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Pricing Your Proposals Accurately: Determining Labor’s Hidden Costs

Written by  Richard D. Ollek, CBSE

Have you ever delivered a proposal (not a bid) where you “just knew” you were going to get the account? Your presentation went excellent, all the buying signs from the prospect were there, and you left confident you would be selected to perform the service.

Then you really get pumped up when the prospect calls and gives you a glowing report on how professional your proposal looked and how great your presentation went. But then they proceed to explain that you came in second to another company. You ask why you were not chosen and they explain your competitor was a few dollars a month less, and they felt obligated to their stockholders to be good stewards of their money and the select the lower price. They may even tell you the amount you listed was too high, and of course your natural reaction is “We could have done it for that.” I’ve learned that in the real world second place doesn’t pay anything. Second might pay in sports, but not in the business world.

My question to all BSCs is: Do you really know what it costs you to perform an hour of work? Many contractors will use industry averages or some form of estimate for their costs. For example, if you are paying $10 per hour for a cleaning technician, do you really know what your loaded cost per hour is, or do you say it’s about 15 percent or 20 percent because you heard that was an industry average? Industry averages are nice to know and are important benchmarks, but you are not an industry average and your prospects don’t buy industry averages—they buy the numbers you present in your proposal. You are a Building Service Contractor with your own set of costs, and those are the ones that are really important. Nearly every day, I see BSC’s lose out on opportunities where they might have been able to do the job better than the contractor that got the job, but they were using averages in their pricing and not their own company numbers.

Let’s break down what really goes into an hour of labor:

FICA: Most everyone is familiar with this social security tax at 6.2 percent of each labor dollar. Added on to that is 1.45 percent for Medicare for a total of 7.65 percent. Nothing profound here.

FUTA: This is the federal portion of unemployment tax that employers must pay on the first $7,000 of each employee’s wages. That rate is 0.6 percent.

SUTA: This is the state unemployment tax that we all pay on employee wages, and the rate varies widely by state. In Arizona and California, for instance, you only pay on the first $7,000, but in Washington state you pay on the first $39,800. This tax is one that a contractor can have a certain amount of control over. If you have high turnover and aren’t monitoring your unemployment claims you can get a rate that is double or triple that of your competitor, who may have a systematic way of following and “fighting” the unemployment claims of terminated employees. Most states have rates that vary from 0.5 percent to 6 percent or more depending on the circumstances described above.

There is another interesting additional tax. If you are in one of 18 states or the Virgin Islands that has had elevated unemployment rates as a result of the recession over the past several years, you are paying an additional 50 to 150 percent over the 0.6 percent standard Federal rate. This is the money the Federal government is asking those 18 states and the Virgin Islands to repay that they borrowed in past years to fund their high unemployment rate. So, in effect, you could be paying 1.2 or 1.5 percent on the first $7,000 of payroll instead of the standard 0.6 percent. Do you know if your state has this surtax, and if so, what it is? This adds to your loaded payroll rate and has to be computed when determining your REAL loaded labor cost.

Workers’ Compensation Insurance: Just in this past year I have seen these rates range from .55 percent up to 18 percent. Most of you already know this, but you receive a modification factor—either up or down—depending on your claims, their frequency, and their severity. Think of the disadvantage in pricing if you are on the high end of this equation. Much of this rate can be controlled by BSCs who:

1.    Have a solid working company safety program.
2.    Meet regularly with their insurance company to review claims, ask questions, and challenge those claims they feel are questionable.
3.    Negotiate with the insurance company for discounts on all coverage. Don’t allow your insurance agent to bring in next year’s rates two days before your current policy expires. Request a reasonable lead time for the quote, so you can review it with them and solicit other proposals if you feel you aren’t making progress with them on this or other parts of your insurance coverage. Remember, your customers solicit other proposals if they feel your pricing is out of line, so it is natural that you do the same.

If you are not paying attention to your on-the-job injuries, you are going to be paying a high rate and your negotiating power is virtually nonexistent. This particular cost of your loaded labor rate is one that can really get out of hand, but if you will manage your safety program and your injury claims, you can make substantial progress in keeping these costs competitive.

General Liability Insurance: This will also be a percent of your labor dollar, and it too will vary by state and company. I have seen instances where one BSC had a rate more that double that of a competitor in the same state—and in some cases, in the same city. Some insurance companies require an audit of your payroll at the end of your policy year, and they then either credit you or bill you additional depending on your final payroll amount. I have seen other insurance companies quote a rate and not audit. So do your homework. It may just mean the difference in a highly competitive proposal (not bid).

Many states have also instituted other payroll-related taxes, such as employee training taxes, healthcare coverage taxes, etc. Know what those EXACT rates are, and include them in your loaded rate.

Comparing Loaded Costs

ProposalsLet’s look at an example of a loaded rate for two businesses. Company A is diligent in their safety program, has a procedure in place for following up on unemployment claims, and negotiates the best deal they can on their general liability. Company B just accepts whatever happens as fate, doesn’t care about safety, and doesn’t monitor their unemployment claims.

Which one do you think has the advantage in pricing? Company A has over a dollar per hour labor cost advantage when they begin their pricing on a proposal, and we haven’t even started to address supply and administrative expenses—which can have some of the same issues. Oh, and don’t forget, if you are in one of the 18 states or Virgin Islands you need to add the additional unemployment tax.

Additional Costs

It is important to address supply costs the same way. Determine YOUR average, and then take it step further by looking at the job you are pricing to see what specifics will add or subtract costs to that particular account.

What about supervision? Is it a remote location that will require drive time, or is it next to a location you already clean? This can make a difference in how you approach pricing.

Now I am sure many seasoned veterans are thinking “Tell me something I don’t know.” Yet the problem is we often don’t use what we know. I don’t think there is a BSC alive that hasn’t wished he had priced a proposal a few dollars less to get the job knowing he “could have done it for that.” I know I did this several times until I finally quit using industry averages and started using my company averages.

Let me challenge each of you to make a commitment to review what it is REALLY costing you for every hour of labor you place on the job, including your actual supplies and supervision. You may just be surprised to learn what those costs are. In the future, this will prepare you to be more competitive—and certainly more accurate—in your pricing. Don’t lose another proposal because you didn’t have a handle on your exact costs.



Richard (Dick) Ollek, CBSE is the senior consulting partner for Consultants in Cleaning, LLC, where he provides consulting assistance to BSCs. Prior to forming the company in 2005, he owned and managed his own cleaning and facility services company for 34 years after managing another company for 9 years. He has written 4 books for the industry on selling, human resources, operations and the do’s and don’ts of contract cleaning. He also writes a weekly blog that can be accessed at www.consultantsincleaning.com. Ollek is also a principal in Tripod Learning Associates, which every Monday morning produces a FREE podcast at www.tripodcast.com. Additionally, he produces CDs and DVDs for the industry on a variety of subjects that are accessible on the Consultants In Cleaning website. Dick can be reached at 573.374.1111 or through his website.

 

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