Last week we discussed why your Chart of Accounts is important and how to organize it so it can give you information that is both helpful and relevant.
The most useful organization of the Chart of Accounts that I’ve ever seen is the following:
- Project Costs
- Operating Expenses
You may recall, also, the first three are the most important. Once you have your project and operating costs under control and you’ve a clear idea of your debt load, you can begin to dig into allocating a depreciating value to your assets (this is a tool for saving for their replacement and can impact your tax return) and begin to build your equity in your company.
This is the goal: building the equity in your company.
To do that we need to pull information from the books that have recently been organized to give you a clear idea of what it costs to operate your business. A few weeks ago I wrote about why record keeping is important. (link) and last week I explained why the way you organize your chart of accounts is vital to being able to draw specific information from your books.
To build your labor rate, which is the bedrock of your company’s ability to build equity, you must have your operating expenses, along with your labor burden..
Remember your labor rate is the price you charge to send men into the field. Your labor burden is how much it costs you to send men into the field. These are very different numbers.
Your labor rate is broken down into three parts:
- Labor Burden: this includes the rate of pay, benefits, payroll tax and workers compensation.
- Operating Expense: this includes all of the costs associated with running the business regardless of whether there are projects running or not. For smaller contractors this includes GL, Umbrella and Auto insurance as well as giving yourself a market rate wage.
- Profit: this is often a percentage.
Knowing your labor burden is the first step. Now, I’m going to dive into NYC numbers as of 2022. These numbers are likely to change according to your location and the time you read this.
Your labor burden breaks down into three parts:
- Base Rate per hour
- Benefits per hour
- Payroll Taxes & Workers Comp Insurance
Let’s say you are an Electrician on a State Prevailing Wage project in NYC. This is how these numbers line up:
- Base Rate = $58.00
- Benefits = $58.46
- Payroll Taxes & Workers Comp = 30.51% = $35.53
- Your Labor Burden in this example = $151.99
Obviously if you don’t do Prevailing Wage work, your equation will be different, but hopefully you are building a company that creates a benefits package for your workers, so they have more incentive to stay. But that conversation is for a different blog post.
The breakdown of the payroll tax I included are as follows:
- FICA = 6.2%
- Medicare = 1.45%
- Federal Unemployment = .8%
- State Unemployment = 4.025%
- Disability = .03%
- Workers Comp = 18%
I would suggest double checking these numbers against current rates and, of course, your Workers Compensation rate depends on the risk associated with the work you do. Your broker or NYSIF should be able to give you that rate.
Your operating expense is broken down by how many labor hours your crews use a month.
Let’s say your operating expenses are $50,000, including yourself, a month and you have 20 full-time crew members in the field.
There are 2,080 labor hours in a year (52 weeks x 40hrs a week).
Divide 2,080 by 12 months gets you 173.33 hrs.
173.33 x 20 fulltime crew members = 3,466.67 labor hours a month.
This is assuming everyone works full-time. If you have a part-time crew, then you need to only count the number of hours they work per month.
Now we’ll divide your operating expense by how many labor hours you send out a month.
50,000/3,466.67 = $14.42
I realize everyone thinks that 10% is a perfectly good profit number, but I disagree. If you can reduce your operating expense enough to pull off a 15% profit margin, you’ll be in an excellent position.
It’s worth noting that these are pretax numbers. And my calculations do not include marking up the operating expense, only the Labor Burden.
Using our example above of an electrical contractor working on Prevailing Wage projects in NYC.
- Labor Burden: $151.99
- Operating Expense: $14.42
- Profit: $22.80 (15% of Labor Burden number)
- Labor Rate = $189.21
When you use this math based formula, it’s easy to play with the numbers to see what your rate will be when you add more crew to the field, since your operating expense rate will lower with the more men you add to the field. Of course there’s a flipside to this, larger crews are harder to manage, you need more managers, and your operating expenses go up as a result.
We’ll dive into this later this year, but for now I hope you can see how creating a structure around bookkeeping, documenting and tracking your operating expenses.
If you’d like to have a conversation about how we can help you build a contracting business that’s ready to scale, schedule a meeting with us!