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- Trainer's Corner March, 2010
- By Wally Jurina, Instructor
-
The labor risk ratio percentage appearing on the Price Summary screen in the classic Estimating programs allows an estimator to analyze limits of labor cost or man-hour overruns. Before moving forward, let’s define the labor risk ratio percentage:
This percentage is calculated by dividing profit dollar value by labor dollar value, and multiplying the result by 100. Since labor is the most volatile portion of the job, the labor risk ratio percentage provides you with a margin of error in the event that unanticipated variables such as weather, labor relations, or employee illness affect the labor dollars.
The Price Summary screen illustrated below indicates a 16.8941 labor risk ratio percentage (LRR%) for a project.
Figure 1 Labor Risk Ratio calculation.
In version 10, an estimator is allowed to set a desired LRR% for a project to assure an appropriate profit to cover any labor overruns.To change the LRR% of 16.8941% in the above example to a pre-determined LRR of 20%, follow these steps:
Step 1: Move to the Final Price screen and select the Total Markup percentage cell (notice that the profit % in this project is a composite value of 10.611% and $100382.69 as illustrated below.)
Figure 2 Select the Total Markup Percentage cell.Step 2: In the Total Markup percentage cell, click the ellipsis button to display the Labor Risk Ratio dialog as illustrated below:
Figure 3 Displaying the Labor Risk Ratio dialog.Step 3: In the Labor Risk Ratio dialog, click the button next to "Calculate Total Markup based on a pre-determined Labor Risk Ratio" and enter 20 in the Labor risk ratio % as illustrated below:
Figure 4: Setting the labor risk ratio.Step 4: Click OK in the Labor Risk Ration dialog and the new LRR% is recorded in the Total Markup cell on the Final Price screen. As well, the profit percentage is adjusted to the new profit of 12.562 % and $118837.65 using the pre-determined labor risk ratio setting as illustrated below:
Figure 5: Indicating the new LRR percentage.On the Price Summary screen, the new values of LRR percentage & profit dollars are displayed as illustrated below:
Figure 6: Price Summary Screen displays new LRR valuesStep 5: If an estimator wants to reset the labor risk ratio to the original LRR% and profit dollar values, return to the Final Price screen, select the Total Markup percentage cell, and click the ellipsis button again to display the Labor Risk Ratio dialog. Now, choose the button next to "Calculate Total Markup based on entered percentages" and click OK as illustrated below.
Figure 7: Resetting the LRR% to its original valueStep 6: The Price Summary screen will now display the original LRR value of 16.8941% as illustrated below:
Figure 8: Price Summary displays original LRR percentageThere is always a problem establishing a bid with a fair profit percentage, but the labor risk ratio percentage will aid in this assessment process. A higher LRR percentage provides a larger buffer for labor overrun due to labor volatility. As a general rule of thumb, a reasonable labor risk ratio can be in the 20% range with the understanding that there is no one ideal LRR percentage. The economic times, type of project, etc. will help determine what an estimator should set for a LRR percentage on a bid.