What Custom Pricing Is, and Is Not: Part 2

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Publisher’s Note: According to C&R/KnowHow’s 2022 State of the Industry study, getting paid is a top pain point for a majority of restoration contractors. Costs, labor burden, and overall pricing methodology are part of that equation, along with working with adjusters, having mortgage carriers involved, and so on. In this 2-part series, Anthony Nelson pours his years of learning and knowledge gained as a restorer on customized price lists onto paper. This series is NOT on specific prices or costs; it is a textbook of sorts on equations to ethically and logically figure out true costs for materials, labor, benefits, and more. Read part 1 HERE.


Hopefully you read part one of this series, which appeared in the July/August issue of C&R. If you haven’t read it yet, you can easily find it on the website and catch up! Now, let’s keep the conversation going.

Labor Burdens

This is where your required reading is going to start to pay off. The white papers and retail labor definitions do a great job of telling us what’s included in our labor burdens. Below is a breakdown of what’s contained within the labor burdens, a definition, and a method for how to calculate each. Since Xactimate calculates everything as a $ per hour, we will do the same for our math. In our example, we’ll use $20 per hour as a base wage. 

Taxes

There are three tax types contained within all labor markets. I would encourage all restorers to check with their local CPAs (Certified Public Accountant) or PEOs (Professional Employer Organization) to confirm if there are any additional taxes they should consider that are specific to their region. Any taxes that are assessed to the individual employees should not be accounted for here. ADP has a great resource on their website for state-by-state payroll information at https://www.adp.com/resources/tools/tax-guides-and-forms/state-and-local-tax-guides/state-tax-guide.aspx. 

  • FICA – Named after the Federal Insurance Contributions Act, this is a federal tax that is inclusive of both social security and Medicare taxes. There’s some nuance to this but for employees making less than $160,200 (likely all trades) the effective rate is 7.65%

HOW DO I CALCULATE THIS?

Take the hourly rate and multiply it by the tax rate. 

    • FICA Tax Burden = Base Wage x 7.65%
    • $20.00 per hr. x 7.65% = $1.53 per hour 
  • FUTA – Named after the Federal Unemployment Tax Act, this is a federal tax that covers unemployment at the federal level. Again, there is some nuance here and I would encourage everyone to verify with their local laws because there is a relationship between FUTA and SUTA taxes. For most the effective rate will be 0.6%

HOW DO I CALCULATE THIS?

Take the hourly rate and multiply it by the tax rate. 

    • FUTA Tax Burden = Base Wage x 0.6%
    • $20.00 per hr. x 0.6% = $0.12 per hour 
  • SUTA – Named after the State Unemployment Tax Act, this is a state tax that covers unemployment at the federal level. Now unlike Federal Taxes, this one will be specific to your company. This is an area where managing unemployment rates for your company can pay off. The ADP guide mentioned earlier does a good job of illustrating the range of these taxes; however, this is one you should ask your CPA or PEO about. For Hawaii, the maximum rate is 6.2% so we’ll use that for our example.

HOW DO I CALCULATE THIS?

Take the hourly rate and multiply it by the tax rate. 

    • SUTA Tax Burden = Base Wage x 6.2%
    • $20.00 per hr. x 6.2% = $1.24 per hour 

Company Insurance

For company insurance there are two major buckets Xactimate identifies as part of the labor burden: General Liability and Worker’s Compensation. If it’s not specifically listed here, then it belongs as a part of the labor overhead. A good example of this is automotive insurance. You won’t see it listed here; therefore, it belongs in the labor overhead. For both, your insurance agent will usually quote your rate as a price per $100 of payroll or a price per $1000 of payroll. Pay attention to that extra zero, it can throw off your math. Also, since both are contingent on payroll numbers, this is where you’ll want to make extra sure you’re following the definition of “the prevailing amount paid in the geographic area for a skilled tradesperson with at least 8 years of experience.”

  • General Liability – in this bucket I also include the pollution liability, excess/umbrella and anything usually quoted as a part of your General Liability package. For more information, I would encourage you to speak directly with your insurance agent. In a recent conversation with David Dybdahl of American Risk Management Resources Network, LLC, he indicated that most policies for restorers tend to fall in the range of $5 to $7 per $1000 of payroll. For our calculations, we’ll use $6 per $1000 of payroll.

HOW DO I CALCULATE THIS?

Take the rate, divide it by 1,000 to get the rate converted into $ per $1 of payroll, then multiply it by the wage.

    • General Liability Burden = Insurance rate/$ of payroll X Base Wage
    • $6/$1000=$.006 X $20.00 per hour = $0.12 per hour
  • Worker’s Compensation – Worker’s compensation rates vary wildly by state, labor trade, and your company’s performance in keeping its workers safe. Most restorers either process our own payroll and have our insurance agent provide a policy for this or use a PEO (Professional Employer Organization) that bundles work comp along with other fringe benefits. Depending on your individual model, you’ll likely have to call to get these rates for each of the labor trades you’re going to customize in Xactimate. Using our example of a mitigation technician, let’s assume our agent informed us the rate is $5.44 per $100 of payroll. The math works like the General Liability Example above EXCEPT most worker’s comp rates are quoted in $100s of payroll as opposed to $1000s of payroll.

HOW DO I CALCULATE THIS?

Take the rate, divide it by 100 to get the rate converted into $ per $1 of payroll, then multiply it by the wage.

    • Work Comp Burden = Insurance rate/$ of payroll X Base Wage
    • $5.44/$100=$.0544 X $20.00 per hour = $1.09 per hour

Legally Required Benefits (LRBs)

The taxes and insurances above represent a group of burdens I like to call “legally required benefits” or “LRBs” for short.  It’s important to take a moment and subtotal them before we move on to fringe benefits. In the next section we will be using both the base wage and the base wage combined with the legally required benefits for our math. 

  • Base wages with LRBs – This is the sum of the base wages, taxes, and company insurance we just calculated.

HOW DO I CALCULATE THIS?

Add the base wages, taxes, and company insurances together.

    • Base Wages with LRBs = Base Wage + FICA + FUTA + SUTA + General Liability + Worker’s Comp
    • $20.00 per hour + $1.53 (FICA) + $0.12 per hour (FUTA) + $1.24 per hour (SUTA) + $0.12 per hour (General Liability) + $1.09 per hour (Worker’s Comp) = $24.10 per hour (Base Wages with LRBs)

Fringe Benefits

This is a collection of payroll-related items such as Paid Time Off (vacation, sick, holidays etc.), Supplemental Pay (overtime), Retirement Benefits (company 401k), and all employee related insurances (Health, Dental, Vision, Life, Disability, etc.). A lot of these will be specific to your company and the benefits you offer. In my experience, restorers have had to increase their benefits offerings over the years to remain competitive in the marketplace as compared to traditional trades companies. This is an area where I would encourage all restorers to look deep and make sure you’re capturing everything. Also, certain state and local regulations can require some of these benefits. If you’re using a PEO, you may be paying for some of these benefits without even knowing it. For example, in Hawaii we are required to provide health care at the single rate and disability insurance. Checking with your insurance agent, CPA and/or PEO is advisable. The list below is in no way exhaustive but hopefully it helps get your own brain juices flowing. Lastly, at the risk of being hyper redundant, this is another area were following the definition of “the prevailing amount paid in the geographic area for a skilled tradesperson with at least 8 years of experience” is critical. Historically the more tenured employees have the richest benefits packages. 

  • Paid Time Off – I include all benefits related to paid time off in this bucket whether your organization lumps them all together into one bucket or you have separate buckets, for this example keep them all together. We’ll need to know the total number of PTO hours our example employee has in their comp package. In this example, let’s assume our mitigation technician with 8 years of experience has 160 hours (4 weeks) of PTO available to them.

HOW DO I CALCULATE THIS?

This is complex. What we’re trying to solve for is how much more per hour we should add to our retail labor rate to be able to pay our employees for the time they’re not working. To do our math, we need to know that there are 2,080 regular time working hours in a given year. If you don’t trust me, take the total number of weeks in a year (52) and multiply it by the number of hours worked in a week (40). We’ll then subtract our PTO hours from the total hours in the year to get the number of actual hours worked in the year. We’ll then divide the PTO hours by the number of actual hours to get a ratio between the two. If we take that number and multiply it by our base wage with LRBs, we’ll have the total per hour we’ll need to charge for the hours worked to fund this employee’s PTO. 

    • PTO Burden = (PTO Hours/ (Total Annual Hours – PTO Hours)) X Base wage with LRBs
    • (160 hours / (2080 hours – 160 hours)) X $24.10 Base wage with LRBs = $2.01 per hour
  • Supplemental Pay – This is overtime. Now the definition of supplemental pay will make you want to include things like on-call pay. Since Xactimate has separate line items for these, we’ll want to exclude them to remain consistent with their pricing methodology. Additionally, for mitigation technicians you may want to exclude these calculations since Xactimate has line items in the WTR category to account for after-hours work. To calculate this, you’ll want to know the number of hours our example employee worked last year. Historically, your more seasoned employees want overtime. Let’s use 200 hours of overtime for example.

HOW DO I CALCULATE THIS?

Like above, what we’re trying to solve for is how much extra do we need to add on to our retail price to fund this overtime. We’ll use pretty much the same formula from above subbing in the PTO hours for the overtime hours. The exception is we will multiply the result by 0.5 to represent the value in addition to the straight time calculation. If you discuss this with your PEO or CPA, they will be very quick to inform you that overtime should be calculated on a weighted average which is different and more complex than a straight 1.5x to time. For our needs, the 1.5x formula gets us close and I want to keep the math simple for everyone. 

    • Supplemental Time Burden = (OT Hours/(Total Annual Hours – OT Hours)) X Base wage with LRBs
    • 200 hours / (2080 hours – 200 hours)) X $24.10 Base wage with LRBs X 0.5 = $1.28 per hour
  • Retirement Benefits – Since benefits packages vary wildly relative to retirement, I’m not going to take the time and explain all the options. For this example, I’m using a standard 401k program with safe harbor match. The way this plan works is the employee must fund 5% of their wages into the program to receive the 4% match from the company. Employees with 8 years of seniority usually are participating in the program we’ll assume the company burden is 4% of wages. Another key factor to know is that most retirement plans function on a pre-tax basis, so we’ll want to use just our base wage (not Base Wage with LRBs) for this calculation.

HOW DO I CALCULATE THIS?

    • Retirement Benefits Burden = Base Wage X Company Match %
    • $20.00 per hour X 4.0% Company Match = $0.80 per hour
  • Employee Related Insurances – Take a moment to take inventory of all the insurance benefits the company affords the employee. Any employee, funded items should not be included. This is only what the company pays for. You’ll want to grab the annual amounts that these benefits cost. Typically, they’re quoted in months, so feel free to multiply those amounts by 12 to get the annual amount. If you have other non-insurance benefits for your employees, you can list them here. As an example, our employees would receive a $100 Amazon gift card for both their company anniversary and their birthday. For our example employees, they have the following coverage afforded to them by the company. 
    • Health insurance – Single Rate – $3,912 per yr
    • Dental insurance – Single Rate – $1,488 per yr
    • Vision insurance – Single Rate – $1,056 per yr
    • Short & Long-term Disability (req in HI) – $912 per yr
    • Other Benefits – $200 per yr
    • Total Annual Company Funded Insurance Benefits – $7568 per yr

HOW DO I CALCULATE THIS?

    • Company Benefits Burden = Total annual benefits / 2080 hours worked in a yr
    • $7568 in Annual Benefits / 2080 hours worked in a year = $3.64 per hour

Take a break, you’ve done the hardest part! Below is a quick summary of all the burdens you’ve calculated. 

  • Base Wage – $20.00 per hour
  • Taxes
    • FICA – $1.53 per hour\
    • FUTA – $0.12 per hour
    • SUTA – $1.24 per hour
  • Company Insurance
    • General Liability – $0.12 per hour
    • Worker’s Compensation – $1.09 per hour
  • Fringe Benefits 
    • Paid Time Off – $2.01 per hour
    • Supplemental Pay – $1.28 per hour
    • Retirement Benefits – $0.80 per hour
    • Employee Insurances & Benefits – $3.64 per hour
  • Total Burdens – $11.83 per hour or 59%
  • Total Base Wage with Burdens – $31.83 per hour 

While these numbers are important to know for the purposes of calculating your Retail Labor Rate, they also inform you of some pretty vital numbers that help you understand how your business performs. For instance, knowing that for every dollar you pay this employee, you also pay $0.59 in burdens can drive a lot of decisions about how you operate. Knowing this employee costs you $31.83 per hour in direct costs can help you make decisions and prioritize how you direct that employee with their time. 

Part 4: Labor Overhead

Per Xactimate, the definition of labor overhead is “Labor Overhead is determined by direct surveys with contractors and includes any additional costs, overhead, or markup not included elsewhere in the unit price, or the general O&P applied to the end of the estimate. Examples of labor overhead costs which a contractor may include in the reported Labor Overhead are (but not limited to): vehicle costs, cell phones, pagers, uniforms, depreciation on hand tools, insurance, etc.” Or loosely, I interpret this as Labor Overhead is the “catch-all” for everything else about your business. But before we start doing math or discussing any methodologies it’s most important to point out what labor overhead IS NOT as defined by Xactware. 

Labor Overhead does not include the following:

  • Base wages
  • Labor Burdens
  • Job-related overhead are costs where they are specific to a job but not specific to a task & there is a line item in Xactimate such as
    • Equipment with line items (i.e. air movers, scaffolding)
    • Project Managers.
    • Temporary Site utilities (i.e. portable restrooms, temporary fencing).
    • Safety Supplies.
    • Any component already included in an Xactimate line item.

Per Xactimate, Labor Overhead includes Job Personnel Overhead items which they define as “Labor expenses not related to wage or burden. Examples include vehicle expenses, uniforms, hand tools, mobile phones, etc. These are expenses for contractors using their own employees and would be apportioned to subcontractor overhead and profit when subcontractors are used.”

Per Xactimate, general overhead is defined as “Expenses that are a cost of doing business, not related to a specific job. Examples include office rent, licensure, advertising, office equipment, payroll for office personnel, etc. They occur regardless of the size or type of job, and they will vary depending upon the size or type of contractor or service provider performing the work. Within Xactimate, general overhead and profit (O&P) for general contractors are added as percentages in the Estimate Parameters window. Subcontractor overhead and profit is intended to be included in the labor overhead portion of the retail labor rate.”

Where Does Overhead & Profit Live?

While the topic of how and when to charge overhead and profit is a wonderful debate, it’s not for this article. A Retail Labor Rate, in my definition, is the final price by which I will sell my services. Therefore, I use the following rules when I am creating Retail Labor Rate pricing. 

  • If I usually apply OH&P to this trade, I will subtract the value of that OH&P from my final calculations to determine my Labor Overhead.
  • If I usually do not apply OH&P to this trade, I will use the full calculated value of my Labor Overhead. 

I know there is a ton for our industry to discuss on this topic. I also recognize that my rules do not consider subcontractors. We have a lot to solve here but if you use in house labor, then the rules above apply unilaterally. 

What Does Labor Overhead Include by Definition?

Below is a list of rules I use to determine if a specific item should be included in my labor overhead. Bear in mind my method for OH&P.

  • If there is a line item or a component buried within a line item in Xactimate for it, it’s not Labor Overhead. To represent using those items, I should use that line item. 
  • If there is no line item or a component buried within a line item that represents it, then it is labor overhead.
  • If it’s profit or markup (materials, equipment, labor) it belongs in labor overhead. 

What Items Should Specifically be Included in Labor Overhead?

The list below is in no way exhaustive but should directly represent the cost accounts on your profit and loss statements. These are the items I see that should be included. 

  • Job-Personnel Overhead
    • Education and Training
    • Vehicle Costs
    • Uniforms
    • Mobile Devices
    • Tools (not on the components list in Xactimate)
    • Materials and Equipment Markup or Profit
  • Non-Job Personnel Overhead
    • Labor
      • Management Labor (ex-project management)
      • Accounting Labor
      • Coordinating Labor
      • Estimating Labor
      • Sales Labor
      • Executive Labor
  • Administrative Expenses
    • Office Supplies
    • Safety Expenses & Training (not contained in line items)
    • Computer & IT Expenses
    • Software Expenses
    • Automotive and Other Insurances
    • Licensing Expenses
    • Sales & Marketing Expenses
    • Professional Services
    • Facility & Utility Expenses

How Do I Calculate My Labor Overhead?

Here’s what I would advise restorers to do now. Bear in mind there are ways more sophisticated to do this, but this way is accurate for your financials, fast, and relatively easy. You’ll want to run a P&L for your business for a whole year. Make sure run it with % of Revenue as a column. If you’re on QuickBooks, just use the help function to learn how to do this. It’s easy. We’ll be looking for two key numbers as a % of revenue. What are your COGS (Cost of Goods Sold) and what are any expense accounts on your P&L that represent items we SHOULD NOT include in our Labor Overhead (see above for my list). In this example, we have a cost account called “Safety Expense” which has everything safety for our company. We looked at the charges and 50% of them are for consumables we have line items we charge for on our Xactimate estimates. We’ll want to make sure we credit half of that account off our Gross Margin. For your company, you’ll want to do the same for all the cost accounts you identify as having costs not included in Labor Overhead. Here’s the numbers from our example companies P&L. 

  • COGS as a % of Revenue – 45%
  • Safety Account as a % of Revenue – 1%, but only half of it is line items we write.
  • Profit as a % of Revenue – 13% actual but our budget is 15%

With those figures in hand, we are now ready to calculate our markup. 

With both your Total Markup and Overhead Markup numbers as a utility, you now can accurately calculate retail prices to customize your own Xactimate prices. This also helps you understand how your business functions relative to your labor. 

If you’re wired like me, you’re probably exhausted after all the math and maybe wishing you had a cigarette handy. Ultimately, if you’ve done the math to determine your own retail labor prices in Xactimate’s methodology, you are well equipped to talk with any adjuster on both why and most importantly HOW you’re customizing your Xactimate labor prices. 

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Anthony Nelson

After 13 years growing Premier Restoration Hawaii to 4 locations and 160 employees, Anthony Nelson has become a partner in Pivot My Business, a consulting firm helping property restoration companies obtain their highest levels of success. Additionally, he serves as an xactimate pricing subject matter expert with Ed Cross and the Restoration CrossCheck team creating the Customized Restoration Price List service.

Starting as a technician in the industry in 2000 Anthony fell in love with property restoration because he got to make a difference in people’s lives every day and didn’t need a PHd to do it. That mission continues today in his efforts to build better businesses and leaders. He believes that strong leaders are what propelled him to his level of success and is anxious to pay it forward to the industry at large.

Anthony currently serves on the RIA Board of Directors, is a consensus body member for the forthcoming IICRC S760 Standard for Professional Wildfire Investigations and Restoration of Impacts to Structures, Systems, and Contents and serves on the Construction Industry of Maui board as the chair of the scholarship committee.

In his free time you’ll find him collaborating with other thought leaders in the restoration industry trying to fulfill his mission of giving field based staff 15 minutes of their day back. In his opinion no one works harder or deserves more from us than our technicians in the field.

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