A recent question I received:
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If a company offers no sick pay or vacation pay…but is about to start – which is more important to offer first, anticipating that the next year we can offer the other? Any recommendations re what needs to be in the bank to be sure to cover the expense – obviously, you’d have to figure the basic numbers, but anything else I might not be thinking of? We already offer health insurance.
Both sick pay and vacation pay are an overhead expense. Deciding which to offer first is really just a judgment call. Which would be more valuable to your employees, which would cost you the most? At my age, sick pay would be far more important than it would be to a 24-year old employee. Does anyone else have an opinion? (not about my age)
The cost needs to be included in your markup (by the way, gang, that’s why every business has a different markup factor!) Figure out what percent of your total sales the expense will probably be, factor it into your markup and you are good to go. If you want to build up a reserve account for safety reasons, then I would set aside the same percentage from every check in the door. Better safe than, “How do I pay this?”
Even in today’s climate, there are some construction-related businesses doing well enough to consider adding benefits instead of cutting employees!
I have never liked the idea of sick days and/or vacation days. I always preferred to call and use “personal” days. These could be used for holidays, vacation, sick days, etc. Every employee got the same amount depending on years with the company and could use them to best suit their needs, age, and lifestyle.
Andrew stole my thunder. Employees will lie and say they are “sick” when they just need a day off. Does it matter to the employer? I’m not suggesting allowing employees to call in 5 minutes after their shift was to start to say they want a vacation day, but if you’re willing to pay them for time off, encourage them to schedule it. If they’re too sick to work, they won’t come in and you’ll have to deal with it. If they plan weeks ahead to call in one morning to use a sick day wouldn’t you rather be able to work that into your production schedule?
I don’t offer sick pay, at all. I do offer vacation time after one year of service and offer holiday pay for the six major holidays. If you are sick, you don’t get paid. We have an open enough work environment that the guys know if they need a day off that we always try to support their needs. None of us lives to work, I hope we all work to live.
As Michael said, this is an overhead expense, so be sure that you calculate your additional O/H expense and add it to your markup. Don’t take from your own pocket. Your employees will thank you for it later, when your company is still in operation.
I beleive that any cost that can be calculated as a direct costs should be moved there and off of overhead. I would suggest that vacation time, sick time, as well as any other direct payroll expenses be calculated as a direct cost NOT overhead cost. You simply have to calculate all costs and divide by billable hours. In my example below, an employee paid $25 per hour plus benefits works out to be $33 per hour direct cost based on working 1840 hours per year.
Base Hourly Rate $25.00
52 weeks @ 40 hours per 2,080
Base Wage $52,000
CPP/government pension 4.30% 2,236
Employment Insurance 2.60% 1,352
Workplace insurance 6.80% 3,536
Medical/dental 2,400
LTD 1,200
Bonus 5,200
Group RRSP/401K 2,600
Total Annual Cost $70,524
52 weeks @ 40 hours per 2,080
10 Vacation days -80
10 stat holidays -80
5 personal leave days -40
5 education/training days -40
Total Billable Hours 1,840
Labour Costs per Hour $38.33
The same thing can be done for a vehicle (per crew):
Total monthly lease/maintenance/insurance/gas $750
Total billable hours per month 150
Cost per hour for truck $5
And for tools (per crew)
Description Costs Life Per Yer
Table saw $600 4 $150
Miter saw $600 4 $150
Circular saw $250 4 $63
Hammer drill $250 4 $63
Belt sander $200 4 $50
Jig saw $200 4 $50
Power planer $200 4 $50
Sawzall $250 4 $63
Palm sander $100 1 $100
Cordless drill $100 1 $100
Miscellaneous hand tools $1,000 1 $1,000
Total Annual Cost $3,750 $1,838
Carpenter Tool Cost per Hour $1.00
Conversly, a carpenter who provides his own truck could expect $5 per hour premium and own tools $1 per hour premium.
Good To Hear From Toronto Canada!!!
Rob -
Thanks for your post. I just want to add a warning here.
Your example above can be used to calculate a labor rate for estimating purposes or for handyman type jobs. It’s important to recover all costs, both labor and overhead in your job price, so if you add what I consider an overhead cost to your labor rate, make sure it isn’t in your overhead when you calculate your markup.
However, I would avoid this method on T&M or Cost Plus jobs over $2,500.
When you take an expense that under normal construction accounting procedures would be considered overhead, such as a bonus, sick pay or vacation pay, and put it in job costs, if the customer accuses you of overcharging on a job, you will be in the position of having to defend yourself against the charge of “Double Dipping”, i.e., having the same cost in both overhead and job costs. Hopefully you aren’t double-dipping, but when they find one cost that is usually an overhead expense sitting in your labor rate, they will start looking for more. A minor nightmare can turn into a major nightmare. It isn’t worth it.
So make sure you know what you are doing before you use this method.
Michael
When you consider the hassles that come with dealing with employee’s benefits it is a wonder that more companies are not outsourcing this. My company hired a PEO a year or so back and it has helped things tremendously, in terms of productivity we spend more time focused on clients and less time on worrying about benefits. Actually seen an increase in sales, which is saying something over this past year.