Finding the Right Balance
For most contractors, the success of their jobs are largely dependent on labor costs because it typically accounts for 33% to 50% of the project’s budget. With the summer season now upon us, many contractors are faced with new challenges to keep pace with growing backlogs of work. Often that means accelerating schedules to exploit the benefits of good weather through overtime.
Overtime is widely regarded as the most popular method of accelerating schedules because of the complications that can arise from overstaffing and shifting work. As such, numerous studies have been conducted over the years in an attempt to find a definitive formula for determining when overtime is cost-effective. Some contractors benefit from overtime shock, which is when employees are excited for the opportunity to work overtime. However, other contractors might require overtime for extended periods of time that will cause the employees to pace themselves, resulting in decreased productivity. While there is no simple answer that is applicable to all situations, understanding the implications of overtime is essential to making an informed decision.
Overtime Pros and Cons
The most obvious advantage of overtime is it can help you be flexible and responsive to unexpected changes, without the long-term costs and obligations of additional employees. In a competitive labor market, the promise of regular overtime is among the most effective incentives used for attracting employees.
Additionally, overtime can serve to benefit the company by avoiding penalty clauses or achieving bonus clauses. Avoiding penalty clauses is especially important because approximately 73% of project owners will refuse extensions on a project.
On the other hand, a clear downside to scheduling overtime is the immediate wage premium it entails. With various legislation, such as the Fair Labor Standards Act and the Contract Work Hours and Safety Standards Act, requiring contractors and subcontractors to pay at least time-and-a-half, labor costs can quickly eat away profits on a fixed-bid project, in the absence of a bonus provision for completing work early. Overtime premiums can also be a source of contention on cost-plus and construction management contracts.
Studies by various industry groups suggest that an even greater cost associated with the continued use of overtime is the negative effect it has on worker productivity – not just during overtime hours but during the regular workday as well. The Associated General Contractors of America (AGC) concluded in their publication, Guidelines for a Successful Construction Project, that “After seven to nine consecutive 50- or 60-hour weeks, productivity is likely to be no more than that attainable by the same work force in a 40-hour week.” Moreover, the AGC paper argued, worker productivity will continue to diminish as the overtime continues, eventually canceling out all the production gains from the early weeks.
One of the most commonly used methods in determining the correlation between overtime and productivity is the prospective allocation. This method assigns an inefficiency estimate based on research, which identifies productivity lost based on hours worked and continuous time frame. Using a consistent 40 hour week as the optimal standard, it is clearly shown below that productivity decreases significantly as hours and continuous weeks increase.
Other potential disadvantages associated with the use of overtime include increased absenteeism, fatigue, accidents, and reduced morale. A study by the Bureau of Labor Statistics concluded: “Injuries… increased as hours increased, not only in absolute numbers but also in rate of incidents. In most instances, the number of injuries (per hour worked) was very much higher at the longer hours.”
Using Overtime Wisely
Despite the disadvantages, there can be times when overtime is unavoidable or even desirable. As such, these four principles should be considered when using overtime:
- Use it judiciously. Most of the disadvantages associated with overtime result from using it as a standard operating practice. When scheduled overtime pressures workers too much, this can lead to employee turnover, decreased moral and unacceptable work performed. Completion schedules should be realistic and allow sufficient flexibility to absorb some unexpected delays. Any large-scale change orders should trigger an extension of the scheduled completion time.
- Watch for signs of pacing. Parkinson’s Law says work expands to fill the time available for its completion. Workers may not even be aware that they are engaging in pacing, subconsciously slowing their output to match the time allowed. Monitor daily or hourly productivity metrics closely whenever overtime is scheduled.
- Keep a close eye on safety and worker fatigue. Just one accident can quickly eradicate any benefits attained from an accelerated schedule. According to a study by the Bureau of Labor Statistics from 2002, “the average cost per-case of fatal or non-fatal injury is $27,000 in construction, almost double the per-case cost of $15,000 for all industry(ies)”.
- Double-check legal and contractual requirements. On cost-plus contracts, make sure the customer receives all required notifications of the use of overtime. And, of course, be careful to comply with any applicable labor union contract provisions, as well as federal, state and local labor regulations.
Wipfli/Bauerle can help you analyze labor, scheduling and other management practices. Give us a call to learn more at 303-759-0089.