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Job costing: Why and how to prove employee ROI

job costing

Are you satisfied with your employees’ overall productivity? Do you feel like you’re making the most of your payroll investment? Do you measure employee ROI?

When discussing business productivity, it’s important not to overlook financial productivity. To gauge your success, you must assess the balance between the time your employee spends on projects and the profits those projects generate.

What is employee ROI?

Employee ROI (return on investment) is the metric used to measure the financial return on payroll investment (your employees). It’s an evaluation of the costs associated with employing your people.

Employee ROI = (Net profit generated by employees/Total employment costs) x 100

How do you track employee ROI?

It all starts with correctly pricing your services, based on people hours.

Here are three key steps:

1. Track your payroll expenses at the same level you are billing your clients. Whether it’s customer, job, service, item, department, team or individual, a detailed breakdown can provide valuable insights.

2. Post that cost in your accounting system to visualize profitability by each of those categories: Who are your most profitable individuals, teams, departments, etc.? Knowing those answers can help you adapt and optimize resources across the board.

3. Determine whether your jobs are priced appropriately. Every business owner has a profit-per-job expectation. For example, you want to make 50% profit on a specific job. If you only make 35%, you have to determine the cause of the shortfall.

Very often, your pricing is off. Or, is it your employee productivity?

What’s the value of tracking employee ROI?

1. Evaluate service value

To unlock the real value of your services, track the actual cost of delivering a job. Uncover hidden elements that might go unnoticed, such as the contributions of a project manager. Some business owners underestimate the benefits of having someone oversee quality control, client communication and overall project management.

Recognizing these contributions allows you to incorporate them into your pricing strategy.

2. Optimize employee efficiency

Is your staff working as efficiently as possible? The disparity between your best and worst projects often boils down to two factors: employee skill sets and behaviors.

Behaviors are different from skills in that they have to do with how someone acts – usually a part of their character. Skills have to do with competence or ability. By identifying the key behaviors that distinguish your top performers, you can integrate them into your hiring process and interview questions.

3. Asssess supervision

Supervision and employee engagement are intertwined and can directly impact profitability. The saying goes: People join companies and quit bosses.

Look at the skills and behaviors of the supervisor and develop an engagement plan. You can’t have an effective human capital strategy unless you know who are your best teams, your best jobs, your best employees and your best supervisors.

Employee engagement and the bottom line

A very powerful concept is that a company can increase profit by more than 3% just by gaining 15 minutes of extra workforce productivity per day. If you can get all of your employees to add 15 minutes of productivity each day, that will translate into a 3% improvement in your bottom line.

That means that for every million dollars in revenue, a 3% productivity improvement adds $30,000 to the bottom line.

Chances are, at some point, your employees have slacked off while on the clock. And oftentimes it’s because they aren’t engaged in the company. And studies have shown that companies with engaged employees have significantly higher earnings-per-share than their competition.

What sets these high-earning companies apart? A human capital strategy that drives employee engagement.

How to increase your ROI

How do you get your employees engaged enough to deliver the 15 minutes per day of increased productivity? A human capital strategy can help you:

  • Define strategic objectives and goals to achieve them
  • Manage employees as assets not as expenses
  • Understand the behaviors that make people successful and create a culture that allows them to thrive
  • Recruit people that fit that culture
  • Give performance reviews to help employees understand their goals and how they support the company’s goals
  • Make sure they have the resources to achieve those goals, including the training that will help improve productivity and basic skills

Want more great tips on nurturing talent? Download our free e-book, How to develop a top-notch workforce that will accelerate your business.