I ended up writing a client a check for $200,000 because I
made a pretty big mistake. I call my my lawyer. I'm like,
hey, you know, what did we miss? And he goes through our contract
and goes, you need to have an exhibit in your contract that
states the billable rate.
Welcome back to the modern craft Podcast. Today we are going to
dive into two things. One, a recap of our most recent
contractors coalition Summit, and two, more exciting labor
burden. What is labor burden? It is the total cost a business
incurs to employ a worker beyond their direct hourly wage or
salary. It includes all additional expenses associated
with that employee, such as payroll taxes, insurance
benefits and other indirect costs. So many of us are not
accounting appropriately for labor burden. So Nick and I are
going to dig into mistakes that we've made, what it's cost us
from a financial perspective, and how we account for the labor
burden associated with employees, both, as per Nick's
business and my business, because they are a little bit
different. And then we are going to give you the offer of a free
labor burden calculator if you're signed up for the
newsletter. So definitely hang around. Talk a little bit about
CCS, how much fun it was, what you missed out on, and why you
should sign up for Chicago. And then also diving into labor
burden and how, if you are not accounting for that, you are
leaving a ton of money on the table and most likely putting
work in place that is not profitable.
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I don't think, I don't think people from Omaha were that fond
of me. I was so if you weren't there, you don't understand what
Nick's saying. But I had, I had some I had some fun.
I don't think the people that were there understood what you
were saying. No, I think maybe it was
just me and about three or four people, but I was comparing
Omaha to a lot of different places, and basically saying
that they were similar to Omaha, but Nick and I and Morgan and
Brad and Mark and Doug and a bunch. Bunch of other team
members were just in Omaha, Nebraska for the seventh CCS
event. I believe seventh or eighth, they said, Yeah, which
was fun, different than other events. I think maybe we'll just
take a few minutes to recap your perspective of the event, how it
went, and then, just like some of the takeaways, I think for
me, one of the biggest things that I recognize with this
event, I guess, being more comfortable, being more engaged,
talking to everyone who was there, sponsors, you know,
attendees, partners, everything else. This was the most fun I
had had at any event. And I was looking back on it, and I was
like, we pretty much, like, we worked, we we did a fair amount
of educational training sessions, but like, I feel like
we were all laughing the entire time with everyone, yeah.
I mean, I couldn't agree more. I think, you know, we we ran the
structure is a little different this time, but we still managed
to get through everything that we wanted to. But, yeah, I
think, I mean, it's funny what happens when there's not ideal
situations. And in this particular scenario, it was 105
degrees with 40 mile an hour winds
and humidity
and humidity, and it literally so you're outside, it literally
feels like you're standing in front of a hair dryer. It was
insane. And at one point, you know, it was just hot. We were
done with education for the day. We're gonna go do this event.
And then we're like, you know what? We sent out an email.
Everyone back to the pool. Tabs open, come eat dinner and enjoy.
And I had no plan. I mean, I brought a swimsuit, so I guess I
did plan on going in the pool, but I didn't really think I'd
spend much time in the pool, if at all, and what we end up
spending until like, 10 o'clock that night. And it was, yeah, it
was cool because it was this, you know, the education sessions
are super intense because there's a ton of information
everyone is like, you know, feverishly, you know, taking
notes and trying to ask the right questions at the right
time. And you know a situation, you know where it's after dinner
and everyone's hanging out and chilling, there's so many good
conversations where it's, you know, we just get to know each
other at a deeper level. And you think 30, over 200 people now
have attended CCS, which is insane to me. I told Mark, I was
like, I've really thought we were going to do Nashville, and
that was it, yeah, and, you know, now 200 people have shown
up, just just, you know, attendees, never mind the
countless vendors and plus ones and everything else, like,
that's a lot of that's a lot of people, and to be able to have
one on one conversations and just kind of, you know, build a
a strong community. And that's really what, what it's about.
Yeah, I think for for this one, it just seemed as though all of
the guests there with everything that was going on with whether
it was, you know, just audible and heading down to the pool and
hanging out that everyone let their hair down and right, like
a lot of times, it's a short amount of time, you're probably
not going to be as vulnerable as you should be to maximize the
return on the investment, to open up the window to your
business, to your to your personal life, to who you are,
right? You're going to show up and you're going to have a
straight face, and you're going to act professional and ask the
right questions and say the right things, and it wound up
being with like, the weather, you know, having to change some
plans and somewhat flying by the seat of our pants when things
didn't go in as anticipated, that everyone was like, oh yeah.
Like, everyone, nobody's perfect, right? Right? You can
see into what's going on. You can see into how we're trying to
make this as great as possible. And I think that everyone just
kind of let their guard down a bit and connected on a more
personal level. And yeah, there was professional connection as
well, but I think that it just made for, I don't know, a bunch
of banter, like inside jokes, camaraderie between everyone.
And it got me thinking that for future events, like, to me, this
seemed like a social event, a mini vacation, and also the
educational aspect of it. And I'm like, That's the ticket.
Like, it's the perfect blend of all three, right? We could
create an event where everyone's coming and it's just business,
no talking, no phones, 10 hours a day, where we're just grinding
it out. Or we can create a mini vacation where there's really
great social aspects of it, having some fun, staying loose,
laughing. And again, I look back at this and I'm like, I don't
think. Not at work aside. Like, I don't think I've laughed that
much in a while, like, I'm still kind of smiling thinking about
it was just, it was really enjoyable. Yeah, I had, don't
know if I need to go back to Omaha, might be set there, but
it, it was fun. It was, we love you Omaha. Yeah, I had a lot of
fun, yeah,
no, I'm excited. I think you hit it, you know, we were, we were
there, and it was exactly as you said. It was like a social
event, you know, and be being able to hang by the pool and
just chat, that was super cool.
I think, I think what happens is, right, you're, you're
charging money for this event, and you're trying to deliver and
quantify, like, how much value is there, from like, a
deliverable standpoint, when you like, this was, this was social
proof to me that there's more than just, like, the tangible,
quantifiable deliverables. And there's a lot to be said for
letting your guard down and developing actual relationships.
Well, you're spot on because, you know, we've done it well,
not we've always had the social aspect of it, but there's
definitely been past events where it was more structured and
I didn't build those relationships, and we just
didn't keep in touch after where it's, you know, I have a list of
people that were, you know, I keep in touch with now, and I
plan to follow up with because I want to either, you know,
there's kind of mutual help. It's like, hey, they're working
on something. I want to continue to be a resource. I was talking
to someone. I was like, my biggest thing with this is I
want to make sure that when you leave here, you can implement
it. Yeah, you know what are going to be the missing pieces
that are preventing you from actually implementing this stuff
in the business so well. With that being said, we're heading
to Chicago, November 7 through the 10th. And I mean, if you
want to come, I would urge you to book your ticket. I know we
threw a banger of a discount. You know, a couple weeks ago
when we were in Omaha. Unfortunately, that discount has
expired, but if you want a modern craftsman discount, you
can shoot us a DM and we can get you a discount code to sign up.
But we'd love to see you in Chicago. We're excited to, yeah,
I haven't been, I actually have not been to Chicago. Oh, really,
yeah, I'm excited to be there.
I've been maybe twice. It was a while ago. I really enjoyed it.
It's a nice city, pretty clean city, so I had fun. I'm looking
forward to it, yeah,
well, so we I want to get into something, because I told a
story when we were in Omaha that I think I had a lot of people a
little bit surprised, just based on the the nature of it. So just
to cut to the chase, I ended up writing a client a check for
$200,000 because I made a pretty big mistake. And that mistake,
it was, you know, we were, well, I want to preface this the right
way. We were doing this project. It was a big renovation project,
and we it was essentially this evolving scope. By the time we
finished the project, the project grew by four times the
original contract value, and there was heightened
frustrations, because, frankly, we weren't even the only
contractor on the job site. We this was a job that we kind of
took mainly because of the time in our career that we needed a
project, and some unforeseen circumstances in the market that
prevented us from continuing some other projects, whatever,
blah, blah, blah. All that to be said is we were getting towards
the end, and the client started getting very upset that the
project wasn't done, but it was this evolving project, and
actually threatened one of my guys and said that he was going
to put us out of business. And, you know, I, obviously my guy
calls me and says, Hey, this is what's going on. I'm like, What
in the world are we talking about? You know, we're we're
there every day. We're to look like this place looks amazing.
What is? What is? What is going on? And he essentially said that
our contract was stated. Contract stated one thing and we
were doing another. Again, not really sure what we're talking
about. I give him a call and come to find out we had been
billing our billable rates for all of the labor on the job
site, and in our contract, it state it didn't say anything
about billable rates. So what that means is, I was billing out
someone, say, $75 an hour, which would be, you know, anywhere
from 75 to 100 is a market rate for a good carpenter in Boston.
So we're billing our carpenters out at 75 to $100 but we didn't
have that labor rate defined in our contract. So our contract is
cost plus means we can only build the actual cost. So we got
audited on this project, and they went through all of our
financial records. We. I just gave up. I was like, Hey, I'm
full transparent. I'm not doing anything wrong. Yeah. Like,
here, here, here you go. Here's all the, all the, all the
receipts. And they came back and they said that you've charged,
you've overcharged just $200,000 and we expect you to pay that
back or we will come after you. And I literally wrote him a
check for 200 200 grand, and sent it back to the client, and,
you know, moved on. The
problem the discrepancy this the between what you were charging
they were saying that $75 an hour isn't the cost of your
employee, like you were paying them less than that
exactly. So they were like your your your chart, like you pay
them say it's 35 bucks an hour, right? W2 so then I went through
and it was like, Yeah, but here's the actual burdened rate.
So we'll get to that in a second. But we were making a
profit on the labor, as we should be. So of course, I'm I
call my my lawyer, I'm like, hey, you know, what did we miss?
And he goes through our contract and goes, you need to have an
exhibit in your contract that states the billable rate, and
because, since you're especially being that your cost plus, so
cost plus means you're charging the cost plus a predetermined
percentage fee or predetermined fee, whether that's $1 amount or
fee, I mean a percentage, but if you're going to charge a rate
for something, you can charge a rate, but that needs to be
defined in the contract, specifically or explicitly.
Yeah, so you know it, whether that's labor or say you're
charging an insurance fee. You know you can set a 2% insurance
fee, but it needs to be defined in the contract and agreed upon.
So we, you know, from that point, we spent a couple $1,000
with our lawyer, rebuilt our contract, and now, you know, we
have exhibit in our contract that states every rate. It also
states when those rates can change for fluctuation. So you
have a multi year job like the rates can go up, etc, etc. But
in this exercise, I realized, you know, I wonder if I'm
actually accurate in terms of what this employee costs.
So before we get to that, can we take a step back? How could we
have avoided this? There's the exhibit right, where you have a
billable rate, or a market rate, or not a market but like a
billable rate, or, I guess, you could have had your cost plus,
but then you would have had to had within your contract or
within your invoicing cost for all of the cost associated with
that employee, right? So, like, you would have had to have
either a percentage, percentage or an hourly cost for payroll
taxes, workers comp, general liability, all that stuff. So
that's the other way that you could have avoided this. You
didn't have either you just you were charging a billable or a
market rate, and they were basically saying, well, this
isn't the actual cost, because you didn't spell out that there
were costs above and beyond, right? Just what their W, what
you're paying them.
Yeah, right. So you know, that project goes, we learn from it,
and we, we dig in real hard on All right, what's the true cost
of this labor? And I want to, I want to say something, you know,
like high level, if you're, if you're self performing labor,
you should be making a profit on that. And I'll give you an
example before we dig into like, the specifics of burden. But I
had a client after this, like, after that, client a couple
years later, say, Hey, are you charging me a labor rate that
includes profit for your labor, and then you're getting your
cost plus on top of that? And I said, I am. And the client said,
That's double dipping. I said, Well, I don't really love that
term, but I guess if you want to look at it that way. And she
said, Well, I don't want to pay a markup on a markup. I said, No
problem. I said, what we can do is, and rather than use our in
house labor, I'll just, I'll sub everything out. And she said,
Well, what do you mean? I'm like, I'll just sub it all out.
It, you know, the market rate for a carpenter is $75 so I'll
just sub it out that way. When I transfer it over to you, you're
paying the exact same price, but at least I'm not making
additional profit. And she She smirked, and she said, Well,
that doesn't change anything. I said, right? I said, the
additional profit, and
that's because when a subcontractor gives you a number
that you are paying them, they have profit in it for
themselves, right? And then you're having your company
profit on top of that, right? And so that's like, what
essentially you're doing, even with in house labor, you still
are accounting for your profit, but then you have your plus on
top of that, right?
And as you should, because if you have in house labor. You
know, there's costs that go into keeping those guys in house.
It's everything that goes above and beyond training them, the
culture, the work parties, the work events, the bonuses.
There's, you know, and just then, you know, that's the
overhead associated with it that doesn't necessarily always get
captured in. And the the rate, but then the profit you're
taking the risk of having employees, you're like, that's
you should be that is a risk that you're incurring, so you
should be profiting for that. And so the client ultimately was
like, well, that doesn't make sense. I'd rather work with your
guys. I said the price is the same either way. Yeah, you're
gonna get your note, you know what you're going to get with my
guys. You know, we're a company, you know, the company with the
company culture. And she was like, Okay, understood that
makes that makes sense to me. And never, never had an issue
beyond that. But we went into this kind of we literally
printed out a year's worth of transactions, 1000s of line
items, and just went through and basically said, you know, is
this associated with we did two exercises, we this is when we
really started digging into the cost of running a job versus
running the business. And basically, like said, if we
don't need, if we had no projects going on, would we have
this cost? And if the answer was no, then it was a job cost. We
made sure we were billing for it. But we did the same thing
for labor, and we just kept going through line by line and
highlighting things that were associated directly with an
employee. So, you know, obviously payroll tax for 1k
contribution, health insurance, you know, dental, vision, all of
that stuff is kind of pretty straightforward, yeah, but then
it was the vehicle. And so then we built out this spreadsheet
that, you know, okay, well, how much is the vehicle, you know,
what's the monthly payment on that vehicle? What's the
insurance rate for that vehicle? How much are you spending in
fuel per month? And we basically built all this stuff out on a
monthly cost, and that way we'd have a monthly cost, and then we
could divide it down to week, day and per hour. But that, as
we continue to do it, and we do that, we look at this thing
every six months. As we continue to do we kept finding things. So
I'm actually, I'm going to pull it up, because I just wanna make
sure
you have different burden rates for different types of
employees. Or are you averaging that for all employees,
different different rates, uh, different rates for different
roles, different roles. Yeah. And I'm gonna explain, and there
can be a swing in what our markup is. I'll get that. But so
just going down the list, we have cell phone like, are we
paying for their cell phone their vehicle? Are we giving
them an allowance, or do they get a company vehicle? You know,
how does that break down software? So we essentially, we
found that about $1 per hour is what it costs us for the
software stack that each of these employees have, and
that's, you know, their project management platform. License,
Adobe, license, Blue Beam license, the the $8 a month I
pay for their custom email, you know, an amortized cost for
their laptop, iPad, so on and so forth. Workers Comp based on
what their role is. Their workers comp is different, you
know, a super versus a carpenter, verse, you know,
office, their workers comp rate changes, yeah, and same thing,
which in general liability, their their general liability
changes based on that role. So then we have this direct cost,
which, you know, we now we understand, oh, you know this,
this employee, just for example, like, you know, hey, this guy
makes, you know, we pay him $24 an hour, all right, that
actually costs the company so far 30 bucks an hour. And then
we factor things in, like, how many company holidays are they?
How much PTO do they get per year? And then we make sure that
we understand the PTO cost, so that $30 just turned into $35
and then we look at, okay, now what's the market rate for that
particular role? So market rate for that role would be anywhere
from like 50 to $65 an hour. So we'll just call it 65 you're
making 30 bucks an hour on this this role, the as they get, say
they start making $26 $28.30 say that. Say the role that they
fill ranges from 25 to 30. Our rate, our billable rate, doesn't
change. Yeah. And the reason we felt comfortable with that is
essentially, if you're if you're on the low end of that rate of
that that role, you're going to make more mistakes, and the
company is going to be paying for more, basically paying more
to fix things and or or paying for your inefficiencies. You get
paid more based on less mistakes higher efficiency. So you know,
we're not necessarily tracking the inefficiencies, but in
theory, you know the person that's making on the low range
is going to make more mistakes so that that that margin is
larger. So we're we're capturing those inefficiencies in that
larger margin, and as you get to the top end of. That that rate,
that margin, is smaller, but you're making you're essentially
dipping into it less for
mistakes. I mean, you also, from a job perspective, don't know
who's going to be on what job for how long, even if you're
bidding work that's six months out if that employee is going to
be with you. So you have to understand when you're looking
to replace those, those people, if they leave, or if you lose
them, or for whatever reason, that you replace with somebody
who fits within that range. And it avoids having to actually
have, like, an exact dollar number for that employee, and
then saying, you know, it's this much for this employee, this
much for that employee. You're covering a range within that,
that the cost of that employee, I think that something that I I
realize, even with your labor burden that you should be
accounting for, is like downtime and inefficiencies. We don't
work in a perfect environment, in a perfect world. And to bid
something, to price something, to have labor rates that are
based on 100% efficiency, like you might have a job, and if it
rains that day, you're going to have less productivity than if
it didn't. So you should be somehow accounting for that
within your labor burden. If you think that you're going to get
100% 100% efficiency to for 40 hours a week, you're foolish,
and you're going to be losing money. And that's something that
I did for a long time, even as the owner of the business, if I
want to be able to have 40 hours a week on the books that I can
charge my clients, I probably have to work 50 hours a week. So
can I capture those additional 10 hours? There's a lot of
downtime associated with the work that I can't necessarily
bill them for those 10 hours. So how am I building that into my
rate to ensure I'm getting paid for those hours, and I don't
actually have to work 50 hours in order to just invoice for 40?
Well, that's so we have a line item on there called break even
hours. So essentially, you know, based on that margin, assuming
that they are operating efficiently, you know, it that
particular role that I was just giving as an example, they need
to work 21 hours a week to be billable. If they work less than
that, that means we're making, we're losing money on that
employee. If they, if they're any hour that they work above
and beyond that is additional profit. So if you think, you
know, 21 hours is half the week, you know, once they hit half the
week, it's great. Now you're in the profit. You're profiting.
But what that does is it helps capture the downtime, the
inefficiencies, the in between work, the company events, the
you know, the meetings that they're attending as a company,
the what we call general time. And we take this information, we
basically run a report every week and look at every employee,
how many hours they worked, and then what, what, what profit
we're making on those hours. So that way, we can see if you
know, if we're dipping into general time, you know what's
going on. Why are we spending so much time on general and it
might be because that, you know, that particular employee is
working on something that is for the business or or higher level,
or they're in between jobs, but at least we're looking at it and
understanding it on a regular
basis. I looked up the definition of labor burden, and
like in layman's terms, it's the real cost to your business for
every hour an employee is on the clock, not just what you pay
them, right? So you have to understand that another mistake
that I made forever, right? Where it's like people tell you,
Oh, mark them up 15% and then mark that up 15% for your
profit. That it doesn't work that way. You should be
accounting for all of the costs associated with them, and then
your profit and if your cost plus, like Nick, at that point,
you need to have your plus above the line, on top of the on top
of that cost as well some typical labor burden components.
Nick mentioned a bunch of these, but payroll taxes, workers
compensation insurance, General Liability health insurance
premiums if you're paying them, retirement contributions, if
you're paying them, PTO, vacation, holiday, sick days,
training, onboarding, downtime, work, vehicle costs,
maintenance, insurance, fuel, phone, tablet, software, tools,
safety gear and uniforms. So those are a lot of costs that go
into the price of having an employee that if you are not
capturing them, you're going to be losing a lot of money fairly
quickly.
Yeah, and it's, you know, a couple things on on that, one of
them going back to PTO for a minute. You know, you also have
to consider, okay, well, you know, I'm just using that as an
example, but PTO we get this is factoring in, like, two weeks.
So two weeks of PTO equals about $2.40 an hour. That's. Direct
cost, meaning that that's what it costs to send that person on
PTO for two weeks. But something to consider is, if that person
needs to be replaced while that other person is out, or someone
has to take the role of that person, you should be accounting
for that as well. And again, to simplify this, like we I mean,
if you're listening to this when you're driving or working, you
know, well, actually, we actually have a downloadable you
can have this Excel. It's completely free. It's on our
website. We'll put a link below. But the the simple way to
summarize this is, if the only reason you're spending that
money is because of that employee, that's part of the
cost, yeah, meaning, like, that person goes away, that that
cost, in theory, should go away. Maybe it's harder to get rid of
a truck because it's, you know, you can't just return to the
dealership and say, I'm done with it. But, you know, in
theory, that person goes away, the cost goes away. That person
is there. You incur that cost. I
mean, it comes down to being like a direct cost, right? If,
if your cost plus, and you have your direct costs, and that's
what you're putting your your builder percentage plus on,
like, that's a direct cost associated that job. If that, if
that employee is not driving to that job, to work, he does not,
or she does not, need that truck, right? Right? They don't
need the uniform, they don't need the cell phone, they don't
need the software. So that cost is directly tied to the
execution of that project and the production of that project.
So understanding all of those costs that go into your direct
costs to make sure that you're accounting for that needs to be
accounted for. And you know you're you're a smaller company,
maybe your employees don't have all of these, right? They don't
have a truck, they don't you, maybe they don't have
contribution into retirement, maybe they don't have health
insurance, like you have to understand what's going into the
cost of these employees. There's still costs associated with
them, even if it's just inefficiencies that you need to
account for to make sure that you are not bearing the cost of
those employees and your the jobs that you're doing and your
clients that you're working for, are
one of the questions that comes up is, do we use a flat
percentage, you know, to mark all of our labor up? And the
answer is no. And the way we do it is we look at, again, market
rate and and follow up. Question is, well, how do you know what
market rate is? Okay, that's good question. If you were to
hire a 1099, Carpenter, what are they going to charge you? Oh, it
depends. Well, what's it depend on? Well, it depends on who I
talk to. It's like, okay, but that relate is probably related
to their skill level. Sure, you probably have some guys out
there that are charging an arm and a leg because they just want
to charge more money, and they they're maybe they think they're
more valuable. And you probably have the opposite of where guys
are not charging enough for their time. But what is the
market rate if you were to go hire a carpenter on 1099, and it
for us, 75 to 100 sometimes 120 bucks, depending on the
carpenter. Okay, well, then you should be accounting for that.
And at the minimum, just hit market rate. If you feel as
though your guys are better, or you can sell the premium, sell
the premium. But if you know, and what that does is, number
one, it makes it keeps things consistent. But number two, if,
say, your employee does take PTO you know, or has to, you know,
gets hurt, or quits whatever, whatever the case is, and
you're, you're moving in the job, and you have to replace
him. And maybe you can't make a hire, but you can get a 1099,
guy in place now, you now, everything stays the same. You
know that they come in, hey, I'm $75 an hour. Great. I was
billing, you know, billing my guy out in $5 an hour. So it's
the same it's the same thing. Now you're just not, you're just
not necessarily profiting on that, that person, but
ultimately you're because they're a subcontractor and
you're subbing it out.
But this, this is why, like so many times, people want to just
say, well, what are you charging for your employees? What do you
charge for yourself? And it's completely irrelevant, right?
Like you're even if, simplest terms, you're doing market rate,
like your market's different than my market. What you can
charge for your market rates different than mine. But then if
you're looking at it from this, like fully burdened rate, your
burden rate is going to be different than my burden rate.
One, because the employee might cost a different amount. But
then two, your business is structured with different
percentages and different costs that you're putting on top to
get that burden rate. So you have to understand what works
for you and what Nick charges, what I charge, two completely
different things. So asking, you know, what's your what's your
builder's fee percentage for cost plus builder, or what are
you charging as a TNM contractor? Like, it's
completely irrelevant. You the question would be like, how are
you coming up with that rate? Because if you understand how
you're coming up with that rate, if you use this labor burden
calculator, then you can plug your own numbers into it, and
you have a basis, like, for me being TNM, it's closer to, like,
the market. Great type of perspective, but I need to have
what's called a loaded labor rate. So my loaded labor rate
that I'm presenting to the client contractually covers all
of the burden, plus the overhead and profit. So like, I'm not
putting that plus 1015, 20% on top of that labor rate. So I
need to make sure that my loaded labor rate accounts for the
fully burdened rate plus my overhead and profit. So my
number that you see, as far as a labor rate in my contract, would
more than likely be higher than Nick's, because Nick's labor
rate within his contract then gets an additional builder's fee
put on top of it. So you have to make sure contractually, you
understand how you operate as a contractor, how you're charging
and contractually, legally, how those numbers are supposed to be
communicated and written within your contract. But I know mine
is different. It's a loaded labor rate, and there's no
percentage being applied on top of that, so I have to explicitly
state what my low loaded labor rate is for what roles, what
employees, to ensure that I protect myself on the back end,
and I can actually charge for that as far as like this, this
burden rate. And starting to determine that, did you was it?
I know that you had this one job where it was an issue, but you
already started understanding like, what your your burden rate
was, and what you needed a profit. But like, how did you
start figuring that out? How did you understand what to put on as
far as profit goes? Like, what was the discovery process like
for you?
Honestly, I think we just knew that. I mean, early it was it
was nothing, it was simple. It was just, you know, we're gonna
bill a rate. And we didn't. We didn't know. We just, yeah,
we're billing a higher rate, because we knew that labor
wasn't just labor. And I think on one hand, I was lucky in the
sense that I just went right to market rate. But truthfully, we
had, we had some employees that were, we were billing out at
market rate. But when we went back and fully burdened them and
understood what their costs were, we were losing money,
yeah, and I mean, some of like, one of them, I remember it was
literally $2 an hour. So basically the company was paying
$2 an hour for that employee. So we said, All right, well, that
employee there needs to become more efficient, or we need to up
their rate, and we ultimately let like leaned on finding more
efficiency to make sure that they were capturing that we were
basically capturing that employees cost against multiple
jobs rather than just one. Yeah, but you know, I think early on
we were just, you know, we weren't considering it as a
profit. We were just considering it as, this is a labor rate, and
it's covering the cost of the, you know, of all the direct
costs related to that. Yeah. But to your point, you know, it's
just like, it's just like, running the business, you know,
until you really understand what it costs you to to do something,
you know, you're just, you're just flying by the seat of your
pants, yeah, and, you know, it's, you know, one of the
examples we brought up at in Omaha was, you know, I had a
year a couple years ago where every job was super profitable.
So when you look at individually, you know, man,
we're killing it. We're making great profit. But then you, you
bring all that profit down, and then you, then you run your
expenses against it. We were spending more. We were spending
more on more overhead than we were collecting in cash. So
individually, projects can look really profitable, but when you,
when you bring it all the way down to the bottom, if you're
spending more than that profit than you are bringing in for
profit. It's gone.
So let's, let's unpack how, like, how that happened for you,
yeah, and potentially how that may happen and for and correct
me if I'm wrong. But one way that that could happen is when
you are determining your costs, whether it's your burden or it's
your builder's fee and your percentage. It's based on the
overall volume of work, or your your revenue that you're
generating in a certain year, right? So you're saying, We're
doing X amount of million dollars, or whatever that
revenue is, and then you're trying to allocate a percentage
per hour, per unit cost of that job that you're applying to
those projects based on a proposed amount of work that
you're putting in place. So if you end up with a lighter year,
say, you sold $10 million the year before, you've now
redefined all of your numbers based on your projections of $10
million or more for the next year, maybe you project that
you're going to sell 12 million and you only sell seven or eight
now, the amount of work that you're putting place, that
percentage markup actually needs to be higher, because you have
less jobs, less unit costs, less direct costs that you can apply
that mark. Markup to so yeah, it all looks profitable, but you
actually are not generating enough direct costs for your
business to apply that that markup to to cover your
overhead. So at the end of the year, you didn't have enough
work to cover your overheads. You actually your jobs were
profitable. The numbers worked out. You managed them correctly,
but you didn't bring in enough direct cost or sell enough work
or generate enough revenue to actually cover your overhead, so
your business didn't make money.
Yeah, I mean, we can bring this back to labor. So that's why we
have the break even number, where every hour, if you're
let's say we're building this guy out 65 bucks an hour, and he
costs the company 35 you know, we're making $30 per hour. That
sounds like a lot of profit, but say he only works 21 hours a
week, or, I'm sorry, let's say he works 40 hours a week, but
only 21 of them are billable to a job. Well, now every that $30
an hour I was making now goes to paying the other 19 hours, yeah,
so at the end of the week, zero profit. And that's what happens
on the bigger scale of overall revenue. Where it's you know,
you're just simply not working. You're not doing enough billable
work. So all of your your your profits are eaten, eaten up by
the general tasks, the non work, yeah. And for me, you know, it
wasn't that I wasn't aware of that at the time. I was just
heavily investing into marketing and basically operating at a $10
million a year company versus, you know, what I was producing
was closer to seven,
yeah, so it's all of those costs that aren't directly tied to the
job, like your direct costs and what would be like, quote, above
the line was all making sense. Your numbers worked out. It was
everything that was below the line, like the overhead of your
business that is not directly tied to job costs that was too
high based on the amount of work that you were putting in place,
right? So if you if your overhead is, you know, a million
dollars for that year based on a $12 million revenue projection,
you have to make sure that as you go each quarter and as
you're lining up these jobs that you are understanding, hey, we
need to sell and generate $3 million worth of revenue each
quarter if we're under that our percentages that we're charging
for our markup, like, what would be your actual plus fee? That
needs to go up, or else you're never going to cover your
overhead, because you're just not putting enough work in
place, right? So that's, that's a very that's as clearly as I
can put it, where it's like, you have to understand what your
projections are for the year, and you have to make sure that
you're maintaining that, or if you're not, that you're
adjusting your pricing, or finding efficiencies if you've
already contracted that work, or finding a way to put that work
in place that doesn't cost You as much money because you've
built an overhead based on a $12 million projection, and you're
only putting $8 million work in place. You will never cover the
overhead of that business,
right? And you know, this goes back to the conversation we had
a couple weeks ago. That's a big reason why. I mean forever. I
just, I just worked. I didn't, I didn't look at what our
projections where I shared an email last week about, you know,
the fact that we lost $2 million off our revenue projections, and
how that, I would have freaked out before, but now I look at
our revenue projections and our cash flow forecast and
understand, Okay, well, all right, we're gonna have a couple
tight months, but and a year Where we'll be good, yeah, and,
and without knowing that it's you, you. I mean, for me, I'm
like, I'm an anxious person. I have, like, if I don't, you
know, I don't think about what's happened to me. I'm not, I don't
slip into depression, but I'm constantly slipping in and out
of anxiety and, and it's self inflicted often. And for me, you
know, I think I, I can't remember if I shared this on the
podcast, but, you know, recently, I just, I was feeling
wildly overwhelmed with stuff on the personal side, and I felt
like I was falling behind, and I had this mountain of mail
sitting on my desk, and I was just like, I know I need to go
through that. And I need to, I need, I need to go through it
and, like, make sure I don't have any past due bills. And
literally, that day, I walked out to my truck being booted
because I had unpaid parts. And that was, you know, it was so
stupid, like, I a friend of mine texted me, goes, they sent me a
picture of my truck. He goes, is that yours? I'm like, Yeah. He
goes, you're an idiot. I'm like, yeah, 100% and I the next, I go
get my truck back, come back. I'm like, I'm sitting here, and
I'm gonna go through all the mail. And it was, I remember
every envelope I opened, I was like, freaking out. I'm like,
this is just gonna be, I'm gonna get, I'm gonna write down a
number that I'm I don't know how I'm gonna pay. This is gonna be
so. Frustrating. And I do go through all the mail. Oh, that's
it. And it's in my mind I made this like mountain out of
nothing, when, you know, the reality of it was, oh, it was
primarily the parking tickets I didn't pay because I'm an idiot,
and then a handful of other things that were fine. And, you
know, and it's the same thing with business. It's, you know,
you go through, you know, anxiously, like, hoping that
you're just going to continue to work, work, work, work, work.
Bring in money, bring in money, bring in money. But, you know,
for me, five years ago, that's all I did. And then I
overwhelmed my team and say, Hey, I need you to go here, and
I need you to go there. And, like, we got to get this job
done. And hey, before you finish that one, go to this job. And it
was a nightmare. There was no organization and sure, like our,
you know, our revenue numbers were up, but did they need to
be? Yeah, I didn't know because I wasn't trying. I didn't know
what we were spending on overhead. Now, you know, I know
what we spend on overhead, so I know based on the overhead that
we're spending, we need to do X amount of dollars per year, and
that number is plastered on the wall, and it's, you know, we
meet every week and say, All right, it's June. We're halfway
through. Did we are we halfway to our revenue goals? I had this
conversation with someone at contractor coalition Summit, and
they were saying, You know what their goal is for the year? And
I was like, Well, what have you done to date? And it was, I
think it was like a quarter of the target. I said you're
halfway through the year. Are you going to do 75% of your work
the last six months of your year? Yeah, well, probably not.
I'm like, right so right now is the good time to adjust that
projection, because if you're going to go the rest of the year
thinking you're going to do, you know, $5 million when you've
only done maybe a million dollars so far, you know you're
going to be pretty short. And you're spending money, you're
spending overhead, like you're going to make $5 million
so I'm looking at, I'm doing, I'm typing some questions and,
like, some prompts right here. So this is why it's so
important. You hear everyone say, to know your numbers, and
it's that's not just, Hey, I figured out my numbers for last
year. I can walk away from that. We're good to go. You have to
constantly be monitoring this and like, I guess it can become
fairly convoluted, and it can become fairly complicated and
overwhelming. But I it's not necessarily like you have to
know your numbers with regard to what's being, the type of work
that's put in place, how much, what it costs you, what you
should be marking up, what your overhead is. But just if you
look at bigger picture, like, you know, understanding how
you're tracking as far as revenue, because everything is
based on that, your overheads based on that, your
profitability is based on that, how much work you should be
putting in place, what you're selling at the end of the year.
And the fear is that you're putting less work in place,
right? So you're not covering your overhead, so you're less
profitable. But there's also risk in doing way more work that
you anticipated. You're bringing in money, right? If you sell two
and a half million dollars work this year, and everything was
based on one and a half million dollars or projections like
you're going to make more money. But what you have to be careful
of is your overhead will probably go up, because in order
to put more work in place, it's going to require more input,
more resources, so your overhead will go up. One of the dangers
there are tax projections right where it's like, you don't
realize you made a million more dollars this year and you didn't
monitor that to Yeah, like, your overhead probably went up, from
a numbers perspective, so the percentage dropped. But like,
what about all of that additional profit that you
didn't account for, that you didn't put money aside for, to
pay your taxes at the end of the year, when you made a million
dollars more, or you had a million dollars more in revenue,
your profit was definitely not a million dollars more. But if,
if, typically, in years past, you've paid $20,000 a quarter,
you probably should have been putting more money in. So if
you're not accounting for that like the dangers aren't just
coming in on the low side of revenue, but also, if you're
going way over understanding how you should be adjusting and
paying your tax liability quarterly so that the end of the
year doesn't come, and you're like, oh my god, I owe way more
in taxes than I thought, and I thought we had money in the
bank, and we were spending money probably more frivolously than
we should have, from a business perspective. So there's dangers
on both ends of the spectrum that you should be aware of. How
are we what's the best way for us to peep to get people the
labor burden calculator?
We'll put it. I mean, if you go to modern craftsman.co, up on
top of the there
should be a drop down.
Yeah, it's so I'm just gonna put. Up the website to make sure
I'm saying it correctly. But yeah, if you go to modern
craftsman.co, shop extras, you can get that. You can click
right on that labor birding calculator, and you name an
email and we'll send it to you. And it's an Excel file, so you
can open it up and everything is self explanatory. It's right in
there, and it walks you through calculating that labor burden. I
think you go through that exercise. If you have questions,
obviously, email us hello@monarcrossman.co I'm
typically monitoring that email. I am monitoring that email, but
why don't we will also attach it if you're if you're not part of
our newsletter, you should be and you should head over to the
website and sign up for the newsletter. But every week, we
send out the show notes and we'll include the attachment in
that email. Are
we, should we do that, or should we make them sign up for the
newsletter?
Well, if there's that's what I'm saying, if, if they sign up for
the newsletter, they'll get it.
Oh yeah, that's what I'm saying. I'm saying, like, we'll attach
the link to sign up for the newsletter, and you can get it,
but like, we're not just giving them the document, right? Should
we?
No, no, the show notes are only for people that are okay. All
right, perfect, yeah. So we'll put, we'll put a link below the
show, The Show, the show, I'm sorry, the show notes on the
podcast. Yeah, platform of your choice will have a link to sign
up for the newsletter. Yes,
no, you gotta, no, no, yeah, you gotta at least get on the
newsletter. So what we should also do Nick is we should have
one of our workshops where we allocate to explaining how to
use that labor burden calculator. So that if you
download that and you want to know how to use it, we set an
hour aside at some point to hop on and have like a real life
walkthrough of what that is. So all great information, something
that I kind of if you are not accounting for labor burden and
you don't know what you should charge. You don't know your
numbers right now, but you want to get something in place and
start heading in the right direction. I would recommend
whatever you are paying an employee to 2x that, and then
whatever you want for profit on top, right? So if you're if you
are paying an employee $20 an hour, 2x that, they're going to
cost you 40, right? So you're going to break even at charging
your clients or billing your clients at $40 an hour. So then
put whatever you want as far as profit and overhead on top of
that. But like, if you want to get started and right now you
don't understand all your numbers to even get into this
labor burden calculator. That's a great way to at least get
started and make sure that you're somewhere in the ballpark
of charging like, what do I charge for an employee 2x their
number, and put your overhead and profit on top of that.
That's going to be my little bit of a tidbit for you to at least
get you in the ballpark of the right direction. And the one
last thing I want to talk about with regard to this Nick. You
may have something else, but I believe we were in at IBS maybe
two years ago, and this it was an older gentleman. He was
retired at this point, his company did bathrooms like small
bathrooms, $20,000 $30,000 like, not huge jobs, and their
specialty was just turning these projects over really quickly.
Bathrooms are difficult to turn over quickly. So he created
this, like business niche for himself by doing this. And he
mentioned, with regard to labor burden that he realized early on
that he made more money when his guys and girls worked overtime.
And I was like, how does that work? Right? You're paying
whether it's time and a half or double time for them to work
overtime. And what it came down to was that much of his labor
burden would not be 2x when he paid them to work overtime,
meaning you don't need another truck, right? If you have an
employee and he already has a truck and you're paying him for
overtime at 2x you don't need to bring another employee on to put
in another truck, right? So he could pay his smaller amount of
employees an overtime rate, but his overhead of his business to
put that work in place didn't necessarily double. He didn't
need to pay two extra insurance. He didn't need to buy two trucks
for that person. He didn't need to have two cell phones. So like
a lot of the numbers that were associated with that labor
burden don't double when you're paying somebody overtime. And I
was like, I thought that everyone tried to avoid paying
overtime because it made them less money, or they couldn't
capture that cost with regard to what it cost them to put
somebody on a job, when in actuality, there were a lot of
items. Dollars that would be applied as an overhead to this
labor that he doesn't actually 2x even though he's paying the
the rate for them is more right? So if you have two employees and
your your billable rate for them is $35 an hour, whatever it is,
it's 70 bucks an hour. Now if you have one employee that's
paying overtime, what you are paying them per hour may go up,
but the burden, the labor burden, associated with that,
probably doesn't go up. So when you look at the overall hours
going in, it was actually costing him less money to put
work in place by paying employees overtime, which he
wouldn't have known if he didn't understand the labor burden. And
I thought that was just like, a really neat perspective. That
was like, Holy crap. I never thought of that.
Yeah. I mean, it's a similar perspective around 410s you
know, when guys switch to five eighths versus 410s and the
argument is, you've you've lost. You basically reduced the
mobilization, demobilization by two, yeah, now you're doing,
you're working, you know, you're working the same amount of
hours, but not setting up, cleaning up
guys, the only way to know this is to actually measure it and
track it. And you know, you'll hear us talk about that a lot if
you, if you joined us in Omaha, you You heard us, you kind of
beat that into the education and it that's what it comes down to.
Is we've, we've, as you heard in the beginning, I've made some
big mistakes and expensive mistakes, and I want to continue
to share a lot of that here and through our newsletter. I'm a
little bit more open and candid in the newsletter, because you
guys just read it. But the whole point is to share, you know,
what, what, what mistakes we made, and how we learn from
them, and how you can avoid them. So if you want to be a
more profitable business, you know, take it from us. This.
These are these, the little things that can make really big
impacts. Yeah. Well, guys, appreciate you listening. If you
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