With each passing fiscal year, “budget season” seems to come faster and faster, alongside the looming question: “Have we achieved our EBITDA (earnings before interest, taxes, depreciation and amortization) goals?” Businesses within the construction industry are uniquely challenged in two ways. First, the financial success of the company relies on being awarded bid-upon business. Second, project completion relies on present, productive employees.
Logic would reason that absent employees impact the company in a variety of ways, including but not limited to timely completion of projects. As such, construction companies should strongly consider the indirect costs—or the productivity costs—of employee absenteeism in addition to the direct costs. The totality of these costs will better position the company to understand how many projects need to be completed in order to achieve EBITDA goals, as well as how many employees are needed to successfully complete a job.
Direct cost of absence is a “hard” dollar, such as insurance premium paid to a disability insurance carrier or fees paid to a third party administrator. Direct cost may also include the income replacement benefits paid to an employee during his/her absence. Direct costs are likely captured somewhere—on an invoice or a payroll report. Indirect costs are the monetization of lost productivity due to absenteeism. These costs may not be documented on an invoice or payroll report, but they are far from fictitious. Consider the “expense” of a single employee:
- wages;
- health and welfare benefits;
- other liability coverage for employing the individual such as workers’ compensation; and
- any other overhead expense.
As an employer, the hope is that the cost of an individual employee is offset by the employee’s productivity and contribution to the organization. Otherwise, the employee is a pure expense—a debit to the balance sheet. Thus, there is an inherent cost when an employee is not contributing productively to the completion of any job.
Another way to contemplate indirect cost of employee absenteeism is the downstream—often unintended—consequences. Certainly not an exhaustive list, downstream impacts of absence include overtime paid; temporary staffing; employee turnover; inconsistent quality; and perhaps most important, customer dissatisfaction. Customer dissatisfaction, as with any other business, is a serious cost, particularly for a construction company that relies on market reputation. The aforementioned indirect costs are indisputable and tangible, hence why indirect costs should be measured and taken into account with any budget plans.
The general industry varies on how to measure indirect costs. Some groups rely on an occupational “factor” whereby different jobs experience different magnitudes of productivity loss due to absence. Others take a more conservative approach, following a dollar-for-dollar principle where each dollar paid in income replacement benefits yields a similar cost due to productivity loss. Regardless of the method, indirect costs should neither be ignored nor regarded as the “cost of doing business.” For instance, if overtime or temporary staffing can be reduced, then this will undeniably result in operational savings.
Amidst the need to actively evaluate indirect costs, it should be noted that indirect costs cannot be entirely eliminated; it is unrealistic to assume that employee absenteeism will never occur. However, reducing lost productivity is a function of comprehensive return to work programs; robust safety programs; ongoing education; and importantly, measuring how much lost time occurs. Consistent measurement of lost time affords the company many powerful benefits, not the least of which is to improve visibility to project bandwidth and the ability to establish a profit-generating competitiveness.
