Despite being similar in dozens of ways and having many lessons we could learn from them, contractors rarely look towards the manufacturing industry for tips on how to run their operations more effectively. That's a real shame.
Prior to 2000, nearly every business improvement practice introduced to the business world came from the manufacturing industry. Some examples are: breaking jobs into specialized tasks, statistical process improvement, cost accounting, incentive pay, self directed work teams, safety standards, standardized operating procedures, and customer centric business planning.
What has always caught my eye is how similar construction is to manufacturing, and specifically to a manufacturing job shop. In a job shop, each item is built to a specific drawing, the product is generally not mass produced on an assembly line, and controlling productivity is a never-ending cause. The same can be said about construction projects.
Today, we're going to take a practice from the manufacturing world and adapt it to our world. Manufacturers are obsessed with one piece of information that contractors across-the-board are almost oblivious to: indirect labor.
Are you familiar with the term Indirect Labor?
Indirect labor has a profound impact on your cost competitiveness and your bottom line. Indirect labor is something you need to keep a close eye on and manage aggressively.
Let's start with Encarta's definition, I'll tweak it to better represent the accepted meaning in the manufacturing world, then I'll explain how it should be used in your business.
Per Encarta's online dictionary, Indirect Labor is:
Work not directly related to production: work that is not considered in determining costs per unit in producing or manufacturing something, e.g. work done by clerical or maintenance staff.
In the manufacturing world, accounting usually draws the line between direct labor and indirect labor based on job position. In other words, all hours turned in by factory floor workers are defined as direct labor hours. Hours turned in by everyone else are considered indirect labor.
When it comes to indirect labor, manufacturing can get away with tagging positions as either direct or indirect. It makes the cost accounting easier and it rarely sends misleading signals to management.
That approach does not work so well for contractors. Where manufacturers can cleanly tag a particular job as either direct or indirect, you as a contractor must look at each field worker hour. For you, indirect labor should be coded by task, not by job. Failure to do so can mask a potentially devastating expense.
Both Guy and I have seen this over and over - a contractor's casual approach to timesheet coding covers up a significant amount of wasted time.
The wasted time is created by poor labor coordination and decision making on daily assignments. Many times, the field productivity is far better than indicated as hours that should be coded to indirect activities - and pulled out of the labor productivity calculation - get tossed into the pile of direct hours and used to measure field productivity. That is an extremely misleading practice.
Wondering whether you have an indirect labor opportunity to capitalize on?
Here's a quick acid test:
- Do your field workers code their time to a project?
- If the answer to No. 1 is yes, do they assign their time to task codes?
- If the answer to No. 2 is yes, do you have a task code for "overhead" or something similar?
If you didn't answer YES to all three, you could not possibly know the amount of time and money you're losing to indirect labor. You need to correct that situation as soon as possible.
If you truthfully answered YES to all three, congratulations. You're probably in pretty good shape - assuming you taught your foremen and/or superintendents how to code time.