Be forewarned that your indirect labor should not be zero. Zero is neither a realistic nor desirable target. The appropriate amount of indirect labor is somewhere between 1% and 10% depending on the size of your company and the service it performs.
Large contractors should be no more than 5%, and preferably well less. Smaller contractors, especially those whose average job runs less than two weeks, are probably in the right neighborhood if their indirect labor runs in the 5% to 10% range.
Common tasks that should be tracked and treated as indirect labor are:
- On-the-clock drive time
- Planning and coordinating
- Equipment maintenance
- Preparation in the yard prior to heading to the job
- Working around the yard and shop
- Waiting on and handling material or equipment deliveries
(The last item should be eliminated by planning, coordination, and communication.)
You might be wondering how bad your indirect labor could be. All we can share is what we've uncovered at some of clients' businesses after getting the proper tracking system in place.
30% - that's right - 30% of their field time was spent not putting in work.
To throw gasoline on that fire, their 30% did not include the cost of working inefficiently or lazily. Those are completely different issues and costs. And they went on top of the 30%.
The 30% we found were hours the crews assigned to indirect labor tasks. Even if 10% was a perfectly appropriate number for these contractors - and in some cases it was - that still meant one out of every five hours was wasted.
Imagine how much more money you'd make if your field crews got 20% more work done for the same cost?
Kind of hits you right in the stomach, doesn't it?
Here's what you need to do.
- Update your cost code list to include one or more tasks that you consider to be indirect. If you choose to only offer one indirect code, call it "miscellaneous".
- Update your timesheets.
- Teach your foremen what activities should be charged to the indirect cost codes.
- Run weekly reports showing direct hours, indirect hours, and billable hours (hours charged to job that aren't over-budget).
- Take necessary action to keep the indirect hours in budget.
Ron Roberts teams with Guy Gruenberg as The Contractor's Business Coach. They show contractors how to grow their businesses profitably. To sign up for their FREE Newsletter or join their Private Club, visit www.FilthyRichContractor.com.