The True Cost of Labor

Any business owner with one or more employee knows this to be true... the cost of labor can be stifling, especially in states with high minimum wages, mandatory benefits, and strict definitions of 'who is a contractor.' Less talked about are the indirect costs of labor, which can go so far out of control, that many employers and contractors are overwhelmed by the challenges they face.

We publish this article to more completely explain the actual costs that are involved in maintaining a full-time, part-time, and contingent workforce, the direct costs such as payroll, employer taxes, benefits, and insurance to indirect costs such as processing expenses, operating costs, invoice exceptions, and time-theft. We'll touch on the pros and cons of using an independent payroll service, managing a contingent workforce, and the increased regulatory compliance. In the end, any average company will have the resources to analyze the cost to benefit when deciding their optimal workforce mix.

NOTE: As you read on, be mindful that all companies, and even entire industries, will have major and subtle differences in their business model, culture, and/or vision statement - all of which can influence or adversely impact the cost factors described below. Equally important to consider, some organizations will have a higher tolerance for risk, reside in states with more or less regulation, are subject to more or less oversight, or simply have a shallow talent pool - but for the most part, this article applies to a broad range of California employers, from any industry, and does not pertain strictly to the live event industry.

Finally, as we reread this article, we realize that many companies have labor only as a cost to the business, whereas most service-based companies see labor as a profit center, as well as a cost center. This piece is written from the later POV.

Direct Costs

Direct Costs are all expenses directly connected or associated with the wages earned by an employee or contractor. They are the most common costs that come to mind when you think of the Cost of Labor, such as wages, taxes, benefits, and liabilities.

Payroll Expenses

Employee Payroll / Contractor Fee: This is the sum amount of the monies owed to the employee or contractor. This can be an hourly-rate, day-rate or flat rate - although some rules must be followed when calculating flat-rates to ensure that regardless of the agreement, the amount paid is higher than the applicable minimum wage.

Employer Payroll Tax: This includes the employer contribution for federal, state, and local taxes and government insurance, such as Medical and Unemployment. The employer contributions for Federal include Social Security (6.2%), FICA (1.45%), FUTA (0.6%), and in California, the SUTA for new employers (3.4% for new California employers), plus any local or municipal taxes.

Non-Billable Expenses: When parking, bridge tolls, hotel room nights, meals, and other job-related expenses cannot be billed back to the client, those costs must be accounted for and are often charged against the job. They include any expenses or other incurred costs by company personnel at, on the way to, or on the way back from the job site, including transportation costs, drayage, transfer fees, equipment rentals, and expendables, etc.

General Liability Insurance: A policy limiting your company’s liability for claims made resulting from an accident caused by one of your employees. In some cases, you can request freelance contractors indemnify you and name you as Additional Insured on a policy they may carry. But less established techs rarely carry their own liability and therefore must be covered under yours, as necessary. And employees are automatically indemnified by their employer, except in cases where the employee acted in a fraudulent manner or in violation of applicable laws without employer knowledge.

Workers Comp Insurance: Insurance providing disability benefits as wage replacement and medical care and benefits to employees injured in the course of employment in exchange for relinquishment of their right to sue your company for negligence. This insurance is mandatory for all employees, whether part-time or temporary - and if your contractors fail to provide their own worker's comp insurance, for many jobs the contractor must be covered by your company’s policy. Failure to do so could result in the contractor filing a claim against your end-client’s policy - which won’t go over too well with most end-clients.

Commercial Auto Insurance: If you’re going to have a contractor or an employee drive vehicles, like trucks, cargo vans, passenger vans or even their own vehicle to run and pick up supplies, commercial auto insurance provides protection from liability, injury or collision damage if they get into an accident. And be careful to read the fine print on your rental truck agency agreements. It’s a misperception that your personal auto insurance will cover your rental van. Where they may be true as you drive it away from the lot, the moment you put people or gear in it that’s work-related, most policies won’t cover an accident or the costs of collision damage, theft, property loss, personal injury, medical expenses or possible punitive damages.

Processing Expenses

Merchant Processing Service Fees

Cost for processing a credit card payment which will vary by company based on volume, risk, and credit rating. Fees can be as low as 1% or as high as 5%, but the average for small business that accepts payments by phone or thru companies like Paypal, the average is a base rate of approx. $1, plus 3% of the sale.

Invoice/Payroll Processing

It takes time and resources to process an invoice and payroll for payment. It might seem simple enough. Print it, pay it. But there is a process that must be followed to allow for adequate tracking and audit, including verification of the hours, accounting entries, client approvals, and the resources to complete, run and file the payment. On average the all-inclusive cost to manually process a single invoice can range from $12 to as high as $40 per invoice.

Invoice Payment Transaction Fees

Our normal process to pay invoices is a company check mailed on Fridays for invoices received by EOD Tuesday. However, as a consideration for our crew, we have paid using Venmo, Paypal, Western Union, and several other systems. Most charge a transaction fee, ranging from a couple dollars to a percentage of the transaction total.

Invoice Exceptions Expenses

Since time cards or contractor invoices often do not match up with employer-provided timesheets, extra time must be devoted to researching and investigating Exception invoices. This sub-process takes that invoice out of the queue for processing until it can be handled individually and adds additional days and associated costs to its processing. In many cases, invoice exceptions do not represent a minority of transactions but can range between 50-70% of a given job.

Indirect Costs

Indirect Costs are those expenses that are incurred in the process of recruiting, onboarding, training, soliciting, scheduling, managing, paying, and terminating an employee through the cycle of their employment.

Also underestimated, these costs may also include hard and soft costs associated with loss of opportunities or revenue, such as court and legal fees, collection costs, disability/unemployment claims, penalties & fines, adverse decisions & punitive actions, as well as the loss of clients or liabilities surrounding employee fraud or negligence.

Cost of Job/Sale

This list includes the additional costs associated with each sale. Some of the lines include ambiguous references to company personnel. It’s important to remember, like the staff required to process an invoice, there are other costs associated with making the job happen, such as: making the job possible, ensuring we have the means to fulfill it, promoting our ability to do the job. Similar to operating expenses (which we describe below), the lines here should be summed up and divided by the total number of jobs. That remaining value is the sum total of all the indirect resources that are required to make the job even possible.

Materials: The cost of any materials or supplies used in the execution of the job. This can be as simple as file folders & labels and paper & ink, but might also include specialized gear and expendables such as custom tool kits, specialized electronics, personal protection equipment, personal hydration devices, and first aid supplies.

Human Resources

Administration: The cost of the administration staff required to manage the day-to-day administration of the company, from corporate governance and compliance audit to management of Human Resources and Finance.

Recruiting & Onboarding: Cost associated with providing specialized personnel to solicit, recruit and interview new candidates; then guiding successful candidates through the Onboarding and orientation meetings or webcasts

Training & Management: Costs associated with providing specialized personnel to perform training and workshops, as well as costs required to provide effective and efficient management.

Marketing & Marketing Operations: Costs associated with compelling clients to buy. These costs including demand generation, lead nurturing, advertising, promotion, and sponsorship - as well as the systems and processes required to ensure there are accurate and effective.

Sales & Sales Operations: Costs associated with capturing the sale and fulfilling the order. These costs include commuting and travel to and from job sites, potential lost opportunity, business development, account management, materials, and collateral, etc - as well as the systems and process required to control spending and record accurate and profitable transactions.

Operating Expenses

The following list includes the various costs incurred to operate the business on a day-to-day business. The gross profit from the cumulative sum of all the jobs must cover these basic operating expenses or the business will be in the red at the end of the year. Therefore the operating budget per job would be the total annual operating budget divided by the total number of jobs for the year. That dollar amount is the average that all the jobs must clear, on top of all the expenses listed above. This is just a sample list, and not exhaustive - but you get the picture:

Office Salaries: Office personnel including Labor Coordinator, Accountant, Office Manager, Sales & Marketing personnel, Operations & Production personnel

Office Wages: Includes any non-salaried positions including admin assistants and clerical staff

Office Lease & Utilities: Includes office lease, warehouse lease, building improvements, as well as gas, electric, water, and garbage.

Telecom: Includes landline, toll-free, fax, and mobile numbers - and may also classify high-speed internet and digital cable.

Professional Fees: CPAs and bookkeepers fee for managing books, preparing and filing taxes, performing audit review, and representing a taxpayer during an audit, as required. Lawyer(s) for contract review, document prep/review, negotiation, litigation, litigation defense, trademark/copyright protection, infringement, legal complaints or responses, and other related actions.

Supplementary Insurance: Umbrella Liability, Errors & Omission, Equipment Damage or Replacement, Medical, Dental, and Vision, etc.

Office Furnishings: Even a home office or satellite office requires a desk, table, chair, lamp, filing cabinet, computers, and printer.

Office Supplies: Business requires basic expendables to function, such as paper, pens, folders, paper clips, labels, envelopes, desk organizers, toilet paper

Recurring Fees

Trade Membership Fees: Professional trade organizations, industry associations, networking organizations, community engagement programs

Vehicle Registration: State vehicle registration, commercial vehicle registration, operating weight decals, annual registration tags, motor carrier permit

Software Licenses: Network Administration, Accounting, Office Applications, Webcast, Project Management, Customer Relationship Management (CRM), Marketing Automation, Sales Operation, Graphic Design, Document Portability, Digital Signatures,

Monthly Bank Fees: Service Fees for one or more checking account maintained by the business, such as Operating Account, Payroll Account, Escrow Account, and Tax Savings Account

Loan Interest: Interest paid monthly on a business loan, company credit card, line of credit, or other unsecured credit accounts.

Municipal Tax, Licenses & Permits: City Business Tax License, Reseller Permit / Resale License, EDD Insurance

State Tax Prep & Corporate Filing Fees: Articles of Incorporation, Company Bylaws, Board Meetings & Minutes,

Income Tax Prep & Filing Fees: Annual Tax Forms, Schedules, Worksheets, Quarterly Payments, and other filings.

Lost Revenue/Opportunity

Don't underestimate the value of revenue lost from a missed opportunity. We may not notice the jobs we don't get if we weren't called for them. That's among the reasons cash flow analysis, profit & loss statements, comp analysis, and inventory value reports are necessary to identify adverse patterns.

Service Recovery: Discounts or refunds returned or credited to clients due to poor or substandard performance of the part of an employee or contractor that is deemed unacceptable and therefore not collectible - not is it recoverable or reimbursed by the employee or contractor.

Bad Debt: Any sum of money unpaid on the invoice(s) due that are deemed unrecoverable, typically the result of client financial troubles, poor service recovery, lack of proper record-keeping, or degraded client relations.

Late Payments: Cost associated with receiving payments late. This can include interest paid on short term loans or amounts balanced on credit cards requiring an additional service charge and/or interest charge.

Lost Sales Opportunity: The happens for many reasons, including problems with crew or crew chemistry, poor performance, poor communication, or poor business process. When calculating the value of a lost opportunity, don’t measure just the lost future sales projections. Try to measure and quantify the cost invested in acquiring the client from the beginning.

This is a pretty comprehensive list of everything that goes into hiring and managing a production management staff and/or event production crew - however, it’s not an exhaustive list, since as mentioned earlier, these account for the basics of the business. Be sure to consult with a professional that understands your business and the laws of your state before edit your existing process based on what you learned here.

Let’s demonstrate an example of the True [Real] Cost of Labor is, factoring in some of the variables discussed above. To make this exercise easy to follow along, we’ll use some round numbers and some values from my previous company. This is based on a small company that does an average of $350k in net sales and $210k in payroll expenses. It’s also based on a new employer paying into Unemployment insurance and a Workers Comp rate of $0.08 per $1.00 of pay.

This does not compute all the lines we reference above, but granted, it’s a small company. The data represent a real-life scenario, but there are so many factors that contribute to the top and bottom line, that hopefully this simply makes you aware of the factors that not only labor companies face - but yourself face them. I’m actually surprised how many small companies are facing them, and don’t even realize it.

Forgive us for the length. There was a lot to cover…

# # # #

For more information about our rate structure or questions about the topics discussed above, please contact us at info@crusolution.com.

Important Notice: This article is an opinion editorial and not intended for use to determine your company's legal or regulatory compliance. This is not a legal publication so it can aid in your research and understanding, but it is shall not be construed or regarded as legal advice or instruction.

Before taking any action, based on what you've read in this article, be sure to consult with your lawyer and/or accounting professional - or appropriately licensed professionals familiar with the laws of your country, state, or municipality.