Struggling with overhead

[Resprez]

Hello,
This is my first post so be gentle.
My business partner and I are struggling with the cost of WC insurance and payroll services fees. We operate a small general contracting company and are trying to find ways to keep our overhead down. We are paying 28% WC rates and after our employer taxes are finding it hard to make a profit. I'm basically looking for help to determine if we have a structure problem or maybe our pricing structure is off. Any assistance is appreciated.

[Harold Mansfield]

Hello,
This is my first post so be gentle.
My business partner and I are struggling with the cost of WC insurance and payroll services fees. We operate a small general contracting company and are trying to find ways to keep our overhead down. We are paying 28% WC rates and after our employer taxes are finding it hard to make a profit. I'm basically looking for help to determine if we have a structure problem or maybe our pricing structure is off. Any assistance is appreciated.
Kind of tough to answer without any details. How many employees? Do you need that many full time employees year round? Can you do your own payroll?
Here's an article about keeping WC costs down
Clamp Down on Workers' Comp Costs - LHSFNA (http://www.lhsfna.org/index.cfm/lifelines/january-2010/clamp-down-on-workers-comp-costs/)

[Resprez]

Thanks for the reply. We have two full time employees and the two of us (company owners) who work full time but are not drawing a salary (another issue for another day). The reason we went with a payroll co is that they are handling the WC through their services. This allowed us to avoid a large upfront down payment and the costs are directly proportional to the number of hours each employee works. They have heavy fees however so we are looking at payroll co options. We have considered using only 1099 sub contractors but we are afraid that that will drive our pricing up in a very competitive market. Between WC and taxes, we are paying around 40% out of every dollar. If we did a better job tracking all expenses I'm sure that number is closer to 60%.

[Fulcrum]

28% comp fees? I may be in Canada but $28 per $100 earned sounds a little steep. What does your state/federal law say for your industry and how many insurable claims have been made?

Can you share what state you are from as well?

On a side note, start tracking everything better. Need an eraser or paper clip? Record the purchase even if it's only $0.25.

[Resprez]

We are in Georgia. Yes, 28%. It's even higher for roofing. We are doing basic remodeling. We have no insurance claims. I shopped the rates and that's the best I could find. It's robbery.

[Fulcrum]

Yes, 28%. It's even higher for roofing. We are doing basic remodeling. We have no insurance claims. I shopped the rates and that's the best I could find. It's robbery.

Wow, no wonder the underground economy is growing - not to mention keeping wages low. Does this number include what you need to spend on Obamacare (for lack of a better term)?

Edit: I do not normally use a term like Obamacare. I can't think of a good name for it right now so I made sure to use one everybody could understand.

[Resprez]

The two employees are offered healthcare through the payroll service. To clarify, the two full time employees are actually employees leased to us through the payroll/leasing company. So, me and my business partner pay for our healthcare individually.

[turboguy]

Edit: I do not normally use a term like Obamacare. I can't think of a good name for it right now so I made sure to use one everybody could understand.

How about U-ACA Short for unaffordable affordable care act. Obamacrud might be another.

Back to the topic. You may find your UC rates come down over time if you have a good track record. I haven't looked at ours for a while but they used to be 8% and how I think are down around 3-4%. Yours sounds awfully high. I am sure there is more risk in the construction industry.

[Harold Mansfield]

Wow, no wonder the underground economy is growing - not to mention keeping wages low. Does this number include what you need to spend on Obamacare (for lack of a better term)?

Edit: I do not normally use a term like Obamacare. I can't think of a good name for it right now so I made sure to use one everybody could understand.
The ACA requirements kick in at 50 employees or more. A restaurant with 10 employees (for instance) is not required to offer health insurance. And even then, there are still all kinds of exceptions and subsidies. Not to mention wellness rebates. For instance employees who quit smoking can be responsible for a 50% cost reduction.

But for home improvement and construction it's probably hard to keep good talent without offering benefits.

I'm spit balling based on what I hear from friends who have employees and businesses of various sizes in different industries. And it's easy to find online in about 3 seconds.

[Bobjob]

The two employees are offered healthcare through the payroll service. To clarify, the two full time employees are actually employees leased to us through the payroll/leasing company. So, me and my business partner pay for our healthcare individually.

These two employees you have through a staffing agency?

[Harold Mansfield]

From what I'm reading, the way to get cost down in your industry is through safety qualifications. Also, back to this service that you are paying who is taking care of everything, are you sure you are paying the best rate or are they tacking on fees? Seems to me with 2 employees you can do your own bookkeeping (maybe visit an accountant 2-3 times a year) and do payroll through your bank and save all of that unnecessary expense.

I don't know the full scope of your business, but from what you are saying you are paying someone else to handle this and don't really know what your options are, or if you're paying the best rate, and you don't keep track of your expenses properly. I know from experience how easy it is to nickle and dime yourself to death on things that you can easily do yourself.

[MyITGuy]

There are a few vendors you can look to for Payroll processing to eliminate/reduce those costs:
I.E. Payroll services to easily pay employees, file taxes - Intuit Payroll (http://payroll.intuit.com/) and https://zenpayroll.com/ come to mind as cheaper alternatives which care for submitting your tax info/payments as well.

[krymson]

I would look at it this way... If you're not making a profit, there's something wrong with your pricing structure. With competition, they probably have a larger workforce, able to work on multiple jobs at once, and therefore can have a more "competitive" price structure. You unfortunately, do not have such a luxury so you need to charge where you can cover your expenses and make a profit. Otherwise there's no point in being in business because you'll just be stuck in a circle with no where to go by breaking even.

I'm in the web design and development world and there are others of us here that are as well. We can tell you our competition, mainly overseas *cough cough* middle easterners *couch cough* kill us because of exchange rates... They may do work for, literally, pennies on our dollar. For example a $2500 website that I would build... they would charge people $50 bucks for. How can I compete with that? I don't because I know what I need to make in order to make a profit and build a business. You have to come up with a competitive advantage and show people WHY you charge more and why it's worth it. For me it's simple, I market to Americans, who want something American made, and who live in a similar time zone (give or take an hour or two as I live in the central time zone) so contact is quick and there are 0 language barriers.

If you can't make a profit due to government fees and other things then you need to increase your prices. If you don't take anything out of this... take this... Inflation is a motherfudger

[jamesray50]

Hi - payroll and the costs associated with payroll are usually the highest percentage of expenses when operating a business with payroll. One way to reduce the cost is to stop leasing employees. You are paying a fee for that service. I'm not sure what type of construction company you are, but you may be able to use sub-contractors to complete jobs. But, you would have to be careful that the workers are classified correctly. Typically a sub-contractor works for himself, pays his own taxes and supplies his own insurance. Maybe you could use a combination of employees and sub-contrators. If you decide to keep employees and stopped using the leasing company would you have to hire new workers or could you keep them? If you don't know how to do payroll there are payroll providers who provide that service. If you go that route choose a company that is familiar with the construction industry, understands worker comp audits and job costing. Your worker comp insurance is going to be high because of the risk associated with the job. Read the IRS rules on how to determine a worker's status, and call payroll providers for estimates. Most of them have free consultations and will give you an estimate for free. Be sure to inquire about hidden costs (filling out additional forms, sending you reports that you may need, etc). Good luck with your business. It takes a while for a business to grow and a lot of hard work. Hope this has helped.

[jamesray50]

One more thing - ask your satisified customers to refer you to their friends, ask for written reviews on whatever websites you are listed on, and pass out you business cards everywhere, tack them on bulletin boards, leave them at business, etc.

[DeniseTaylor]

Oh yes, the issues of being a small business with employees. I had a brick and mortar family business once and our problem boiled down to pricing vs volume. There has to be enough volume in order to compete, so you can keep your prices in a range that will attract customers.

My advice is to increase your visibility by improving your location and marketing efforts. Then once you get your volume into a range, adjust your pricing according.

On the other hand, you can charge more than your competitors if you offer something unique or better. Better service, better quality, easier, more convenient, etc. That's one way of getting around the volume/pricing problem. Set a price that works, then add so much value that nobody minds paying it.

Hope that helps!

[turboguy]

There are lots of things that are "nice to have" We started to look hard at our expenses a few years ago. We found we were wasting a ton of money. At one time we had a check service, Telecheck maybe, that would guarantee any checks we took. It cost us about 2% but if we got a bad check they would cover it. We were leasing a postage meter. Now when we leave at night we turn down the heat. We made sure we took every discount and never paid a late fee. We started to pay where we could with a cash back credit card but of course paying it in full each month and get a lot back from that. We were spending money on advertising that was a waste. The list of ways we were wasting money could go on a long time. We started to look for every way we could cut our costs. We also looked at our pricing. We had things we had not raised prices on in 20 years. We were still making money on those things but not what we could. We thoroughly analyzed all our costs and found things we were almost selling at a loss. We adjusted all our pricing but really on the things people looked at hard we didn't need much in the way of price increases. The end result was that we decreased our expenses from 51% of sales to 38%. Our profits now are the best they have ever been.

I have a feeling if you look at anyway you can find to cut costs you will be surprised how much you can save and how much it will help your profits but look at your pricing too. Understanding money is a key to having a profitable business.

[TAAccounting]

Resperez,

As an Outsource CFO -- this is a problem I deal with on a regular occurrence. This will be a rather long response so I apologies in advance.

1. Work Comp being high in Georgia -- having a few client in Georgia myself, that rate is a bit high for a roofing company. But definitely, not unheard of. Your best bet would be to ask the payroll company to price it again since not ALL payroll companies go through "Open Market" and thus, their price could be higher or lower, depending. I'm dealing with this for a client right now actually -- one payroll company declines, another approves with better rates (baffling sometimes).

2. How are the employees from the payroll company leased to you, but are on your payroll and benefit packet? That defeats the purpose of "lease/staffing" by regulatory code. If the employees are "staffed" to you, then your work comp should only have to cover you and your partner. The firm staffing the workers need to carry their own, pay their own taxes, and offer their own benefits. So I would take a closer look at that if I were you.

3. The payroll for the two workers is really a "Cost of Goods Sold" and not an "Overhead" item. So if you have it going to overhead or if you are omitting the "COGS" area completely -- that would create a costing issue for your jobs. Also, your Work Comp would be a "COGS" item as well as it pertains directly to providing a service/goods

Conclusion:

I would revisit your agreement with the staffing of the two workers and even shop different payroll companies. But the way it sounds right now, really does not sound right to me. I would also take a closer look at your cost and see if it can be managed better. What it sounds like is you are pricing it incorrectly. Remember, "pricing" is a calculated figure, based on facts and costs. Why people should pay that is the value you provided and only you can answer that.

I hope this helps! Have a Merry Christmas!