Here’s Why You Should Get Clear On Labor When You Sell Service

By PRETTY BOOKS ON October 3, 2022
HERE'S WHY is a collection of simple explanations for the things in your business that just don't make sense. There are a lot of moving parts in your business, and not all of them are obvious. Here's Why gets right to the point in identifying what's happening, why, and what you can do to improve your operations. Here's the deal, you need clarity in your finances to make data driven decisions for your company.

You recently brought on a new team member, expecting to improve the total bandwidth of your team. With this additional bandwidth, you hope to be able to go on vacation soon. But three months later, it seems your people are busier than ever. You haven’t taken on that many more projects. You don’t understand how, even with the addition of a team member, everyone is still chasing their tails. Here’s the deal, you need to get clear on labor when you sell service.

Why? You’re not tracking the amount of time your employees need for a project.

Let’s say you quoted a project to take 10 hours. You set up an agreement with your client, and the work begins. That 10 hours you quoted, however, might not take into consideration the indirect work relating to this project. Sure, it could seem like it only takes your team 10 hours. But what about the behind the scenes work? Your team could be spending 2 hours researching, 1 hour sending emails and communicating with this client throughout the project, and an hour for internal team synchronization outside of the work itself. That’s five extra hours outside the 10 hours you quoted.

Have your employees track their time for the next month. Have them track all the time they spend on a project, from direct to indirect work necessary to complete the it. At the end of the month, review their time to look for trends and analyze the time reported for each project. Then repeat this process each month. The trends you see can become a realistic benchmark for what you can expect from your team.

Tracking your team’s time will let you better estimate the amount of work required to complete projects. With a clearer picture of your team’s bandwidth, you can more accurately quote your projects.

Why? You overlooked your own labor

If you are a managing member, you probably support your team on these projects. It took your team 15 hours to complete that project, but how much time did you spend working on it to solve problems and push the work along? Hours you spend working directly with projects are billable hours.

You need to be clear on your own bandwidth to accurately quote a project and keep from overloading yourself with work. It is important to understand how much of your time is spent directly working on projects and how much of it is spent working in your business.

Similar to your employees, you need to track your time. Categorize the time you spent on a project vs. on your company so there is a better understanding of how your time is allocated between direct billable time and managing your company.

Why? You are not recognizing all direct labor on your Profit and Loss.

The way your compensation is accounted for tax purposes often blurs the true profitability of your business. In order to fully comprehend the profitability of a project, you need to be meticulous on the labor required to service your clients, whether it is apparent in your bookkeeping or not.

In terms of your own labor as a business owner, you need to really understand how much it would cost to replace yourself. The amount you are paying yourself could be significantly more or significantly less than what the market says your labor is worth. In order to fully understand how to price your projects properly, you need to account for any additional work you do for these projects.

If you are a business owner, it’s probably wise to do analytics of how much would it cost to replace you. First figure out the allocation for work you do related directly to client projects and directly for managing your company. Do market research to find out how much you would have to pay someone in order to do each of those types of work. That is the going market rate if you were to replace yourself.

When you are determining the cost of your project, you need to take the number of hours you work on that project and multiply it by the going market rate. Take that number plus the cost of your team’s labor to get a better benchmark of how much time and money it takes to deliver on this project.

Some things to consider

If you want to be strategic about the growth of your company, then it’s important to analyze where you and your team’s time is being allocated most.

  • What is your profit margin? Review the average time it takes both your employees and yourself to complete a similar project. Add them together, then figure out the cost of labor. Add it to any other costs you’ll incur during the project. Subtract it all from the total revenue of the project. Is the profit margin good enough for you? Is there some way you can increase it if it isn’t?
  • How does your team allocate their bandwidth? Can my team take on another project? Can I take on another project? Do we have enough time to dedicate to this project without it affecting other projects? Will we be comfortable and confident in taking on this project?
  • Are you tracking any labor efficiency issues? If you are working for similar projects, you expect the same work goes on in similar projects. If you are noticing fluctuations, investigate your project and people management processes.

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The information provided in this post is for general informational and educational purposes only and is not a substitute for professional advice. Consult your financial, business, or tax advisor with respect to matters referenced in this post. Pretty Books assumes no liability for actions taken in reliance upon this information.
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