Labor utilization is a metric that service providers use to ascertain the amount of time your workforce spends on billable tasks. It may be an indicator of employee productivity but, more importantly, it can help you gauge whether you are understaffed or overstaffed for a particular project. It can also be one metric that helps determine the profitability of any project.
In this article, we will aim to discuss how you can increase your labor utilization rates, since it’s often an indication of profitability. But, more importantly, you want to get your labor utilization at the correct rate for each department in your organization. “It’s all a function of the outcome you’re seeking,” says Jerry Bernard, president of Kansas City Audiovisual Solutions, an audiovisual integrator in Kansas City, Missouri, serving primarily K-12 and higher education facilities in Missouri, Kansas, Nebraska and Iowa. “The labor utilization with respect to installers is a barometer. Is the utilization running too high? You don’t want to burn people out. If you see those numbers creeping up, it might be time to add more labor. On the flip side, if they are consistently declining, maybe it’s time to make a tough decision and reduce the amount of labor we have.”
In this regard, labor utilization is more a function and measurement of management than employee productivity. “We don’t put the pressure of utilization on our employees; instead, we place it on management to monitor and ensure our business is healthy,” Kyle Habben, regional general manager – New England, AVI-SPL, says.
With this in mind, there are some average labor utilization rates that most successful service contractors, including audiovisual integration firms and security integrators, can strive to achieve that indicate a healthy balance between staffing and projects in the pipeline.
Before you can gauge whether your labor utilization should be higher or lower, it’s important to have some benchmark figures.
These figures are for the tech industry as a whole, but representatives from AVI-SPL and KCAV agreed with the assessment.
“If you factor out PTO and holidays, which we do here at AVI-SPL,” Habben says, “then 70% to 80% is a good blended rate across all COGS employees. So, each employee group may have a different percentage for their KPI, but if the blended total is between 70% and 80%, I think most integrators would be satisfied with that.”
Keep in mind that the optimal labor utilization rate varies based on the employee’s role. Installers on the job site performing physical labor may have a utilization rate of 90% or more, whereas the sales team, project managers and consultants might have a target utilization rate of 75%. For instance, Bernard mentions that design engineers typically have a labor utilization of just 50%. “They are designing systems for competitive proposals and RFP client proposals for jobs that we may not win. So, if we don’t get the job, those hours are considered not utilized,” he says. “For installers who are out in the field doing installation work, we shoot for a 90% utilization rate. For project managers, we shoot for a 70% utilization rate.”
There are also administrators, support staff and accounting personnel who don’t factor into labor utilization at all. “We consider their roles part of the cost of doing business,” Bernard states.
Once you disregard employees with no billable time, it’s fairly easy to calculate labor utilization.
It is often helpful to calculate the labor utilization for various job functions and then determine the average of all positions. This will give you greater insight into whether or not you are achieving your goals and, if you aren’t, what departments may need increased staffing, re-structuring or even cuts.
Calculating labor utilization is just running the numbers. Once you’ve determined KPIs for different roles, you need to find the best way to track labor utilization. Habben emphasized that you want to collect accurate figures. These numbers should not be used to reward or punish employees, but to get an accurate gauge of staffing needs.
Obtaining accurate figures to track labor utilization can be a challenge for integrators, according to our expert sources. That’s where time-tracking software comes in. Larger companies may rely on a proprietary system, but many integrators use customized Enterprise Resource Planning software, such as Solutions360. Bernard notes that Solutions360 allows workers to bill their time against a specific time period, project or job function, such as training or certification classes.
An industry-specific program like D-Tools also incorporates timesheets that can be used to track actual vs. budgeted labor hours and labor utilization across specific projects.
In either case, it’s best to rely on technology to streamline this task. After all, you don’t want tracking time to take too much time and, in the ultimate irony, reduce your labor utilization. “Up until 2019, we were tracking manually,” Bernard says, “which was kind of painful. Now, it’s all done electronically.”
Habben adds, “It should be part of any basic time reporting package. The key to tracking it is not what you use; it’s how you use it.”
Rather, whatever system you use, daily tracking and employee honesty is a key to getting accurate figures. “We promote daily time reporting for greater accuracy. Logging time at the end of each day ensures precise records, whereas reporting at the end of the week, or even on the following Monday, greatly risks inaccuracies due to time elapsed.”
He adds,
- Jerry Bernard, president of Kansas City Audiovisual Solutions
We tell our employees, ‘You're not going to be in hot water if your utilization isn't what we want it to be.’ This is a tool for us to understand where we are from a staffing and planning level.”
Labor utilization measures two important aspects of your business: staffing and profitability. If your organization is running too lean, you may miss deadlines. One project delay can set your other projects off-track, which means you’ll need to hire more labor, which cuts into your profits, or you’ll miss deadlines, which can damage your company’s reputation in the long term.
On the other hand, if you have too many people for the predicted work in your pipeline, you’re paying more than necessary to get the job done, which ultimately hurts your company’s bottom line. Let’s look deeper at labor utilization and its role in these important aspects of business.
“Labor is often the variable that results in the job meeting the profit targets, profits not being as high as they should be, or losing money,” Bernard explained. “When a project is bid, we know the hardware costs and have a selling price. We know the product costs because we know what we paid. When it comes to the labor side, if we aren’t utilizing our labor efficiently, the job is not going to meet the profit targets we planned when it was designed.”
On the other side of that, if you are working at 110% efficiency, it indicates you are trying to get more work done than you have bandwidth to do. Either the project managers underestimated the labor involved or you’re understaffed for what’s needed. That brings us to the next challenge: fluctuating labor needs in a tight labor market.
The tight labor market, right now, creates challenges for smaller firms to find staffing they need during their busiest times, especially if they hire sub-contractors on a project basis. “In the education vertical, they want us to do the work when students aren’t in the building, which is the summer,” Bernard says. “We’re basically on-call May 15 to Aug. 15.”
He points out how hard it is to find quality people and the best names in education contracting are likely not available on short notice. “You can’t call a contractor in April and ask if they can do a job in June. They’re already booked.”
To circumvent these issues, it’s crucial to plan ahead, Bernard declares. That involves enrolling your salespeople to provide accurate projections. “You really need to back up in the whole sales cycle, from having a first meeting with a client to finishing a project,” Bernard says. “We rely on the forecast from the sales team to say, ‘We have these projects’ and ‘I’m working on this project.’”
The sales team can provide the likelihood of closing, the projected installation hours required, and the start and finish dates. From there, the ERP system forecasts the projected date of closing, the time to completion and the labor required. “If the system is tracking every project, it aggregates the days and projects how many hours of labor we’ll need each week,” Bernard explained. “I’d like to tell you it’s that exact of a science, but forecasts are sometimes overly optimistic or just inaccurate. At least it gives you a direction and an idea of the labor you’ll need.”
With all of this in mind, the key to a successful and profitable systems contracting firm is not so much maximizing utilization, but “right-sizing” utilization, experts say.
Habben says.
He explained that, ideally, you want to be staffed for your average run rate over a given year and expand with subcontractors as needed during busy times. “If you are always overstaffed,” he explained, “you have to make some changes in your staffing. The key to maximizing — or optimizing — your labor utilization is understanding your business and what it’s going to do over the next three to four months.”
