Hourly rates that make sense

Jim Huston A mistake many contractors make is to charge the same man-hour rate for maintenance and construction work. Their maintenance rates could be more competitive and their construction ones could contain more profit. CPAs often help clients calculate average rates without understanding some of the subtle reasons why they shouldn’t be the same. Your construction hourly rate should be 20-25 percent higher than your maintenance hourly rate. I’ll calculate hourly rates for both a two-man maintenance crew and a three-man construction crew using a one-day scenario. You can calculate your rates by substituting your costs in these scenarios.

Maintenance man-hour rate.

We have two people earning an hourly wage of $15 and $11. The crew average wage (CAW) calculates to $13. This crew works a 50-hour week. The labor burden (FICA, FUTA, SUTA, WCI, GLI, vacations, holidays, PTO and medical insurance) is 20 percent. General and administrative (G&A) overhead for the maintenance division is $10 per man-hour. The cost per hour (CPH) for the ¾-ton crew truck and trailer is $14. The ride-on mower runs 5 hours per day at a CPH of $12. The 48-inch walk-behind mower also runs for 5 hours per day at a CPH of $6. Edgers, trimmers, blowers, etc., run a total of 4 hours per day at a CPH of $4.50 each.

• Crew average wage (CAW): $13
• The overtime factor (OTF) is 10 percent: $1.30
• The risk factor (RF) is 10 percent: $1.30
• Subtotal: $15.60
• Add the 20 percent labor burden: $3.12
• Subtotal: $18.72
• Add the crew truck and trailer ($112 ÷ 20 Mhrs):$5.60
• Add the average equipment cost per man-hour ($108 ÷ 20): $5.40
• Subtotal: $29.72
• Add the G&A OPH: $10
• Break-even point (BEP): $39.72
• Add 10% net profit margin (NPM) (BEP ÷ (1-.1)): $4.41
• The portal-to-portal man-hour rate is: $44.13
  
   

Residential construction man-hour rate.

We have three people earning an hourly wage of $20, $16 and $12. The CAW calculates to $16. The crew works a 50 hour week. Labor burden is 25 percent. G&A overhead for the maintenance division is $16 per man-hour. The CPH for the ¾-ton crew truck without a trailer is $12.

• CAW: $16
• OTF is 10 percent: $1.60
• RF is 10 percent: $1.60
• Subtotal: $19.20
• Add the 25 percent labor burden: $4.80
• Subtotal: $24
• Add the crew truck and trailer ($96 ÷ 30 Mhrs): $3.20
• Subtotal: $27.20
• Add the G&A OPH: $16
• BEP: $43.20
• Add 20% NPM (BEP ÷ (1-.2)):$10.80
• The portal-to-portal man-hour rate is: $54
  
   

Analysis.

Most of the calculations are self-explanatory, with four exceptions. First, add a 10 percent risk factor because things don’t always go as planned. Second, the labor burden for a maintenance crew is usually a little lower than that for a construction crew. Third, the G&A overhead cost per man-hour for a maintenance crew is usually 30-50 percent lower than that for a construction crew. This is because construction work requires more management than maintenance work. Finally, in a normal market, a residential construction crew should add a 20 percent NPM (this is a 25 percent markup) to its BEP, while a maintenance crew usually operates at a 10 percent NPM.
 

Conclusion.

The pricing for our construction crew is $10 more per man-hour than the maintenance crew. That’s almost a 23 percent difference. Too many contractors, who use an average man-hour rate overprice maintenance accounts while underpricing construction. This means they could be more competitive bidding maintenance work, while making more money on construction projects. And who couldn’t use more money?

Jim Huston runs J.R. Huston Consulting, a green industry consulting firm. www.jrhuston.biz; jhuston@giemedia.com