Labor Burden Counts When Bidding Jobs

Some business owners- when constructing a bid proposal- estimate their labor costs without determining an accurate Labor Burden. They simply equate the number of workers with the length of time it would take to complete a job, then either assign those workers a Piece Rate of Pay- paying an employee a fixed pay rate for each unit they produce, or an estimated Wage Per Hour- a rate an employer agrees to pay a worker per hour worked. This Assigned Cost is then marked-up by 25-35% as the estimated cost of labor. However, if this figure underestimates the true Labor Burden, the results can sometimes affect a business owner’s Cash Flow and may narrow the margins expected to be earned on retainage when the job is completed.

A Labor Burden is the costs beyond the actual cash wages or salary that a business owner pays to the employees. Labor Burden includes payroll taxes, retirement benefits, health benefits, worker's compensation, life insurance, pensions and other fringe benefits. It is a significant portion of the total cost of carrying employees, and when providing a proposal bid for procurement, applying these expenses to the amount of time and attendance of both Direct Labor and Indirect Labor can achieve a more useful estimation of Assigned Cost.

Direct Labor refers to the direct cost of labor contributing to the production of goods and services. Indirect Labor refers to work not directly contributing to the production of goods and services, but necessary in support of the Direct Labor. Administrators, janitors, supervisors and other support workers are considered Indirect Labor and are essential cost components that should be identified to allow the business owner to define a more accurate Assigned Cost.

Co-employing with certain Professional Employment Organizations (PEO) is a simple way of identifying ones Assigned Cost for any given payroll period. Since the employment group is assigned a Fixed Labor Burden- for each employee based on their job description, the invoice for any given payroll cycle would include the totals on labor excluding fringe benefits. Applying the payroll invoice amount towards job assignments during that particular payroll cycle provides the business owner with a periodic depiction of employment expenditure and a simple method of calculating Assigned Cost.

In addition, Gulfcoast Employment Matters (GEM) payroll administration can supply reports to include fringe benefit compensation. This provides additional representation and a value-added service which allows the avoidance of clients having the cost and complications when directly purchasing many marketed Cost Pricing Analysist software programs to achieve the same results.

To avoid untimely adjustments to a business owner’s Fixed Labor Burden- although sometime unavoidable- it is recommended employment groups circumvent PEO’s assessing large deductibles and collateral amounts that can be raised by the discretion of the PEO. Because these adjustments can be assessed at uncertain intervals, the practice can disrupt a business owner’s Fixed Labor Burden and affect their Cash Flow at an inconvenient duration of time.

Deductibles have been successfully utilized as methods of claim mitigation by initiating a shared responsibility for the cost of claim by both parties of the co-employment agreement. It is also sometimes necessary to implement deductibles in order to content underwriting requirements. GEM, however, attempts to approach each prospective client by first determining if claims frequency could be controlled by proper risk management, and then introducing back-ended incentives to encourage mutual profitability through co-employment cooperation. The effect correlates with an adjustment of the Reassigned Employee Rates based on the losses the employment group has experienced throughout the year. When year-end evaluations are assessed, the business owner has efficient time to properly assess the adjusted Fixed Labor Burden. Reduced claims experience result in a more favorable Fixed Labor Burden and increased margins are gained by the business owner moving forward.

The second component to consider in constructing a bid proposal concerns Overhead- the costs a business incurs for things that do not directly produce output. This information is not directly disclosed by PEO reporting. Cost of materials, assigned facility costs, utility costs, equipment vehicle expenses, general liability insurance, and the cost of supplies and material are considered Overhead expenses. These items can be readily identified through receipts and invoices obtained by the business owner’s administrator and can then be integrated with GEM reports to provide the necessary information to complete accurate bid proposals.

For more information regarding additional value-added services and how GEM can efficiently assist your business please contact us at www.gempeo.com.