General Inquiries

Direct Labor Cost Pools

  • 1.  Direct Labor Cost Pools

    Posted 04-19-2019 17:08
    Hi all.  My operations manager would like to start charging all Project Management and Superintendent salaries and burden to G&A accounts and then allocating to jobs based on the jobs' budgets for PM and super labor, instead of charging directly to the jobs these employees work on during the week.  Before I set all this up and make changes to our accounting and payroll systems, I was wondering if anyone else does this and whether it's been a good or a bad thing?

    Thanks in advance for any advice or information you can provide.  Trying to make a list of all the pros & cons.

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    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
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  • 2.  RE: Direct Labor Cost Pools

    Posted 04-20-2019 11:26
    :Hi!  I am a bit confused.  What does your operations manager hope to gain from not charging actual time on a job of supers and PM's?  Does this help his incentive plan?  Wouldn't the ops mgr want to know where job complexity or other factors require more time than estimated so as to either feed that back to estimating; or review the efficiency of the super and PM's;  or do something to either mitigate a potential problem.    If they estimates are excessive as to supers or PM's, perhaps might mean that they have capacity, which would reduce costs and possibly win more jobs in the lower bid cost.

    Let me know.  Sorry if this does not help address your question yet.

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    Tony Burruano
    President
    Burruano Group
    Cherry Hill, NJ/Naples, FL
    236.595.2149
    www.burruanogroup.com
    tonyb@burruanogroup.com
    ------------------------------



  • 3.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 08:09
    Anthony, thanks for your response.  The majority of our jobs are negotiated so all he's trying to do is keep labor costs in line with the estimate because we do a lot of smaller jobs where PMs might be managing 5 or more jobs and a superintendent could be managing 2-3 jobs.  He believes it will be easier if their labor costs are posted to G&A and accounting does monthly job cost adjustments to jobs based on budgeted labor costs.  He's told me another local GC processes their payroll the same way - saying they don't post any labor directly to jobs, not even field laborers.  With our guys working multiple jobs they sometimes miss coding their time to a job or two over the course of several months, and then some of their jobs get hit a little more - so rather than some jobs being over-budgeted on PM and/or superintendent labor and other jobs (that may very well be the same PM and possibly the same super) being well under-budget, the OM thinks the system he wants to implement will resolve that and he's not worried about knowing historical or "true" labor costs.  Of course any jobs we do that fall under Davis-Bacon would be directly job costed.

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    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
    ------------------------------



  • 4.  RE: Direct Labor Cost Pools

    Posted 04-21-2019 00:42
    Debbie:

    We starting doing something similar way back in 1996 at a large electrical contractor.   The practice continued at least through 2011 when we sold the company.  The objective was to provide a means of measuring project managers use of their time.  We knew that most of our PMs had some downtime which they could not charge to specific jobs, but might be contributing to other functions such as estimating, purchasing, marketing, special projects, etc.   And unfortunately. we did have some PMs who had so much downtime that they could not charge to other functions.

    Our process was a little different than the one you are considering.  We charged PMs to G&A accounts and then allocated to jobs based on actual time spent on those jobs (not estimates or project budgets).  This required PMs to account for their time much the same way an electrician or foreman account for their time by cost codes.    PM time allocations were periodically reviewed by the operations manager to discourage improper or inaccurate time reporting.

    Our payroll and job cost systems were already capable of accounting for this process so the only extra work that needed to be done was PMs spending a few minutes each week figuring out what they worked on and completing an on line input form that would book the entries transferring the G&A charge to jobs.

    There may be other ways of measuring PM effectiveness, but we realized a number of benefits from our process.  First, it made the PMs think about how they were spending their time.  Second, it allowed management to see how PMs were contributing in other areas.  Third, it was a tool used during the PMs annual performance reviews.

    Most importantly, during the annual business plan and budget process, we would budget the full PMs salary and burden in G&A and then estimate that 90% of this would be allocated to projects.  We could then measure each PMs actual allocation against this 90% standard.   This would help us evaluate each PM and all PMs as a total group.  This information could then be used to determine PM staffing needs.

    Bear in mind that this is only one tool we used to evaluate PMs.   Bottom line profits were clearly more important.  We were also a $600 million company with ten offices and three lines of business throughout the USA.   As such, metrics were critical to our success.   If you are a small company and do not see the value in accumulating and evaluating this data, there might be other ways to achieve what your operations manager wants.







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    Carl Taskalos
    Hastings MN
    (713) 502-3994
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  • 5.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 07:53
    Thanks Carl, I appreciate the info.  That other aspect, PM evaluation, is not something we had considered.  We are a small firm, but our PMs do contribute to other functions - marketing and estimating mostly.  So you've given me a different approach to consider.

    ------------------------------
    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
    ------------------------------



  • 6.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 08:54
    Debbie I can see the logic in this, especially after you related that your work is comprised of many shorter duration jobs with PM's juggling multiple projects simultaneously.   Though not related to labor in your specific situation, I see Utility contractors take a similar approach with equipment costs.  Heavy Highway / Civil contractors who typically have few, but very large projects, will cost Equipment to jobs at direct time based rates, however equipment intensive contractors, like Utility, with many smaller projects sometimes don't.

    Utility contractors who have a very high count of short duration, low dollar volume projects will take the approach you suggest and pool equipment costs, and then allocate as an indirect cost according to some formula / scheme that makes sense to them.   This could work for PM / Super labor as well.

    Critical to building confidence in this approach is having a mechanism to compare actual costs for these resources to the allocated indirect costs, period by period, to see if the formula being used is reasonably close or if it you are consistently under absorbing or over absorbing the pooled costs; and make tweaks to formula until the under / over absorption is within an acceptable tolerance.

    Good Luck!

    ------------------------------
    Dan Conway
    Enterprise Sales
    Viewpoint Construction Software
    Rye NH
    603-502-6657
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  • 7.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 09:11
    Dan, thanks for that information.  It does help and I like your suggestion that we need to have some mechanism in place to compare actual/true costs to what we are allocating.  I'll work on figuring that part out.

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    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
    ------------------------------



  • 8.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 09:37
    Edited by Debbie McDaniel 04-22-2019 09:37


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    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
    ------------------------------



  • 9.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 10:45
    Debbie - Here's another argument for the method you're proposing that could help.  For highly compensated employees like PM's / Supers, elements of the payroll burden can reach their limits before the full year is over.   When using the direct method, jobs that happen earlier in the year can appear to under perform jobs that happen later in the year after the limits have been reached. The method being proposed would smooth this out and be more fair to jobs throughout the year.

    I've seen similar logic applied to labor intensive contractors who have many short duration jobs with respect to spreading overtime.  They think it unfair that jobs that happen late in the week get hit with all the overtime so devise methods to spread any OT throughout the week.

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    Dan Conway
    Enterprise Sales
    Viewpoint Construction Software
    Rye NH
    603-502-6657
    ------------------------------



  • 10.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 08:44
    Debbie,
    Our PM's manage small and large jobs.  They are required to complete daily time cards , just like our field/shop personnel. I know this is different from other companies because when we hire a new PM, they are all surprised by this requirement.
    The benefits to completing a daily time card is that what they actually did that day is fresh in their minds.  Allocating back to jobs at a later date (which we have done in the past with a monthly frequency) is not always accurate.

    Accounting set up has three levels of 'jobs' for payroll to use when entering daily, hourly PM's time.  Each entry drives to a different level of GL expense

    Productive jobs drive to COGS GL section, For any time working on a current job, supervising, ordering, job paperwork.

    in-house jobs are set up to drive to:
    (a.) Indirect job cost GL overhead section.  For any time that would be for benefit of all jobs, for example general department scheduling meetings, employee safety meetings not for specific jobs.

    and
    (b.) General selling and admin section. For example, entertaining clients and any 'downtime'.

    Hope this helps!





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    Lucrezia Esteban
    Controller
    East Muskegon Roofing and Sheet Metal Co., Inc.
    Muskegon MI
    (231) 744-2461
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  • 11.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 09:08
    Thanks Lucrezia.  Your setup is very similar to what we currently do.  Our ERP has a time-keeping module with daily input of time by all employees.  Then HR can upload this directly into our Payroll module and everything is automated.  Changing this system would mean, while payroll would still be automated (now going to all G&A accounts) we'd have to start doing monthly job cost adjustments to charge time back to the jobs.

    ------------------------------
    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
    ------------------------------



  • 12.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 10:26
    Debbie,

    In my experience, what is not tracked is not managed. Tracking PM and super time by job provides more accurate cost information, helps estimators better budget, and helps performance tracking by PM and super. I've seen a lot of companies transition from capturing these costs in G&A to tracking them by job (the opposite of what you're considering), and every company has seen tangible benefits of tracking them by job.

    I work for a subcontractor where simplicity is key, and we've developed a system that allows PM's and supers to capture their daily time in about five minutes on their cell phones. Based on what I've read in this discussion, I would suggest trying to make the process for capturing the PM and super time simpler and more efficient, rather than trying to allocate it.

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    Wade Miller CPA, CCIFP
    CFO
    MTN, Inc.
    Englewood CO
    (970) 580-9007
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  • 13.  RE: Direct Labor Cost Pools

    Posted 04-22-2019 13:15
    I totally agree with Wade, Debbie.  Make it simple...track it...hold people accountable objectively.  Tony

    ------------------------------
    Tony Burruano
    President
    Burruano Group
    Cherry Hill, NJ/Naples, FL
    236.595.2149
    www.burruanogroup.com
    tonyb@burruanogroup.com
    ------------------------------



  • 14.  RE: Direct Labor Cost Pools

    Posted 04-24-2019 11:14
    We Do an Over/Under by division.  It's a bit of a custom, but management here feels it's a better view to allocate a flat rate buy hour type.

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    Michael Bolt
    Director
    ENE Systems
    Canton MA
    (781) 828-6770
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  • 15.  RE: Direct Labor Cost Pools

    Posted 04-25-2019 07:25
    We try to have PMs code/bill as much of their time to specific jobs as they reasonably can, to better track job performance and where they are spending their time. There is often push-back (in order to make their jobs 'look better'), but we have provided solid reasoning to our Department Managers as to why it is important from an estimating/job budgeting standpoint and have had better results in recent years based on that. All other time (estimating/sales/training/education etc) goes through our OH.

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    Scott Bishop CPA
    C F O
    Buist Electric, Inc.
    Byron Center MI
    (616) 878-3315
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  • 16.  RE: Direct Labor Cost Pools

    Posted 04-25-2019 10:31
    Thanks Scott.  That's currently our method - or supposed to be.  But we do get the push-back too - as they will charge to their jobs that have excess PM time budgeted.
    I appreciate your feedback!

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    Debbie McDaniel CCIFP, Masters of Accountancy
    Accountant
    Piedmont Construction Group
    Kannapolis NC
    (704) 773-2620
    ------------------------------