The last couple of articles dealt with the importance of calculating dollar-per-hour overhead (DPHO) for your business. DPHO, however, is only one component of a costing and pricing system that results in profits. The rest requires a precise measurement of labor and material costs.
Material is the easiest to compute. You know to the penny how much you pay for most job materials. One exception is consumables, which ought to be spread across all jobs as part of overhead, but this seldom amounts to much.
Labor costs are a bit trickier. You should know to the penny how much you pay hourly employees – adding in the cost of benefits, broken down hourly, as well as wages. The arithmetic is not difficult. What gets tricky is keeping track of labor time, and distinguishing between productive and nonproductive work.
“Productive” work is billable work, for which the customer pays. Non-billable hours would come out of your own pocket, unless you figure out a way to charge each customer a fair share of the burden.
Many contractors do so via a so-called “trip charge” or “diagnostic fee” that pays for the time spent in traveling. This easily gets applied to the direct labor cost of any given job.
Yet there always will be a certain amount of unproductive labor that can’t be assigned to any particular job. This is time your workers spend in meetings, maintaining equipment, training, or just plain idle. As noted last month, you need to keep track of these unproductive hours and assign them to overhead, with costs spread proportionally among all paying customers.
Daily Tracking: Attached is a daily time sheet filled out for all Blau Plumbing service technicians. It captures all the information needed for us to do the detailed numbers crunching required to track costs and set appropriate flat rate prices.
The first narrow column labeled “GL#” stands for a general ledger code. This helps us cost out jobs via computer. “Slot#” is an order number that differs from our pre-printed job ticket number in the next column.
Further to the right we track the time a call is dispatched, when the service tech arrives and when he finishes. The time is totaled in the next column. The final column, labeled “Pay.” is filled out by our payroll department.
Not the bottom section, with information to be filled out by our costing department. Here is where we derive a variety of information that helps us achieve the following:
• Keep track of hours worked for payroll purposes
• Measure productive vs. unproductive hours
• Compare performance of service techs
• Compare average travel time in order to determine a suitable trip charge
Of course it is pretty hard to do all this without a fairly sophisticated computer system. I don’t expect small shops to have anything resembling our system. However, I strongly encourage every contractor, even you one-man operators, to look into a small personal computer for basic business tasks such as billing, word processing and recordkeeping.
Though it takes some time to learn how to use a computer, the learning curve expands quickly. Once you master the basics, you get paid back a hundredfold in time saved and greater recordkeeping accuracy – including the all important “numbers crunching” that determines whether you succeed or fail in business. Computer generated documents also create a good image. Even the one-man shop looks like a professional organization.
Adding It Up: One thing not provided by the daily time sheet shown here is the actual billing of the jobs performed. That gets tallied from the job tickets themselves.
When all the costs and sales get added up, it forms the basis of a timely Profit & Loss statement. This is essential information for a small business owner, and it is necessary to obtain at least every month.
The next issue will delve deeper into P&L Statements via job cost reports.
Daily Time Sheet