Trade businesses could be forgiven for feeling under fire from legislative changes lately. The additional public holiday to recognise Matariki, the increased price of utes and vans due to the Clean Car Programme, and the increase in sick leave entitlements are all likely to add costs to trade businesses in the short to medium term.
This article focuses on the increase in sick leave entitlements and how trade businesses could go about adjusting their charge-out rate to mitigate the impact.
The legislation
On 19 May 2021 the Holidays (Increasing Sick Leave) Amendment Bill was passed into law. The Bill means that from 24 July 2021, employees are entitled to a minimum of 10 days of sick leave per year, up from the current 5 days per year.
Impact on trade businesses
It remains to be seen whether the increased entitlement will in fact result in employees taking up their full 10 days per year, but from a conservative costing and budgeting point of view it is wise to assume they will.
The increased leave entitlement means that there are now fewer chargeable hours per employee, per year. Therefore, to maintain the same level of annual revenue, the charge out rate needs to increase.
The following is one model which could be used to help determine how much of an increase is needed. Several assumptions are made for illustrative purposes, but these can be adjusted to suit your business.
Costing model
The model assumes an hourly charge out rate to clients of $90 per hour. It also assumes an average of 30 chargeable hours per employee per week, which is 75% of a standard 40-hour week.
We can now work out the annual revenue per employee comparing 5 days sick leave with 10 days sick leave. The table below makes further assumptions around annual leave and public holidays which may vary between businesses but serve to illustrate.
As we see, the extra week of sick leave results in a drop in turnover of $2,700, which is the weekly revenue earned per employee ($90 x 30 hours).
To maintain the previous level of annual revenue, the charge out rate needs to increase. Dividing the previous level of annual revenue by the lower number of annual chargeable hours ($121,500/1320) gives the new required charge out rate of $92.
Consequential factors
The reduced number of chargeable hours per year may also impact the value of materials used per employee. For example, if an employee uses $50,000 of materials each year with a 20% mark-up, the reduced chargeable hours will result in a reduction to this revenue stream which also needs to be addressed.
Support staff and management
This simplified model does not factor in support staff and management costs, but these are also relevant and a further increase to the charge out rate could be appropriate depending on the situation.
Assuming support staff and management use their full entitlement, the higher sick leave allowance will reduce their annual output, which may require additional support staff recruitment and associated costs. These can be factored into the charge out rate using a more comprehensive version of the model above.
Summary
Given this increase to sick leave entitlements, it may be timely to review their impact on your business and to consider adjusting your charge-out rate. While every business will have specific factors to account for, this model should serve as a useful starting point.
For further assistance with costings specific to your business, please get in touch with Brett Crombie at brett.crombie@straightedge.nz.