The real cost of labour in the electrical contracting industry

August 3rd, 2017, Published in Articles: Vector

 

Mark Mfikoe

Every electrical contractor must establish as accurate an estimate of the cost of a project as he or she can to determine the price at which they will do a job. This is called the tender price. The cost of labour is among the trickiest variables contractors must deal with. Material cost is fairly easy. This is determined by the supplier and the negotiated discount you are able to secure as a contractor. The extent to which you would be able to negotiate this depends on the relationship with the supplier, which often depends on the history of trading between you and the supplier. You must then decide what your trade mark-up is going to be. This is entirely your business decision to make.

It is easy to make a mistake when it comes to the cost of labour. This may shrink your profitability on the job or could even result in doing the job at a loss. When you make a mistake regarding the cost of labour, saying that you aren’t able to meet your obligations because you calculated the costs wrongly would not be a valid excuse.

Very often, new contractors are awarded work on a “labour-only” subcontracting basis by established contractors. It is important that both sides of this arrangement understand that neither escapes the burden placed on employers to pay the right costs. The costs are essentially the same for every employer, with slight variations on the up side for employers who pay above the minimum wages. These costs are dictated by statute and by the collective agreement of the industry.

Let us use the example of an Elconop 1 and Elconop 2 by way of illustration.

If your electrical contracting company is based in Soweto, the hourly wage rate of an Elconop 1 is R34,00 and that of an Elconop 2 is R53,29. If you work 42,5 hours a week, what is the cost of your Elconop 1 and Elconop 2 per week respectively? Will it be correct to say that your cost for an Elconop 1 is R34 (rate per hour) x 42,5 (number of hours per week) = R1445, and that an Elconop 2 costs you R53,29 x 42,5 = R2 264,82?

Let’s say your labour profit margin is 15% of your cost. Would it be correct to say that your cost plus profit on labour is equals R1661,75 and R2604,54 for an Elconop 1 and an Elconop 2 respectively?

Let us assume you really need this job and you would rather take 10% profit on your costs calculated here. Based on these numbers, your cost plus profit would be calculated as R1589,50 and R2491,30 respectively. Would this be correct?

I submit that you would have grossly understated the cost of your labour if you calculated the cost of your labour like the contractor above. Table 1 shows the real cost of an Elconop 1 and an Elconop 2 if you are a Soweto based firm:

 

Table 1: The real cost of an Elconop 1 and an Elconop 2 in Soweto.
Item Elconop 1 (Soweto) Elconop 2 (Soweto)
Basic wage rate per hour R34,00 R53,29
Provident fund per hour R2,55 R4,00
ECA labour levy per hour R0,26 R0,26
Sick benefit fund per hour R0,03 R0,05
Council levy per hour R0,14 R0,21
UIF per hour R0,37 R0,58
Total per hour R37,35 R58,39
Total per week R1587,38 R2481,58

 

This shows that, with the correct cost for an Elconop 1 in Soweto, the contractor who relies on “wage rate only” understated the real cost by R142,38 and for an Elconop 2 by R216,76. Just with these two employees, the employer’s calculation is out by R359,14 every week.

In his planning, he was going to bank this money. Because of the error in his determination of costs, he is actually doing the job for far too little. At this rate, his competition need only do far less work than he does for them to realise more profits than he does. At a 10% “margin”, he is doing the job at a loss when you include things like lost time. At 15%, at least some 11% of his anticipated profit is wiped out.

Please note that the calculations in this article do not include company-specific costs like labour contribution to overheads. Irrespective of how you look at it, if you understate the costs of labour by only looking at the hourly wage according to the collective agreement, you will under-recover on your labour. When you accept a job as a labour-only subcontractor, irrespective of your overhead structure, please get your costs right.

On the other hand, as an established contractor, when you give work out on a subcontractor basis, be fair and allow for the subcontractor to cover his costs and some margin. You need a strong subcontractor to deliver on your obligations. After all, he is helping you by giving you certainty.

In the next issue of Vector, I will share regional differences in the calculation of wages with the readers as we continue to explore the subject of the cost of labour in the electrical industry.

Mark Mfikoe, ECA national director

 

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