The Correct Labor Mark-Up

Nov 9, 2021 | Growth Tips, Income

What is the right way to calculate the mark up on your labor cost, to recover the appropriate overhead?

It’s not a question that gets deep enough attention. 

I see many companies with low labor mark ups who are still wondering why their business model is not producing enough profit or cash.

As the guru of benchmarking, I wanted to get to the bottom of this. 

Therefore, in my Leader’s Edge peer groups, I have been shining a light on this metric. 

I started investigating how contractors charge for their hour of time vs. what they pay for that hour.

The results are surprising and eye-opening for those involved in these studies.

  • There is a broad variety of hourly rates (charged to the client) among the companies I measure. 
  • And there is also a broad variety in the costs of labor.
  • But these two don’t always correlate.

Let me explain.

What is the right way to calculate the mark up on your labor cost, to recover the appropriate overhead? It’s not a question that gets enough attention. Let's explore. Share on X

 

The Ratio of Hourly Rates Vs Hourly Costs

Here is an example from one of my peer group studies.

We measured install hourly rates vs hourly costs. Specially, we looked at the ratio of hourly rates vs the hourly unloaded cost.

In one of my groups, the ratio ranged from 2.2 to 4.1. 

These ratios are in essence the mark-up on their labor. Some marked-up labor 2.2 times. Others marked up labor 4.1 times.

That’s surprising, that some companies mark up their labor twice as much as others do!

Caveat: If you use multiple overhead recovery (MORS), you may decide to recover more overhead in your materials or equipment. But (but!) labor is the most important place to recover one’s overhead, so be careful how you apply MORS in your budget. 

What is your labor mark-up, and how do you compare to the industry?

I am proud to announce that for the first time, you will be able to see how you compare with the industry on this metric, in my second annual Financial Master Class, January 5/6th.

We will be covering this metric and many other key benchmarks. 

You will see how the industry marks up their labor, and I will explain where you need to be to run a profitable business.

Register before Nov 30 to gain early bird access, and to get your numbers in on time! 

We had over 150 companies in our Financial Master Class last year, don’t miss out on the best benchmarking in the industry.

For our “5 for 4” discount, email corine@jeffreyscott.biz.