December 1, 2020

Measuring — and improving —  your labour situation


Mark Bradley 2020 was one of the most bizarre years on record, a year where nothing went as expected. First the virus, then the shutdown, then the anticipated economic collapse from the shutdown that turned into a relative boom in demand for many contractors. As usual, this opportunity merely exposed another challenge:the availability of labour.

The labour problem exists for everyone in the green (and white) industries and it is a legitimate challenge. It is, by far, the most commonly cited challenge I hear when discussing business with fellow contractors. Sure, there are things you can do to make your company more attractive to the right talent, but talent is in short supply. It has never been more important to make sure the labour you do have is as productive as possible.

If you’re a business owner or manager, here’s a primer on how to tune your business in the next year to maximize productivity.

Set profitable and productive benchmarks

A couple of years back, I wrote a series of articles about benchmarking your labour. If you haven’t read them, it’s worth looking back in the Landscape Trades archives to find them. But I will give you a quick summary here.

Your Field Labor Ratio could well be the single more important measure of your company’s productivity. It’s pretty easy to calculate. Here’s how:
  1. Split or divide your payroll expenses into two groups; one is field labour, the other is overhead labour. Categorizing each employee is this simple: if they work on a job producing billable work, they belong in field labour. If they work as supervisors or administrators and their time is not included in estimates, they are overhead labour.
  2. Next, add up the cost of wages of your field labour group. Don’t include taxes and labour burden.
  3. Then, simply divide your field labour wage costs by your total revenue or sales. For example, a company earning $750k in revenue last year, and spending $200k on field labour wages, would have a labor ratio of 26 per cent. (That’s 200 divided by 750.)

This number is such a powerful productivity KPI (key performance indicator) because it measures exactly what you want to maximize. The lower your ratio, the better.  

Now come the industry benchmarks. Profitable design-build companies typically have field labour ratios between 20 and 25 per cent. Maintenance companies, because their work is much more labour-intensive with few materials, typically spend between 30 and 40 per cent.  If you are new to this, these are the numbers you want to strive for.  

You can easily measure your field labour ratio at the end of every month by dividing your revenue by your field labour wages to make sure you’re on track. Don’t panic too early in the year — the number will likely start out a little wonky, but by July, you should start to see your actual ratio take shape.

At this point you might say, “Okay, I know my ratio and I’m higher (meaning less productive) than industry benchmarks. What do I do?”

First and foremost, don’t worry. Many companies are higher than the benchmarks, because many companies don’t make enough profit.  But here are some important tips to improve that ratio.

Track and reduce unbillable time. This is my Number One tip. Most companies lose far too many potential revenue-generating hours stuck in traffic, walking around the shop, re-doing work, picking up materials all over town, and far more. Your crews should be recording payroll hours on-the-job and off-the-job every day, and you need to maximize time spent on-the-job.  

Do whatever it takes to maximize on-the-job payroll hours, including starting earlier (to avoid traffic), eliminating pickups wherever possible (get stuff delivered on-site!), optimizing your driving routes and more. Be creative! It’s worth it.

Give crews a labour-hour goal for every job. It never ceases to amaze me how many owners are uncomfortable with this concept. How would any professional sports team evaluate athletes without a) statistics, and b) wins or losses? Your jobs are no different. Give your foreman the estimated hours and inspire them to beat it. Without those hours, they do not have the tools to evaluate and improve their own performance. Even worse, they will believe because they’re not scored, it doesn’t really matter.

Track and report job hours as often as you can. Give foremen the feedback they need to improve. It is entirely possible that every day, on every job, the foreman knows exactly how many hours were estimated, how many hours were used, and how many hours remain to get the job done. There are several apps built specifically for our industry that do this task for you — for pennies per hour. Use them. You could never possibly get data this accurate on pen and paper, and certainly not from random, off-the-top-of-your-head conversations. Technology has made the dream of always knowing the score an easy reality. Don’t overlook this power.

A ratio to evaluate potential jobs

If you have more potential work than you can handle, congratulations! Now it’s time for some tough decisions. Which jobs will you do, and which will turn down? Either way, you will be busy, but with the right way, you will be far more profitable.  Here are two measurements, over and above profit, I find helpful when evaluating jobs.
Job Revenue Per Hour: Take the price of the job and divide it by the number of estimated hours. That’s the job’s revenue per hour. The bigger this number, the more sales the crew is producing per hour worked, which will produce a better field labour ratio — 100% of the time without exceptions. Jobs with more materials, more expensive materials, or jobs that can use larger, more productive equipment produce more revenue per hour. These are the jobs you want to target. Avoid labour-heavy jobs if you want to maximize your ratio.

Job Labour Ratio: Take the number of estimated labour hours multiplied by your average hourly wage, then divide that total by the job’s selling price. For example, say you have a $20,000 front yard project that you estimate at 180 man hours. Your average worker’s wage (not including taxes) is $22 per hour. This job’s ratio is (180 times 22) divided by $20,000, which is 19.8 per cent. That ratio is lower than the industry benchmark (and remember, the lower the number, the more productive!) so it’s a good thing. This job is going to help you improve your field labour ratio. Conversely, a $23,000 back yard that takes 260 hours is going to give a ratio of 26 per cent. Even though it’s a bigger job, it’s not really a better job in terms of productivity. Knowing this is powerful.

Use more equipment

This one is short and sweet. What reduces labour? Equipment. The more equipment you have, the fewer people you need — to a point, anyway. If you are big on opportunity but short on labour, invest in equipment that will help the people you have get through their work a lot faster.

Here’s hoping 2021 is a great year for you and your companies.    
Mark Bradley is CEO of LMN Software, and former CEO of TBG Environmental, both based in Ontario.