The Operating Room June 2004: Watch Your Overtime

Overtime can wreak havoc on your profits and also on your employee morale. For these reasons, contractors must keep overtime hours in check at all times. Let’s take a look at a few considerations:

First of all, ask yourself if you actually estimate the overtime wage scale when you compile your job estimates. Are you sure you do this consistently and accurately? Remember that overtime pay is one-and-one-half of a given employee’s regular hourly wage. Therefore, the halftime portion is probably an expense that you will pay the employee that you may not have considered or budgeted when you compiled your estimate.

For example, if an individual’s regular hourly wage is $12.25 for the first 40 hours worked in a week, for each hour after 40, the wage jumps to $18.37 per hour. (Check your state regulations, as some states require you to pay time-and-one-half after eight hours each day.) In this situation, you end up paying an additional $6.12 per hour plus appropriate taxes. This can add up quickly in the course of a year.

Using these wages, assume you have seven crew-members who work an average of 50 hours per week for a period of 10 months (about 43 weeks). The overtime premium you will pay for this work equals a minimum of $18,421. Further, assume that this manpower produces a total income for the company of $450,000. With this figure, your overtime cost is approximately 4 percent of your entire profit.

The moral of this exercise is to be sure that the rate at which you sell your labor is sufficient to recover the premium pay you incur. If you are charging $32 per man-hour but determined this amount without considering overtime expenses, this could explain why you are still not turning a profit even if you track indirect costs and your crews are meeting their budgeted hours. Remember, the cost incurred as the halftime portion – the $6.12 as shown in the example above – is an overhead item and is not part of your direct costs. You must use “guesstimates” and/or historical information to calculate an hourly rate that will recover your overhead and, of course, generate profit. This is a detailed, disciplined process that you should go through each year.

I realize that many small companies do not develop a budget and pricing scenario, but consider the consequences and the dollars it takes away from your potential profits until you do. Try to raise your hourly selling and estimating price and control and monitor your labor. A great way to monitor overtime is to post a weekly hourly log sheet consisting of all employees’ names in the first column and the days of the week in the remaining columns. Have crew foremen log hours at the end of the day for each crew-member. By Thursday, you will see who has how many hours and can make decisions as to whether or not to give more work to an individual who is approaching overtime. This is a great, simple tool that will help manage overtime through awareness.

On the employee morale side, I find that most companies do work overtime during the season. Many laborers thrive on extra work and if we do not provide some overtime, they may leave for a job that will allow the extra hours. If you treat your employees with respect and have good equipment for them to use, I find that a 45-hour workweek is acceptable in most markets. In other areas, 50 hours is common, but if I see a company that has its hourly employees working 60 hours per week, I almost wish I could be their competition as my labor costs and selling price would be appreciably less, allowing me to become the low-cost provider in the marketplace. Consider what your company could become if you were the low-cost provider in your area. You would grow, provide opportunities for your employees and even relinquish some of your duties to subordinates, leaving some time for yourself.

The author is a green industry consultant with Mattingly Consulting. He can be reached via email at jkmattingly@comcast.net, through his Web site www.mattinglyconsulting.com or at 770/517-9476.