Invoicing - Part 1: The Difference Between Labor Pay Rate Vs Labor Cost Rate

Most people don't love this side of the business but it doesnt have to be complicated if we don't let it. Here, Tonya from The Profit Constructors and Duane from ClockShark discuss the small but mighty difference between the cost rate and pay rate, that could be costing you THOUSANDS on every job.

Check out Part 2 of the Invoicing series to determine accurate costs everytime.

When we talked to a construction company, even any company in any trades, there needs to be an understanding of the books, right?

How so often do we hear that companies go under or they're not doing well, or the number one area that they're struggling in is because they don't have a strong handle on their books. And that's such a broad term. It's annoying. But when it comes down to it, it's all about what you get paid and then what you charge people so you can get paid. And that's all about the rates.

So what are the rates that contractor or anyone in the field really need to be paying attention to?

Bookkeeping can actually be pretty simple. Bookkeeping you can enter the data. But what is harder is understanding the data you need to enter. To answer your question, what are the rates they should care about from a labor standpoint?

They have to obviously the pay rate. Pay rate is the base of everything, it's what you're going to pay. The person, is basically just that person's direct wage. And typically when you're hiring someone, you know their pay rate because you have said to them, works in you an offer for $25 an hour and they say Thank you, I accept. That one is probably the most easily understood rate of all of these labor rates that we're talking about.

The next rate will be cost rate. You know, like I said you just extended an offer to the guy. Now then, you need to know, what does that guy cost you because he walked through your door. And let me break that down just a little bit more. So he's definitely going to cost you something in taxes. You have to now begin to pay above that, let's say $25 an hour that you're paying him, you know, federal, local, state, whatever. And then you also have to pay, typically you're under obligation to pay worker's compensation. So those two costs right off the bat, most people also are taking into account when they say to that person, I want to pay you $25 an hour.

But now we've moved from pay rate, which is the $25 an hour to a cost rate. We now have taxes and worker's comp, but really that cost rate, if you just stop at taxes and worker's compensation isn't complete because you also know that when that person walks through your door, let's say we're going to focus on the construction industry, right? So they're probably going to need personal protective equipment out on the project. And you are probably providing that. They may need a mobile device because maybe they're there having people sign service tickets out in the field, you're going to provide that mobile device. If you're requiring them to have that for signing service tickets. Right so whatever it is that you have to provide for them to be able to go out and get the work done, that is also a cost. And that cost now is associated with having hired that person.

Yeah so if they've got a company vehicle, there is costs associated with owning that vehicle for that person. There's the vehicle insurance, there's the upkeep, there's the gas. Like all that could be wrapped up in this particular person's cost rate, is what you're saying? That's exactly what I'm saying. And I would say use a tool to kind of help you dial in what all of those costs are. You know, we have a tool available we can link to.

Yeah, for sure. The tax and insurance rates and start adding stuff. Just start taking account of what is it that you provide when you come into work for you that you couldn't send them out onto the job site without and then that's going to be what's added into your cost rate. 

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