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How to Manage Your Labor Costs

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There are many ways to reduce your company’s labor costs. At least once a year, review your labor costs and evaluate how you can save money.

Labor costs are any costs that are direct and indirect when paying for labor. These are all overhead costs to run your company and include everything related to employee wages.

For example, labor costs include wages, payroll taxes, overtime, insurance, benefits, training, and meals.

Hire Good Employees and Reduce Your Turnover

Turnover costs money. Whenever you hire, you spend time recruiting but you also spend money on background checks, training, new uniforms, etc. If you have high turnover, evaluate why you are losing employees. If they are leaving the company, it is important to find out why. 

The cost of replacing an individual employee can range from one-half to two times the employee’s annual salary. Fifty-two percent of voluntarily exiting employees say their manager or company could have done something to prevent them from leaving their job. 

Whether you have a management problem or a communication issue, it is important to find out from your exiting employees before they are leaving or have left. Conduct exit interviews and encourage honesty. Some former employees may not give any information because they fear a bad reference, so it is important to reassure them that your discussion is confidential. 

Don’t skip important steps when it comes to hiring. You want top employees so ensure you interview well, conduct background checks, and check references. 

Furthermore, review your policies and handbook. Do you have policies that are outdated or that you need to implement? The lack of structure and policies can cause employees to leave.

Evaluate Your Staff Structure

When you hire employees do you need them temporarily? Are you keeping staff that you don’t necessarily need? For example, perhaps you only need to hire seasonal staff or part-time employees. 

If your business is new, research what your competitors are doing. For example, if you are starting a landscape business, you may only need seasonal employees at first. 

If you are a small business that doesn’t need an administrative person all the time, consider outsourcing some of your tasks. Outsourcing can save a company about 60% in operational costs. You can hire people online from companies like Upwork to do a variety of tasks. This can eliminate some labor and recruiting costs. 

Need an Affordable Mobile Time Tracking App for Your Employees?

Evaluate Efficiency and Reduce Overtime

Are your projects running over on time? If your team is dealing with poor equipment or shortages, it could cause them to spend more time on a project. 

Do you measure your staff’s productivity? Most manufacturing businesses use engineers to measure productivity for all tasks. This way if someone is not productive, the employee may be held accountable.

But as a small business how can you ensure your workers are productive? For example, as a landscaper, you probably know the average time an employee should take to mow different size yards. Ensure they know your expectations. If you find one person is lagging constantly, it is important to talk to them to find out why. What can you do to help? It could be a training or equipment issue. 

Consider writing a training book or guidebook for the average times it should take to do jobs. Also, if the equipment is constantly breaking or your staff runs out of supplies because items aren’t ordered on time, this could cause frustrations for your staff. You don’t want to micromanage. However, your staff should be productive and efficient. 

Consider investing in software that will let you assign jobs and job assignments. This will help measure efficiency on job tasks. You can calculate what your jobs will cost you in labor. 

Invoice Your Clients Correctly

If you find your staff is working longer for clients than you originally calculated, evaluate the reasons. For example, you may have established that your janitorial staff should be done cleaning for a client in three hours. But lately, you notice they are taking longer. The client may be asking them to do extra tasks like cleaning windows.

When writing your contract out with the client, ensure your team and the client know exactly what tasks are included and what will be extra charges. Let them know in the contract they should request a service in advance so you can schedule it accordingly. 

Evaluate Your Scheduling

Employees want to know their schedules in advance as soon as possible. You may not be able to know every job you will have in the future, especially as your business is growing. However, your workers appreciate their schedules being written in advance. 

When forecasting your schedules, you are more likely to have less absenteeism because your team knows what to expect. 

Prevent Time Theft

According to research, time theft can cost companies 7% of profits. It is estimated that over 75% of companies lose money from buddy punching. 

Buddy punching is when someone clocks in or out for your employees. The reason they may do this is perhaps your team member is running late, or they forget to clock out. 

Preventing buddy punching is necessary to decrease labor costs. Automating your time clock systems can help prevent time clock theft. 

Invest in Good Software and Automate

Investing in good software can help with a variety of issues. For example, with ezClocker, you can assign job assignments as mentioned above to evaluate efficiency. You can easily run reports and audit time entry changes to make important decisions on your labor costs. 

ezClocker’s online scheduling system allows your staff to view their schedule anywhere using their PC or mobile phone. You can put your employees’ schedules on the app, and they can see what time they need to be at work the next day. Also, it has GPS technology so you can see when they arrive and leave the job. It is easy to see which employees are on time, late to work, leave early, or don’t show up at all.

Using a good time tracking app allows you to manage your projects, know who is there, and the time spent at the location. You will ensure the invoices you send to your customers are correct. If you must provide documentation to your clients, the information is stored so you can easily download a report to send to that customer.

A good, automated time clock system can also prevent employees from adding time to their timesheet, working overtime, and even working off the clock. 

Research other apps like QuickBooks to help with your accounting needs. Also, some apps help with invoicing and estimating jobs. Automating tedious and time-consuming tasks can help you save on your labor costs. 

Invest in Low-Cost Benefits

You may not be able to afford to pay your employees full medical benefits, which affects your labor costs. However, there are many low-cost benefits that you can give. 

Consider giving them Paid Time Off (PTO), 401k, tuition reimbursement, and offering flexible hours. You can also offer wellness benefits like massages and gym membership reimbursement. 

Consider also talking to a tax advisor in your area. You may qualify for tax breaks for some of the plans you are considering. 

Other Methods to Save on Labor Costs

There are tax credits you may be able to earn by hiring veterans and other targeted groups who have a hard time getting work. It is important to research these opportunities and talk to a tax professional. 

Also, promote from within and know when to hire internally. For example, if you are hiring a salesperson, you may want someone who knows and is invested in your business. 

Consider streamlining your processes. Think about writing processes so that some tasks and jobs won’t add extra steps. Streamlining your processes can help with efficiency and productivity. 

There are other ways to reduce your labor costs such as paying commissions or bonuses instead of raises.  In some cases, you may need to reduce your staff. It is important to evaluate these ideas carefully as you don’t want a reputation for cutting jobs. However, as you grow you may need to make necessary changes. 


Author: Kimberley Kay Travis

Kim Travis has over 20 years of experience in business, human resource management, and leadership roles. She has specialized knowledge in employment law, employee relations, recruiting, management consulting, small business growth, leadership development, workplace safety and health programs, and writing business content.

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