So paid time that you're not producing revenue is a huge, huge expense, and it has to go into their full burden. Another example, if you have a weekly meeting, you're going to meet once a week with your whole team for an hour. That's 52 hours a year that they're not producing, right? And so at, say, $38 an hour,38 times 52, that's how much it's costing you just to have a one-hour meeting every week times every employee. Again, take that times 10,20 employees, you're losing a lot of money, right? So remember, when they're not producing revenue, you're still paying for their time. Somebody has to pay for those hours. So we also, we don't want to mix labor burden with every business expense. So a lot of guys will put their overhead into their labor hour, their labor burden. You shouldn't do that. The only exception is if you do hourly rate billing. So you bill an hourly rate, like time and materials, then your overhead has to be put into your hourly rate because you have to cover that. So if I'm a one man handyman and I'm billing by the hour, I can't bill $40 an hour because that's what I pay myself. I got to bill like $150 an hour or $100 an hour because I have to pay all my expenses. That's the only exception. With everything else, your overhead comes out of your gross profit. And so you don't put your overhead into your labor burden. It just, that's not how you do it. Every crew that you add changes that number. Every employee you add changes your overhead number if you're putting your overhead into that labor burden. So the burden is what that employee costs the business, not what you need to charge to pay for everything. Those are two different things and you got to understand that. So your employees' direct labor cost isn't truck payments, general company software, office rent, marketing, general overhead. That doesn't go into your labor burden. Now, some people will argue about truck payments, truck gas, insurance, all that. Technically, it's an indirect cost. It's not a direct cost. It's an indirect cost. And so a lot of people will say, don't put your vehicle costs into your COGS. I typically put vehicle costs into COGS. Is that technically the right way to do it? No, but I would rather have that extra cost into my COGS, do my markup and make even more money than not have it in there and then lose money. So the only thing it hurts is that your price is going to be a little bit more because you're adding those expenses into the labor burden, which is going to, and then you add your markup, it's going to increase the price of the job. That's the only downside to it. You know, maybe if you're doing commercial and you're bidding. and it's really tight, then yeah, that may cost you a job if you're putting that in there, you're misclassifying it. But I put it in there. If you have a lead guy who has a company vehicle and you make truck payments, insurance, gas, maintenance, all of that cost gets assigned to that lead guy as his burden rate. So that's what that is. All right. But we don't put other stuff in there. We don't put marketing and we don't put office rent. We don't put that stuff into the labor burden. All right. Next cost per paid hour. versus cost per productive hour. So this is where we get fooled. So I just kind of went over this a little bit, but I'm going to dig this in a little bit deeper. An employee might get paid for roughly 2,080 hours a year. That's 40 hours a week. 40 hours a week times 52 is 2,080 hours. Like I said, you're not producing 2,080 hours a year, right? So Once you subtract your PTO days, your holidays, your training, your meetings, and other paid nonproductive time, it changes. So if the employee costs you $75,000 annually, $75,000 divided by 2,080 hours is $36.6 an hour. That's what it costs you. But if you're only producing 1,700 billable hours or productive hours, you take $75,000 and you divide it by 1,700. Because that's how many hours you can bill for. Instead of it being $36.6 an hour, it's now $44.12 an hour, right? So it went up $10. I'm sorry, not $10, $8. Wait a minute, my math's way off. Yeah, $8. It's costing you an extra $8 an hour. Same employee, same annual expense, right? But very different costs for productive hour, okay? So productive doesn't automatically mean efficient. So being physically on the job doesn't mean every hour went toward estimating production. Like I said before, sometimes you're waiting for materials. You got to go to the supply house. You're looking for tools, poor scheduling, rework, bad instructions, waiting for another trade to get out of the way or show up, customer interruptions. All of these things happen on almost every job and we're not taking that into consideration. So now we've moved on from labor burden to labor efficiency. That's what we're talking about. Those are two different problems. Okay, we got to make sure we address those. First, we have to know what our true labor burden cost is, and then we have to take efficiency into consideration. So if your true labor cost is $44 an hour, you're not charging $44 an hour. That's your cost. You still need a gross profit. So now if we're targeting a 50% gross profit margin, which is what I recommend, now we have to add a markup on top of that. So $44 an hour divided by 0.5 is $88 an hour selling price, right? Or you can take 44 times two, same scenario. you're going to get $88 an hour. But don't make this mistake that so many contractors make and I made early on. Your markup is not your margin. So to get a 50% gross profit margin, you have to do 100% markup. If you do a 50% markup, you're only going to get a 33.3% gross profit margin. So if you take 44 plus 50%, that only equals a $66 an hour rate, right? So that's a 50% markup. That's not a 50% margin. And so many people get this wrong. So again, $44 an hour, you sell it for $66 an hour, that's a 33.3% margin. If you sell it for $88 an hour, it's a 50% gross margin, percentage, right? So we're talking 17% difference. That's a lot, guys. 17% of a job is a lot. It's a lot of money you're leaving on the table. Then we have to add in a crew multiplier. So a small mistake. becomes a big number once you multiply this across multiple employees. Like I said, that's just one employee. If you have three, five,10,20 employees and you're making the same mistake, it's not an $8 an hour mistake. You know, eight, if you have four field employees, just four, which is a typical makeup of a remodeling company, and they're producing 1700 hours each, that is a total of $54,400 a year you are underpricing. costing you $54,000 a year because you're not pricing based on productive hours. That's what it's costing you. Just straight out of the pocket, $54,000. You're eating that. You might as well go to the bank, take $54,000 out of the bank, put it on the ground and light it on fire. It's the same thing because you don't know your true labor burden. Right. So you have to figure out what the number is for every field employee. You got to figure out their hourly wage, their annual base wages, their employee payroll taxes, their workers comp, the employer paid benefits, other legitimate direct labor burden, your total annual employment costs, your paid hours, your nonproductive paid hours, your realistic productive paid hours and your cost per productive hour. Those are things you got to figure out. And then you compare that to what you've been using. So you've been estimating at $35 an hour and you actually need to be charging $44 an hour. You just found a major profit leak in your business. Major profit leak. Right. So at this point, you understand what are the differences? What is a labor burden? What do I need to put into it? I just explained all the stuff you got to factor into it. So you've got two options here. You can sit down and go over all these numbers that I just told you. Factor all this stuff in. Do it manually. Calculate it. Right. Or you can just let me do the math for you. Now, this isn't some, I'm not doing this as like a commercial. I'm not trying to sell you something, but this is just a reality. I put together a labor burden worksheet for this very reason, because it can be very difficult to calculate all of this stuff. So the labor burden worksheet does all of that for you. And you can actually grab it. It's only $39. Now it's, guys, it's worth $39. I promise you, if it's not, tell me, I'll give your money back. You keep the worksheet. We'll put a link in the show notes so that you can get access to this. But I'm telling you, even if you don't use the worksheet, I don't care. You have to factor this into your total labor burden, right? You have to. It's costing you thousands of dollars. So make sure you get this right. So like I said, we'll put the link in the show notes. It's $39. It'll tell you exactly what it's going to cost you. The other benefit of this worksheet is that if you have multiple people, you can build out teams. And it will tell you like what your cost per team is. So it breaks down what is your labor, you know, what's the labor burden rate per hour, per day, per week, per month, per year. And then what are all these costs are per hour, per day, all that stuff. So you'll know exactly like, hey, you know, my office time, my meetings cost me $2 per hour per employee. Or that vehicle for my lead guy cost me $3 per hour, whatever it is. It breaks all that stuff down. And then you build your teams. If you have a three-man team, it'll tell you like this three-man team cost you $700 a day, $800 a day. So it's very, very thorough. It's very helpful. So we'll put the link in the show notes. You can grab that. It's a labor burden worksheet. I did it for this exact reason because I struggled so much with trying to understand what it truly costs my employees. So guys, that's the end of the episode. On the next episode, we're continuing on our series from the first one that we did, the seven leaks. The next episode, we're going to be talking about what your efficiency, right? I'm sorry. I can't even read my own notes. The next episode, we're talking about the scope creep, how scope creep really hurts us in our profits, right? So this is the typical, hey, while you're here, we're going to dive deeper into that and talk about it. you know, giving away labor rate, whether we do it on purpose, whether you're on accident, whether our team members do it on purpose or accident, we're going to cover that. So we're talking about scope, creep, free work, and how those little extras quietly eat away at your profit. Make sure you turn in next week for that episode. Guys, thanks for hanging out with me. I really appreciate it. Make sure you go over to the Hammer and Grind podcast website. Leave a review. Leave a voicemail. Tell me what the next topic should be, what you want me to cover, what you like, what you don't like. Give me feedback. I'd appreciate it. And I do have one small ask. If you've listened to one or more episodes and you've gotten value, a small thank you is to go leave a review. Just go to your favorite platform, whether it's Spotify, iTunes. I don't care. You can even go to the Google account and leave it there. But just leave a review about the podcast. I'd really appreciate it. It helps us rank. It helps me to want to go out and make more content, more volume, not volume, more episodes and bring you more value. That's it, guys. Thanks for hanging out with me. Remember, until next time we meet, profit is not a dirty word.
