Overtime: When Is It Okay?

by Frank Ross on December 20, 2012 · 0 comments

In response to a question from a participant in A Better Way 2 Learn Financials concerning the use of overtime, here is what Frank Ross has to say:

Overtime certainly is an illusive target. Some of us think it is just a bad thing, regardless of the circumstances. Others of us think it is a rite of passage for being on the payroll and if we do not work it, our guys will leave us. I, on the other hand, look at overtime as an asset which utilized in a controlled environment, can be a significant benefit for our companies.

Overtime Is a Management Decision

First of all, I think we all agree that overtime is a management decision and is very much a controllable expense line item on our income statement. Our sense for what our guys think notwithstanding, we say when we work overtime and how much. Several of the largest service companies in the country have a policy against working hours in excess of forty. Reason? Their prices are so competitive that working overtime will literally consume any margin they have associated with the work.

What are the “good” times we can work overtime?

1. When we have budgeted for it. Here we have allowed a certain amount of overtime usage in our expense budget. This means that that expense is included in our markups and recovered if we hit budget.

2. When the client reimburses us for the overtime hours worked.  A no brainer, actually, but one that bears mentioning.

3. When we exceed our sales goals and work the additional hours required in an overtime environment in lieu of adding another crew.

4. When the billing rate for a particular skill is more than three times what we pay the man. This is somewhat of an arbitrary relationship and has a lot of moving parts, but one which I have found to be dependable. So, if we pay a man $15.00 an hour and invoice his services for $45.00 an hour, or more, we generate ample margin to more than compensate for the premium compensation we will pay him. Literally, for so long as we are able to invoice for his services, he can work as many hours of overtime as he is able. Prime examples would be irrigation and lawn care techs.

All other instances where men are paid in an overtime environment are likely drains on our profitability … this would be bad.

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