It may seem that running an electrical contracting business is harder than it used to be. Technology can mechanize many tasks and reduce errors, but research has revealed that employee attitudes have a greater effect on productivity than anyone realized.
Past generations of employees weren’t so concerned about whether they were happy at work. However today, a business owner must evaluate the impact of company culture and procedures on company performance and ensure that employees are engaged as well as trained. Measuring productivity is more complicated than ever, but there are still some basic ways to track your operations, while you decide how to make your company a more delightful place to work.
Productivity has traditionally been defined as the output per labor hour. Unless you are operating a factory production line, this is probably not the most accurate way to measure real productivity. Your output on each project is measured differently, and other factors besides labor hours affect your overall performance. Here are two different ways to measure productivity trends more broadly.
Total Factor System
The Total Factor System considers the impact of production costs other than labor on total output. For example, Sales ÷ Number of Production Employees captures the relationships between the people who contribute directly to installation or maintenance on the project site, while Sales ÷ Number of Staff Employees is a measurement of the “knowledge base” of the employees who are categorized as salaried, management or support staff. You know that high turnover is costly and reduces overall productivity, but length of service and experience also refines judgments and reduces errors, which may enable the company to operate successfully with fewer employees.
Sales ÷ Direct Material Cost measures the proportion of revenue allocated to materials and the efficiency of your purchasing process, while Sales ÷ Variable Costs alerts you to how the costs directly related to project performance (e.g., labor, sales commissions, tools, etc.) track over time as a proportion of revenue. Sales ÷ Total Operating Expenses provides a quick snapshot of how effectively your overall system functions in ensuring successful performance of your contracts. Decreases in these numbers warn you that costs are rising, and it’s time to look for inefficiencies and waste in areas such as material purchasing, labor, or management and maintenance of tools and equipment.
Evaluating Sales ÷ Plant and Equipment Replacement Costs (less depreciation) shows you how much of your capital supports each dollar of revenue. It can be useful when you decide whether to lease or purchase equipment or buildings or if you want to refine your capital budgeting to support growth.
Value Added System
Value Added System ratios are similar to the Total Factor System but substitute the value added by your company (employees and assets other than materials purchased for your jobs) for sales revenue in the calculations. Value Added is calculated as Sales – Direct Material Costs. The most common ratios will divide value added by many of the same factors used in the total factor ratios.
For example, Value Added ÷ Number of Production Employees and Value Added ÷ Number of Staff Employees show you whether the value added by the company to its output remains the same with fewer production or “knowledge base” people. You want to see the numbers rise, not shrink, over time. Value Added ÷ Number of Employees tracks the same thing across all employee categories, while Value Added ÷ Plant, Equipment and Inventories measures the productivity of the capital you invest in these nonhuman assets.
These ratios can be customized for each company and tracked weekly, monthly, quarterly or annually. The trend over time is more important than individual variances, but all extreme variances should prompt an investigation into underlying causes before it becomes impossible to reverse damaging trends.
Productivity and efficiency are closely linked, and not all factors affecting them can be quantified. You can certainly measure flow through a delivery—or completion schedule or the effectiveness of your invoice- or estimating-generating process—by tracking the time, labor and other resources invested at each step. It is easy to measure reductions in waste or accident rates. A cost versus benefits analysis improves purchasing decisions. More efficient collections procedures increase cash flow, reduce interest on debt and expedite purchasing processes that support excellent project performance.
The qualitative factors that affect your overall productivity are more difficult to measure. Using surveys, exit interviews and tracking turnover and retention rates may not seem as precise as ratio analysis but are essential to evaluating your success at creating a culture of trust, reputation for fairness and ethical behavior, and relationships that foster customer loyalty and employee engagement. Including these in your productivity analysis is your best chance to ensure steady revenues and achieve your profit targets, regardless of economic cycles.