A number of biomed maintenance managers sell their hospitals’ biomed services to outside facilities. This article will provide a foundation for determining the labor rate for your particular facility.
A number of biomed maintenance managers sell their hospitals’ biomed services to outside facilities. To sell these services, they must establish an hourly labor rate that not only fairly and correctly represents the real costs of providing them; they also must set a rate that is competitive. This article will provide a foundation for determining the labor rate for your particular facility.
How do you determine your labor rate? Simply use the same rate that a major manufacturer or third-party service firm charges? OK, you could, but whose should you use? Furthermore, by doing that you would not really know if you were either profitable or competitive in the local area. The best way is to cost account the way the service vendors do—that is, determine actual costs on a line-by-line basis and develop the hourly (labor) rate by using the same methodology they do.
Types of Costs
Broadly speaking, there are two types of costs with which to be concerned: direct and indirect costs. Direct costs are precisely traceable to a particular job or work and have the largest influence on the labor rate. Indirect costs are often called overhead costs. Indirect costs range from salaries for supervisory and clerical personnel to the cost of test equipment and service aids to the cost of general office and shop supplies. In short, it is the portion of the overall operating costs of your operation that cannot be charged to a unique job or work order.
Direct labor cost is the expense of the people who actually come into direct productive contact with the service or item involved to affect the desired maintenance outcome. You may think, “That’s what the employer pays the workers. That was an easy one.”
Not quite. Direct labor is based upon—but is not exclusively—what the employer pays the worker. Does your employer provide subsidized health care coverage for you and your family? What about dental care? Then there is your paid vacation, life insurance, retirement plan, your employer’s portion of Social Security, and so on.
The cost of direct labor includes both salary and the benefits provided to the direct labor workers in your shop. Talk with the benefits manager in your human resources department. That person is best equipped to tell you the benefit factor (the percentage add-on to salary) that is used in determining what the total compensation package is worth.
To calculate the cost of direct labor, determine which of the personnel contribute direct labor to the operation. Then, multiply the various salaries of each of the direct labor personnel by the benefit factor to arrive at your cost for direct labor. Multiply the number of personnel at the same salary by the direct labor cost for that salary and/or add the different direct labor costs for employees of different salaries. The exact math will vary from organization to organization, but it is easy to spreadsheet (Figure 1).
Figure 1: Sample determination of the number of direct labor personnel and the direct labor cost.
There are four components to indirect costs: general facility, external overhead labor, internal overhead labor, and internal material costs. Some indirect costs (test equipment and tools, for example) pertain directly to your operation and are easy to determine with a high level of accuracy, while others are difficult to accurately determine. Fortunately, they can be estimated with sufficient accuracy for our purposes. Some of the costs simply cannot be determined. For example, if your hospital is owned by Mega Healthcare Corp how much of the CEO’s salary and benefit package (external overhead labor) should be attributed to the overhead of your operation? Additionally, exactly what is the CEO’s salary and benefit package worth? Last, how willing to disclose it to you is that person? Fortunately, this is not a substantial part of your overhead, and, since it is such a small portion of your overhead cost, it is relatively insignificant.
The overhead labor costs—those more realistic and relevant to your operation—are divided into two categories: those generated by other areas (external labor) and those generated by your operation (internal labor). External labor must be best guessed. If you work for the chief technology officer (CTO), how much of that person’s salary should be part of your overhead? Same question for the CTO’s secretary’s salary. The best way I have found to handle this is to do two things. First, go up only one staff level. That would be to your boss and his immediate support staff, like secretaries and others. Above that, the numbers become insignificant. Second, briefly interview each and determine from each how much time is spent dealing with your operation. Do not be surprised if the boss’s secretary spends more time dealing with the operation than he does. After all, everyone knows that the secretary does the ‘real work’ in an organization! Once you have determined the percentage of time they spend on your stuff and their salaries, do the same math as for direct labor, then use that percentage of the resultant labor cost as their portion of your overhead (Figure 2).
Figure 2: Sample computation of the indirect labor cost.
Internal labor costs are those that are totally attributable to your operation and include the cost of you (assuming you’re a full-time manager and not usually on the bench), your receptionist, work-order desk clerk, repair-parts clerk, contract manager, and other support personnel working strictly for the biomed shop. Assuming these individuals work only for the biomed shop, determining their overhead costs involves the same process used to determine your direct labor cost. If, for example, a joint work-order desk is operated for both IT and biomed work orders, ask the clerk to estimate the percentage of time spent working for your shop and do the math as you would for the CTO and his staff (Figure 2). The titles represented here are for a large organization. You must customize the computations based on the size of your organization.
General facility costs are among the easiest to determine since someone in your facility is most likely tracking them. If no one is, someone certainly should be! General facility costs encompass all building overhead from utilities (electricity, gas, water, and sewage) to refuse collection to taxes and other costs of simply having the facility open for business. The most convenient way to acquire this information is on a per–square-foot basis. That is, ascertain what the operating overhead is per square foot. For purposes of this example, it is $3.35 per square foot. Simply multiply that figure by the square footage occupied by your biomed shop to determine the general facility cost (Figure 3).
Figure 3: Sample computation of the labor rate.
Internal material cost is also easy to determine. This includes everything used in the department (or shop—again, depending on the size of your operation) from office supplies to repair parts not identified (and charged) to a specific work order. The repair parts component of the labor rate goes by different names at different places, but we all have them—bench stock, shop parts, nonchargeable parts, junk-box parts, miscellaneous parts, and a host of other names. Collectively they are those parts that are too small, too inexpensive, or too common to be charged to a work order. If your shop’s policy is to not charge for common hardware (nuts, bolts, washers, etc), O-rings from a boxed multisize assortment, low-cost resistors/capacitors from boxed general assortments, etc, then the cost of these parts must be recouped somewhere—that somewhere is through the labor rate. (Under this repair parts charge policy however, O-rings [for example] in specific OEM/aftermarket rebuild kits are charged to a specific work order by part number and price. Therefore, their cost is not included in the labor rate calculation.) Ideally, the repair parts clerk knows the annual cost of these parts as well as the cost of the office supplies consumed by the operation.
Common repair parts and office supplies are the two obvious items to include in the internal material cost, but we need to consider other items for inclusion as well. Don’t forget sandpaper, solder, hacksaw blades, drill bits, spray cans (of everything you use in the shop from cleaners to touch-up paint), and all the other consumables a shop operation uses that are not easily attributable to a particular work order. If your operation pays for its own test equipment, service aids, jigs, tools, etc, the cost of these items must be factored into the internal material cost. Your financial management folks should be able to guide you in determining how to account for the cost of minor equipment (test equipment, for example) since these items can either be expensed out or amortized a number of ways for tax purposes. Likewise, if your operation is a profit center (verses a cost center) you may be able to “earn” additional money for test equipment and service aids you wish to purchase in the following year.
The purpose of determining and incorporating indirect (overhead) costs is to ensure the labor rate charged by your in-house operation realistically represents your cost of doing business and parallels the rate charged by an OEM or aftermarket maintenance firm. However, do not get so “down in the weeds” that you forget the original goal. Sometimes, items have to be estimated to aid in the timely development of a correct labor rate calculation, so do not become so involved in being accurate down to the penny for, say, the cost of copy paper for a shared copy machine. In the big picture of the calculation, the difference of a couple of dollars either way becomes insignificant once the final calculation is performed.
To pull it all together, add the direct labor cost to the indirect costs (Figure 3) and divide by the anticipated billable hours per year. The resultant figure will be the labor rate for your operation. Although it sounds easy, the anticipated billable hours are subject to some debate and will not be the same for all organizations. Determine the anticipated billable hours by multiplying the number of direct labor personnel (15 in our example) times the number of productive hours per employee per year. Although a hospital operates 24/7, the typical biomed work week is 8 hours per day for 5 working days per week. This equates to 145 hours per month or 1,740 productive hours per work year. Yes, I know that 8 times 5 times 52 is 2,080 hours per year; but I don’t know of anyone who never gets sick, never takes a vacation, gets no personal days, and works all the federal holidays every year without fail.
Although 1,740 productive hours is considered a “normal” figure, another commonly used figure used is 1,768 hours. Consult your human resources and finance officers within your organization to determine if there is a preferred figure to use. Otherwise, use 1,740 unless you need to reduce this figure based upon organizational efficiency. For example, if meetings, paperwork, general research, reading periodicals (relating to biomed maintenance, of course) take up 30% of a typical workweek, then only 70% of the 1,740 hours could be considered truly productive. Therefore, consider using 1,218 hours (70% of 1,740 hours) instead. Double check with your human resources and finance offices, as well as any other organizational entity that might have a policy on this, and do the math as shown in Figure 3 to arrive at your labor rate. This is what you should charge for labor. This figure will be comparable to what an OEM or third party would charge your facility—plus travel, lodging, meals, and billable parts, of course.
Robert M. Dondelinger, CBET-E, MS, is the medical equipment manager at the US Military Entrance Processing Command in North Chicago, Ill.