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Labor mark-up The right way to calculate labor cost
Labor mark-up
The right way to calculate labor cost
by Jeffrey Scott
What is the right way to calculate the mark up on your labor cost, in order to recover the appropriate overhead? It’s not a question that gets deep enough attention.
I see many companies with low labor mark ups who are still wondering why their business model is not producing enough profit or cash. As the guru of benchmarking, I wanted to get to the bottom of this. Therefore, in my Leader’s Edge peer groups, I have been shining a light on this metric.
I started investigating how contractors charge for their hour of time vs. what they pay for that hour. The results are surprising, and eye opening for those involved in these studies.
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There is a broad variety of hourly rates (charged to the client) among the companies I measure. And there is also a broad variety in the costs of labor. But these two don't always correlate.
Let me explain.
The ratio of hourly rates vs. hourly costs
Here is an example from one of my peer group studies.
We measured install hourly rates vs hourly costs. Specially, we looked at the ratio of hourly rates vs. the hourly unloaded cost.
In one of my groups, the ratio ranged from 2.2 to 4.1.
These ratios are in essence the mark-up on their labor. Some marked up labor 2.2 times. Others marked up labor 4.1 times.
That's surprising, that some companies mark up their labor twice as much as what others do!
Caveat: If you use multiple overhead recovery (MORS), you may decide to recover more overhead in your materials or equipment. But (but!) labor is the most important place to recover one's overhead, so be careful how you apply MORS in your budget.
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