Overtime: Curse or Creative Way to Generate More Profit?

Coming into the summer period in Australia & New Zealand, together with the ‘silly season’, can lead to a frantic energy in many areas. Attempting to ‘get it all done by Christmas’ means a potential for increased overtime in many businesses.

So, is overtime a positive or negative for your business? Well, it depends!

For short periods of time, over a busy period in a year, well-managed over time could assist your business to complete projects ahead of time and increase profit.

Yet, if overtime becomes a regular occurrence, for extended periods of time, it can take a toll on employees, possibly leading to burnout, reduced productivity, absenteeism, injury, resentment, and higher costs.

Let’s look at how overtime can be a creative way to generate profit. Overtime can help your business by:

• Speeding up the completion of larger projects.
• Minimising costs of lost productivity such as travel, site set up/pack down, scheduling, etc.
• Have a productive team maximise their output on site each day.

Here is an example:

Paul has two of his team (electricians) on a project estimated to take 5 days. That is 2 x 8 hours x 5 days = 80 hours. The labour cost to the business is 80 hours x hourly cost to employ (hourly rate/annual capacity* of 70%), plus the overhead recovery rate of $35 p/h.

*Annual capacity accounts for holidays, annual leave, sick pay, RDO’s etc. Hourly rate assumed at $45p/h.

80 hours x [($45/70%) + $35 p/h]

= 80 hrs x $100

= $8,000

Now if the two technicians were up for doing 10-hour days, which is 2-hours over time each day, the team could complete the project in 4-days.

The 2-hours overtime per day, over the 4-day period = 8 hours at the 1.5 x overtime rate for each employee, however the 8 hours of overtime doesn’t include the annual capacity or $35p/h overhead cost rate.

Therefore:

Step 1. 64 hours x [($45/70%) + $35 p/h] = 64 x $100 = $6,400

Step 2. 16 hours x ($45 x 1.5) = $1,080

Total labour cost = Step 1 + Step 2 = $7,480

Paul has saved $520 in costs (6.5%) from the job, giving the business a higher Gross Profit, and the team is also available to begin a new project on the 5th day. 

There are some important key points:

• Solid planning is required to ensure the overtime is used by productive employees, not people who are milking the clock for extra pay.
• Manage the energy of the employees, especially during hot periods of the year.
• If you have longer days earlier in the week, possibly finish earlier on Friday.

Now, let’s examine when excessive overtime becomes a cost.

Some businesses may not have the culture, systems, or skill level on their team to effectively use overtime like in the example above.  Overtime can then become a curse.

The result can be:

• A lazy work culture.
• Conflict between employees.
• Disengagement and employees leaving.
• Profits are lost.

In this scenario an overtime reduction action plan is important. Consider the following:

• Measure overtime per employee/per month. Just this action will reduce it alone.
• Introduce flexible work schedules. This can include flex time, compressed workweeks and time off to tend to personal matters. Obviously, this also must assist the business to achieve its goals.
• Upskill employees. Cross-training your employees across multiple roles can reduce employee overtime and help create a buffer against labour shortages caused by unexpected absences or skill gaps.
• Upgrade processes. Foster a culture of continuous improvement. Encourage employees to identify bottlenecks and suggest alternative solutions.

If you're considering implementing overtime, make sure you weigh the benefits vs. costs carefully to ensure it's the best decision for your business.

For more assistance, please reach out to the team at PROTRADE United.

Written by Jon Mailer

CEO of PROTRADE United

Author of ‘Not Just a Tradie’