What should labor cost be? (updated for 2022)

July 12th, 2022

Man, it would be fantastic if I were able to answer the question of what labor cost should be with a simple soundbite that applies to everyone. Something like, “No matter what industry you’re in, your labor cost should only be 25% of your sales, period.” 

Although 25% is not technically that far off from the quoted average – 20% to 35% is considered the average labor cost benchmark, generally speaking, but with one big caveat. What industry you’re in is one of the most influential variables in what that number should be.

On top of that, between the pandemic, The Great Resignation, and recent economic volatility, many industries are experiencing wild labor fluctuations up and down. For instance, while the business sector has seen an increase of 1.4% in labor cost, durable manufacturing companies have seen a marked decrease in their labor costs. 

But the most important data point is labor productivity 

If you’re operating a service or labor-based company, this is where I need you to start paying attention. Yes, at its core, the discussion around labor cost is a literal one – how much of your revenue are you actually spending on the people who render the services you offer.

But how productive your labor force is, no matter how much you pay them, is often the most overlooked and essential piece of your business that you need to understand. That same report found that the industries that are reporting the highest upticks in labor cost experienced a 38% drop in labor productivity.

Which begs the obvious question:

As you’re pondering how much you should be spending on your labor, can you currently report with laser accuracy how productive your people are? If you’re still using manual punch cards or systems that make it easy for your people to fudge the numbers, your answer to that question is no.

If you’re going off of estimates, your answer is also no. 

Labor productivity and labor cost are equally important

Labor productivity tracking is something near and dear to my heart. I’m a business owner myself. And I founded Labor Sync, a labor tracking solution, because I was trying to solve for this reporting gap I uncovered within my own roofing company years ago.

It was 2008 and, like thousands of other business owners across the country, I was put in the immediate position to determine how I could keep my business afloat. You can only let go of so many people, and insurance (expensive as it is) isn’t exactly something you can negotiate. 

That’s when I finally admitted to myself I had a big problem. It only took about five minutes of quick notepad estimates to realize my labor productivity tracking solution I had at the time had too many points of failure, too many spaces for the system to be exploited – and I could easily be overpaying $100,000 a year. 

In short, because I wasn’t effectively tracking my labor productivity, my labor cost per year was likely much higher than it should have been.

What does effective labor productivity tracking look like?

For a quick recap, if you’re relating to either of these statements:

  • “On a daily, weekly, monthly basis, I can reasonably estimate with a likely small margin of error how many hours each employee is working or how many hours were spent on a specific job/task.”

  • “I am 95% confident that the labor tracking data I’m currently collecting from my employees is accurate and can be trusted.”

You’re not effectively tracking anything, and you’ve got a labor productivity and a labor cost problem. You can’t really manage what you can’t accurately measure. It’s that simple.

Fractional miscalculations or seemingly tiny margins of error that seem negligible on their face can be catastrophic for your business. And having the right labor tracking technology in place is the only way to guarantee you’re nailing your labor productivity and, as a result, maintaining control of your labor cost. 

Great labor tracking solutions include:

  • Time zone support is essential if you have a regional or national footprint for your business. Without it, you’ll run into a lot of issues, because the timestamping will be incorrect.

  • Extensive language support, because the easier you make it for your employees to use your system (especially those who don’t speak English natively), the more likely you’ll see success in the adoption of your solution.

  • An easy-to-use mobile app is also critical if you have a workforce that is in any way mobile or jobsite-based. 

And, as you evaluate solutions, these are the questions you will want to ask yourself – because not all labor tracking solutions are right for you:

  • What is your geographical footprint? Are you local, or do you have locations, crews, or teams across the state, region, or country?

  • Do you have a multilingual crew? Do you have anyone who works for you where English is not their first language?

  • Do you have your workers clock-in and clock-out at a single location, on work sites, or while out on the road?

Is labor productivity tracking working to control labor costs?

When you’re trying to maintain control of your labor costs, investing in a solution to track labor productivity may not sound like it makes business sense. To put it in perspective, however, the average Labor Sync customer (business owners like you) pay around $2,400-$3,600 per year. 

Now, for instance, let’s pretend you have a worker whom you pay $35 an hour. Working a full, 40-hour week will cost you $1,400. Let’s take this a step further and say this worker, totally by accident and without malice, over reports how much time they are active by a half hour every day.

Per month, that’s an overpayment on your part of $393.75 (approximately). Labor Sync would only cost $10 to guarantee such an overpayment doesn’t happen. And this scenario assumes only one person is making such errors and it’s only in a half hour increment. 

In short, these margins of error are a death-by-papercut situation that, until you can say beyond the shadow of a doubt your labor productivity, to the second, can kill your business. 

Labor cost benchmarks mean nothing without proper technology in place

Benchmarks like the 20% to 35% one are comforting, but those numbers are only half of the equation. If you don’t have an accurate labor tracking solution, I can guarantee you’re losing money right now. And every day you don’t, that will continue to be the truth.

Until you address your labor productivity tracking shortfalls, the labor cost discussion will always fall short under your roof.  

Will implementing such a change be easy? No. But it’s absolutely necessary.