Labour Recovery & Productivity
Achieving Success in an hourly rate-based Business
One of the key pillars to a highly profitable business that generates income by billing time / charging out labour is the ability to charge as many hours as possible.
When managing a team that uses this income method, it's important to understand, use and improve two key metrics: The Labour Recovery rate & Productivity.
Labour Recovery vs Productivity
Let's start by understanding these two metrics and how they're calculated.
Labour Recovery
Simply put, labour recovery is the degree to which someone bills the hours they are paid for.
Formula for Labour Recovery
Billed Time (Hours) / Paid Time (Hours) = Labour Recovery %
To boil it down, if you pay someone to work for one week, you want to charge out (recover) as much of that time as possible. So, it is how much you pay someone versus how much you can charge or recover for that period.
Example of Labour Recovery
If an employee is paid to work a 40-hour week, and you were to charge out 30 hours, that would mean you have a labour recovery rate of 75%.
30 Hours / 40 Hours = 75% Labour Recovery
Within the 40 hours, there is often time that is not directly charged to a billable job, such as breaks, opening/closing time, cleaning, training, administration, health and safety, meetings and more.
For strategies to improve labour recovery, click here.
Productivity
In economics, productivity refers to how much output can be produced with a given set of inputs.
In the context of an hourly rate-based business, productivity is the number of hours billed (output) compared to the time spent on billable work (input).
Formula for Productivity
Billed Time (Hours) / Paid Time - Non-billable Time (Hours) = Productivity %
The key difference between productivity and labour recovery is that productivity uses the more focused measurement of time spent on billable work as the denominator, whereas labour recovery uses the total time the employee is paid for.
Example of Productivity
Again looking at the example of a 40-hour week, our employee may be entitled to 2 hours of breaks, spend 1 hour on administration and be in a meeting for 1 hour of this time. This means they only have 36 hours in which to allocate to billable jobs.
If they were able to bill 30 hours, as per the first example, that would be expressed as:
30 Hours / 36 Hours = 83.3%
This example shows the employee was 83.3% productive during the time they were focused on producing. Careful planning and the right strategies can boost productivity well beyond 100%.
For strategies to improve productivity, click here.
Why is Labour Recovery and Productivity important?
The reason that labour recovery is so important in a service-based business is that labour is the main thing you sell, so it is typically our highest cost and it is also what earns us the most money.
Quite often business owners don't know how much labour they are recovering, so once you know where you are, then you can manage it and you can make sure that you improve and get a better labour recovery, which will lead to better profitability.
