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Where You Should Put Labor Burden

Originally published: 10.01.15 by Ruth King


There is a debate over where, on a profit and loss statement, to record labor burden, such as the FICA, Medicare, health insurance, retirement and truck expenses that are incurred for field personnel.

Some contractors state that labor burden goes in cost of goods sold because these expenses are paid for field employees. Other contractors put them in overhead costs.

There is no right answer — and it doesn't matter when you price your service and replacement jobs using my net profit per hour method.

The only time I always put burden in direct cost is for union cotractors, because the union charges a "burden" for each hour of labor used by the company.

Direct cost, or cost of goods sold, is a cost that is incurred when you sell something. Labor is definitely a cost. But, only labor expended on providing that service or performing that replacement.

If you put labor burden in direct cost, then whenever there is a training hour, a meeting hour, a vacation hour, a holiday hour or any hour you pay where you could not bill a customer, that portion of "burden" has to go into overhead.

In addition, most truck costs such as insurance or loan payments are paid, whether or not the technician has a billable hour or not. That is an overhead cost rather than a cost of goods sold.

In the larger picture, however, it doesn't matter where you put labor burden when you price service and replacement using a net profit per hour calculation.

This is why I never divide by 1-GM anymore for pricing. You miss the overhead portion of cost pricing this way.

True profit is determined by net profit per hour, calculations which take both direct and overhead costs into consideration. Labor burden is included, whether you put it in direct or overhead cost.

Decide how much you want to earn for every billable hour your company has. Then add the overhead cost per hour and the direct cost of the job. It's that simple:

Technician earns $25 per hour.

Technician labor burden is $8 per hour.

Overhead cost per hour when labor burden is included in overhead is $40 per hour.

Overhead cost when labor burden is NOT included in overhead is $32 per hour.

Desired net profit per hour is $100 per hour.

How much should the company charge to replace a condenser fan motor? Assume it takes 2.5 hours of labor and material cost is $75.

Using labor burden in Cost of Goods Sold:

Labor Cost = $25 +$8 = $33 * 2.5 = $82.50

Material Cost = $75

Overhead Cost = $32 * 2.5 = $80

Profit = $100 * 2.5 = $250

Customer pays $487.50

Using Labor Burden in Overhead:

Labor Cost = $25 * 2.5 = $62.50

Material Cost = $75

Overhead Cost = $40 * 2.5 = $100

Profit = $100 * 2.5 = $250

Customer pays $487.50

It doesn't matter where you put burden as long as you put it in the same place every month.

 


Ruth King is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. She has more than 25 years of experience in the HVACR industry, working with contractors, distributors and manufacturers to help grow their companies and make them profitable. Contact her at ruthking@hvacchannel.tv or call 770-729-0258.

 


About Ruth King

Ruth King

Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written two books: The Ugly Truth About Small Business and The Ugly Truth About Managing People. Contact Ruth at ruthking@hvacchannel.tv or 770.729.0258.


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