How to manage labor costs in the cleaning industry
How to calculate labor costs
The cost of labor is typically the most significant expense for a cleaning company, since that sum includes wages, benefits, payroll tax, training and operating a human resources team. Because labor costs are such significant expenses, they’re often targeted for reductions.
The US Bureau of Labor Statistics reports that the hourly wage of janitorial workers is $14.31 an hour. Researchers estimate that the share of revenue spent on wages will decline as janitorial service providers automate their processes and increase efficiency. To manage labor costs without reducing wages, start by calculating direct labor costs:
- Step 1: Calculate how much you’re paying your team in wages (salary or hourly)
- Step 2: If you’re paying workers by the hour, determine how many hours will be worked per week and how many overtime hours are necessary
- Step 3: Calculate other labor costs (benefits, insurance and taxes per employee)
- Step 4: Take those costs and add them to the paid wages amount calculated in Step 1
- Step 5: The previous number is the total cost you’ll be responsible for during that calculated period
- Step 6: To determine the labor cost per hour, divide that total labor cost number by the total number of hours your employees will work
Indirect labor costs are generally more complex, as they include accounting, human resources and other operational expenses. To gain the most accurate information for indirect and direct labor costs, perform job costing to maintain a clear picture of your profitability at all times.
How to reduce labor costs
After calculating labor costs, manage and reduce that number by performing the following steps:
Offer benefits to engage employees and reduce turnover
The ability to identify how each job is performing, so that it’s not pulling down the net profitability of the company, involves understanding how much is being spent on benefits. Tracking benefits shows that your company is in compliance with governmental regulations while remaining in tune with the needs of your workforce.
Knowing the real costs of benefits is important for attracting future employees who may ask questions about holidays, time off, health insurance and retirement plans. Other benefits could include meals or in some cases, equipment and supplies.
Employee benefits account for 29.5% of the average cost per private industry employee, while the remaining 70.5% goes toward wages, according to the US Bureau of Labor Statistics.
It’s common knowledge that a robust benefit package can increase employee engagement, thereby increasing employee retention. But it’s not as widely known that offering benefits while remaining profitable requires a transparent understanding of their costs.
Prevent wage creeping
Wage creeping is a popular industry term that refers to when an employee’s salary increases over time, resulting in higher-than-normal pay for a particular position. Cleaning professionals experience a form of wage creeping on job sites when a worker is pulled from one account, where that worker was making more an hour, onto another job site where the rate is lower.
In this situation, an employee may receive an additional dollar per hour compared to the agreed rate in the new contract, because the previous contract paid them a higher wage. Software solutions that provide job costing and reporting analysis for labor budgets prevent wage creeping.
Minimize overtime pay
Managing labor costs through budgeting and diligent employee scheduling efforts also prevents distributing too much overtime pay. For instance, imagine a cleaning company where the average direct and indirect labor costs are roughly 70%. That means 70 cents on every dollar goes toward wages, benefits, payroll tax, training and operating a human resources team.
Also, assume that the same company is operating at a gross profit of roughly 20%. Then there are only 10 cents left on each dollar to cover corporate operations, administration costs and office expenses. So, a few extra cents each hour spent on preventable overtime adds up very quickly and can take away from your overall profitability.
Scheduling software offers support in terms of reviewing issues with overtime before they occur. More specifically, it gives managers the resources to quickly acknowledge where overtime is being distributed unnecessarily. Alerts or notifications can be sent to professionals who can proactively make scheduling adjustments before profits are lost.
Compliance
Cleaning certain sites may require specific skills. For instance, janitors who work in hospitals may need specific training. Also, during COVID-19, it was common for companies to ask for vaccination records for staffers cleaning their sites.
Clients may still want your workers to provide COVID-19 records, or customers may want your staffers to perform cleaning standards set by OSHA, even after the pandemic. A compliance tracking system can keep track of certifications, licenses, experience and other requirements. You can assign those compliance standards to certain jobs or tasks.
In the future, you might need to show proof that your employees have certain certifications. Being able to handle those types of requests is an indirect way to manage labor costs, as it could help win bids which could lead to more repeat business.
Learn more about managing labor costs
To keep managing labor costs without reducing wages, access software designed for labor budgeting and job costing to gain full visibility in terms of profitability. Use that data for contract renegotiation and bidding for future work, since that information might be similar to an existing job. Schedule a demo to learn more about our job costing and budgeting software.