing a 50% or greater GM.
Interestingly, when measured this way, many integration companies fall short of the 50/100/50 baseline.
And it’s often NOT because they are charging too little for labor. How’s your company measure up?
Steve Firszt and Paul Starkey have formed the quintessential business metrics firm in VITAL Management. Their quantitative model along with group comparatives and personalized coaching form a unique professional service for the custom electronics industry. Working exclusively with companies of $2M in sales or more, VITAL Management is helping good companies become great.