After spending the last year speaking to over 50 small business owners within the industry, I have noticed a common misconception that many of us share. We often believe that we are profiting a great amount on our employees and that more employees is a deliberate and simple path to higher earnings. While it is true you can generate a profit on your employees, I believe that the earnings are far less substantial than most small business owners believe. Certain models like Cost Plus make it a little easier to make a profit on employee labor, but considering that most cost plus contracts are between 12-17% markup, how much money are you actually making? How many employees must you have to truly capitalize on your earnings? Will your market bear the costs of high quality labor and the necessary costs associated with it?

Most business owners within residential construction have 1-3 employees. Assuming that you are capturing the cost of these employees (most are not), with respect to labor burden, inefficiencies, and slippage, how much money can you make on a single employee? It is also important to understand what the market will actually bear for various levels of skill. Let’s break down a simple hypothetical. 

Assume that you are a small contractor with 2 full time employees. You want to make 20% on your employees labor, your labor burden on your employees, is 2x, and you pay each employee $35 per hour. Right off the bat the breakeven with your burden is $70 per hour. The first question I ask myself given my market and structure is if I can afford to capture my premium as a business owner as well as the $70/hour for any employee. That figure is a breakeven. For conversation sake, say I want to charge $125/hour for my time. My daily breakeven rate for myself, and two employees would be $2,120.00. Now add that 20% profit on your employees and you are at $2,344.00 per day. 

I want to be completely honest here. Although it pains me to admit this, there are not an abundance of markets where a team of three carpenters or remodelers can generate $2,400.00 worth of work a week on small remodels, kitchens, and baths. We live in a world where people do not understand their numbers and are super competitive. You have to position yourself in a unique situation in order to capitalize on a market that will bear these costs. This is why I choose to remain small. It is easier for me to remain lean, guarantee my rate, and not depend on an inflated market or high volumes of work to get my price. I am not convinced that my market will bear these numbers doing the smaller types of projects that I do. That does not mean that the numbers are not justified, it simply means that there are too many other people out there offering that same work for $1,080.00 a day. Regardless of your offerings or your marketing, that is an uphill battle.

Now let’s look at what profit I am actually generating from my two employees. After my burden, in an ideal world where I bid everything correctly I am making $14.00 per hour or $112.00 per day on each employee. Again, this is in a perfect world. That comes down to $224.00 a day for both employees. When you truly gauge the risk, exposure, liability, stress, and responsibility of having two employees you start to wonder how much it is all worth? Is it worth an extra $1,120.00 per week to keep two employees busy, land the work for them, cover their costs, and absorb their risk? Again, these numbers are in a perfect world. Most of our world of smaller owner operator type businesses will find it difficult to capture these numbers or sell work at this rate. 

For myself, I prefer to sell less work, have less responsibility, create a better work life balance, and generate higher profit margins. Even if I charge a premium for myself, use subs for the heavy lifting, and use high-quality tools and materials, I can capture the costs far easier in my market. My sales go down, but my profit margins sky-rocket. This is not ideal for our industry. I wish that we could all have multiple employees, charge accordingly, provide benefits, company vehicles, paid time off, healthcare, etc, but it is tough to generate a decent living with those perks in certain markets. It is the world that we live in, and it is our industry. People are often not willing to pay $2,400.00 a day for three men or women, when they can pay $1,000.00. Obviously this is not apples to apples, but that is not always relevant in our world. 

The goal for this podcast/blog is to shed some light on what I have heard speaking to over 50 small business owners this past year. Most owners are not capturing their true labor burden for employees let alone making an adequate markup on them. Most people that I speak with are not even covering the cost of their employees when we dig into the numbers. Imagine wondering why you are struggling to turn a profit, working 80 hours a week, and burning out because you are paying to put work in place for your customers. That is residential construction. That is the standard. We live in a world where no one understands their numbers. They assume more employees means more money. The unfortunate truth is that that sentiment is in fact VERY true, but they are costing us more money rather than making us more money.