It’s a commonly held belief that overtime is bad for business and is only a sign of being inefficient. However, when used strategically, it can help increase profits and mitigate labor issues.
“It’s not bad in itself,” says Ed Laflamme, LIC, a partner with The Harvest Group. “It’s bad because people are taking on so much work. They’re not measuring what they’re actually getting paid for and they’re doing what we call a non-billable work.”
The trick is to make sure you’re getting paid for all the overtime hours by properly estimating and billing.
“The most important thing is to measure everything,” Laflamme says. “They have to have job cost systems so they’re measuring. You’re comparing the estimate to the actual. They’re giving the crews the information they need so that they understand how many hours the jobs are supposed to take.”
He says if the estimates are wrong, that’ll become pretty obvious after a few jobs. If you’re not tracking time on the job, you don’t know if you’re making money on these jobs or not.
Misconceptions about Overtime
The main misconceptions about overtime are that it is a bad practice to use it and that overtime will cost you more money. “Overtime produces higher sales, when you have higher sales what happens is your overhead is reduced percentage-wise,” Laflamme says.
He explains that overtime allows you to increase your sales but reduce your overhead percentage-wise, meaning you’re buying less equipment and fewer trucks because your current crew is working more hours, with the same equipment, creating a bigger bottom line.
“Remember when you’re talking about overtime, if a man works $10 an hour, if it’s overtime, he’s getting $15,” Laflamme says. “The $5 is called premium time. So, when I consider overtime, I don’t consider $15, I consider $5. I would have paid $10 anyway. So, think of it on a percentage basis. That’s not really a lot of money, compared to the amount of money that the man generated for that hour.”
Another misconception is that people who are salaried shouldn’t be paid overtime. However, there are many positions where unless they are overtime exempt, salaried workers still need to be paid overtime.
Strategic Ways to Use Overtime
Some of the scenarios where overtime can be used effectively include utilizing it to deal with scheduling pressure due to client deadlines, weather delays or seasonal rushes. It can also be used in order to produce work that has the overtime premium already priced into it.
“Many times extra work or enhancements are priced at a premium margin with overtime factored into the labor cost,” says Ken Thomas, principal of Envisor Consulting. “Overtime can be utilized effectively to produce this work type when crews are free either on Fridays or Saturdays.”
Laflamme says that they figure five hours of overtime for everybody working in the field for every week of the season, so it’s already budgeted for.
Overtime can also serve as a tool to deal with labor shortages. It can provide savings in the cost of recruiting, hiring, and training a new person only to have to let them go if the work doesn’t warrant hiring full-time employees.
“It could be great because the value of not having to hire someone full time or train them or bring them up to speed even though you’re going to be paying time and a half could mean that you have a really skilled person that you’re going to save the cost of recruiting them, onboarding them, managing them, that’s why, for certain periods, paying overtime can be fine,” says Jack Jostes, president and CEO of Ramblin Jackson, Inc.
When to Avoid Using Overtime
Thomas says overtime shouldn’t be used to produce unbillable work or as a result of a failure to plan. “Overtime shouldn’t be utilized if the additional cost of it is going to devour your profit margin,” Jostes says. “This goes into job costing. If you can’t make any profit margin on the project because of the additional overtime expense, then you shouldn’t do it.”
While profit margins will look different for every company, but Jostes says companies should be targeting a 20 percent net profit margin.
“If they know they’re going to need to have overtime, if they can do that when they’re costing the job, they need to charge more,” Jostes says. “That way they’re buffering that overtime for what they expect it might be.”
He suggests selling projects during priority times that call for overtime at a higher rate, much like how a hotel charges more during their peak seasons.
“It’s tough to do in competitive bid situations,” Thomas says. “Might be easier to do in residential design-build and maintenance enhancement work. Unfortunately, labor compensation is outpacing our ability to increase pricing in the current market.”
For those concerned about offering overtime out of fear crews will abuse it, it comes down to having proper standards and accountability. Laflamme says you should know how many hours a job should take and communicate that goal to the foreman. Jostes suggests possibly offering bonuses when certain standards are met as one way to encourage crews to finish the job in a timely manner.
“Work hard to forecast hours and headcount as far in advance as possible,” Thomas says. “In the maintenance world, companies should be able to forecast headcount for base maintenance for an entire year based on base contracts. Construction is harder but we still recommend scheduling all backlogged work out fully to be able to project labor needs far enough in advance to make educated decisions on overtime and/or increasing staff permanently.”
Laflamme says landscape companies should be taking advantage of overtime all the time, working at least 50 hours a week, especially during the spring. He says 60 hours is the max you should be working a week. He says most of the companies he works with have very high net profits and are working a lot of hours, but they typically don’t work Saturdays and Sundays so the crews can rest and avoid burnout.
Jostes says that employee burnout is a very individualized experience. Thomas advises monitoring employee morale and performance. He suggests rotating team members when possible.
“Some people will gladly work six days a week,” Jostes says. “Finding out who those people are, and managing them, whereas other people might not want to work 5, 6, 7 days a week, and just I believe it comes down to communication and rapport building with their manager.”
Jostes believes you’ll have a better result long-term if employees agree to working overtime and there is a conversation about the needs of the company.
“I think you just need to be transparent with people about where you’re at, what you’re trying to do, and ultimately negotiate with them,” Jostes says. “They need to consent to it, because if you just mandate that people work overtime, they’re going to burn out and leave. Whereas if it’s something they understand and buy into or they know it’s for a certain period, they’ll be more likely to trust you and stay on with you.”
Jostes says also you shouldn’t be afraid to ask people to work overtime, as many of them are looking for the opportunity to do it.
“When they can work overtime, when they can work that 50, 55, 60 hours, they’re happy,” Laflamme says. “When I go into companies where they say 40 hours, that’s it, they’re not happy. They start looking for jobs in other places or they’re doing work on their own.”