Labor Only Contracts

[renosteinke]

A certain large industrial firm (Call it "The Mill") has much electrical work performed by licensed contractors under "labor only" agreements. That is, The Mill provides all parts and lifts; the contractor provides people and tools, including such things as 555's, threaders, and ladders. Under these agreements, the contractor bills The Mill at a rate approximately equal to double what they're paying the journeymen. The contractor does provide basic benefits (medical, 401K, uniforms, etc.), and often he contractor is a "Union" contractor.

Now, let's compare this operation to a major testing firm, which operates on a "not for profit" basis. That is, they're limited by their charter to a certain nominal profit. When a product is submitted for evaluation, they bill their customer at a rate calculated to only cover the costs of employing someone, and basic operating expenses. Over the years, their multiplier has increased from 2.75 to 2.95; that is, they bill their customers for nearly 3x the employee's wages.

This is what puzzles me: how can a firm make a profit at 2X, yet barely break even at 3X? What am I missing? Are the contractors on the road to bankruptcy? Is the 'not for profit' firm simply insulated from its' own inefficiencies?

I suppose the best answer to this question will come from someone who actually operates a large contracting firm. Just how much does it cost you to employ someone (expressed as a percentage of their hourly rate)?

 

[gadfly56]

A certain large industrial firm (Call it "The Mill") has much electrical work performed by licensed contractors under "labor only" agreements. That is, The Mill provides all parts and lifts; the contractor provides people and tools, including such things as 555's, threaders, and ladders. Under these agreements, the contractor bills The Mill at a rate approximately equal to double what they're paying the journeymen. The contractor does provide basic benefits (medical, 401K, uniforms, etc.), and often he contractor is a "Union" contractor.

Now, let's compare this operation to a major testing firm, which operates on a "not for profit" basis. That is, they're limited by their charter to a certain nominal profit. When a product is submitted for evaluation, they bill their customer at a rate calculated to only cover the costs of employing someone, and basic operating expenses. Over the years, their multiplier has increased from 2.75 to 2.95; that is, they bill their customers for nearly 3x the employee's wages.

This is what puzzles me: how can a firm make a profit at 2X, yet barely break even at 3X? What am I missing? Are the contractors on the road to bankruptcy? Is the 'not for profit' firm simply insulated from its' own inefficiencies?

I suppose the best answer to this question will come from someone who actually operates a large contracting firm. Just how much does it cost you to employ someone (expressed as a percentage of their hourly rate)?

The testing agency may have higher fixed costs than the contractor. All of the lab's work is done on it's own premises. They very likely have far larger fixed overhead costs. If I'm the contractor, I can probably put 200 men on the site from the local hall while having only 15-20 (if that) office personnel in a 3,000 or so sq ft facility. I'm not carrying hardly any inventory.

The "lab rats" are likely to be degreed professionals, often engineers, and they'll be a little more pricey than a 1st year apprentice. The lab will have a lot of exotic testing equipment that needs calibration, maintenance, and the occasional very expensive repair. Paperwork requirements are going to be insane. They'll need more square footage per person, and will likely have far fewer warm bodies over which to defray their expenses.

I know this response is a bit fragmented, but that's what I see on a first pass.

 

[charlie b]

I don't know much about the specific circumstances you are describing. But I can say that one possible difference is whether the individual worker is being treated as an employee of the firm, as opposed to being under contract to the firm. A company has to pay the employee's wages, of course, and they have to withhold a percentage for taxes, medicare, and other things. But the business itself also has to pay taxes, medicare, and other things, as a percentage of the money they pay to the employees. The company also has to pay for unemployment insurance, a cost that is impacted by the number of employees and the amount of unemployment claims that have been made through the years. Finally, the company has to pay rent for the facility in which their offices are located, for administrative and payroll services, and for other things I could not name. For a medium to large size company, it may very well require a billing rate of 2.5 to 3.0 times the employee salary, just to break even.

On the other hand, a company that acts solely as a contracting firm may not need to deal with the costs listed above. So perhaps they could make a profit with a billing rate of 2 time salary.

 

[mgookin]

The mill is purchasing labor only.

The customer getting UL Listing is purchasing testing services done in a facility which is very expensive to build, equip, operate and maintain.

 

[growler]

A certain large industrial firm (Call it "The Mill") has much electrical work performed by licensed contractors under "labor only" agreements. That is, The Mill provides all parts and lifts; the contractor provides people and tools, including such things as 555's, threaders, and ladders. Under these agreements, the contractor bills The Mill at a rate approximately equal to double what they're paying the journeymen.

This is what puzzles me: how can a firm make a profit at 2X.

A long time ago I worked for a contractor that did this sort of thing and it was my undertanding that they didn't get rich off of these contracts. They can be very competitive and many have to be bid.

The reason this company went for these jobs was cash flow because the checks rolled in like clockwork from "The Mill".

 

[renosteinke]

I appreciate the replies, and understand your points ... but ...

What I was really hoping for was for someone to post something along the lines of "I employ 12 people, and my direct costs of employing people - benefits, uniforms, workmans' comp, unemployment insurance, taxes, etc. - work out to equal approximately X% of my total payroll, in a non-union/ union environment."

Naturally, these costs vary by location and detail. You can be sure The Mill knows exactly how much it costs them to employ someone. That leads to another question: is there a reverse "economics of scale," where it might cost a 1000-person firm more to employ someone, as compared to a 50-man contractor?

While The Mill might want to save on expense, The Mill also has an interest in the contractors remaining in business, to be there next year.

 

[iceworm]

I appreciate the replies, and understand your points ... but ...

What I was really hoping for was for someone to post something along the lines of "I employ 12 people, and my direct costs of employing people - benefits, uniforms, workmans' comp, unemployment insurance, taxes, etc. - work out to equal approximately X% of my total payroll, in a non-union/ union environment."

Naturally, these costs vary by location and detail. You can be sure The Mill knows exactly how much it costs them to employ someone. That leads to another question: is there a reverse "economics of scale," where it might cost a 1000-person firm more to employ someone, as compared to a 50-man contractor?

While The Mill might want to save on expense, The Mill also has an interest in the contractors remaining in business, to be there next year.

Disclaimer: Any information is 20+ years ago
I've been on both sides.

I worked for a general contractor that had a few contracts supplying labor and some material. Small outfit 6 to 10 employees, non-union, no health insurance, or holiday pay, vacation pay was a bonus at year end (% of profits - sometimes it was a months pay). Pay was very good - and plenty of overtime. Contractor supplied pickup trucks, hand tools and small electric tools - about anything that would fit in the back of a pickup. Anything else, welders, aircompressors, equipment and the like, got billed out at a nominal rate (whatever a rental yard would charge) +15% if he had to rent it. He had an excellent big shop. One of the perks was working on one's own vehicles/boats after work/weekends. Ocassionally on Friday night he would but the beer, It was a good job, but he finally retired. He charged 2X the wage rate, material +15%. The companies we worked for liked him. I'm pretty sure he did better than just a good living.

As an owner's agent, employing a contractor:
Small outfit, maybe 20 people, non-union. I don't recall what he had for benifits. Supplied tools, equipment, material about the same as the first. He paid his crew well - we did a couple of audits to verify wage rates. He charged us 2X labor rate. I think he and his partners made plenty. And that was absolutely okay with me. His crews showed up on time every scheduled day - nobody hung over or doped up. Crews knew their trade and would do what they were asked. A couple of them would even take time to tell me if I was screwed up. He even had a couple of apprentices - books, school, state certified. We liked them.

The no health insurance would not fly today. But then health care was not a $20K/year proposition. Today I would expect it to be added to the wage rate.

ice