When quoting a job or service, one may calculate the profit via how much they’re making on the job itself, but this doesn’t consider the actual rate you’re making said profit. Therefore, when considering taking on new jobs or work, wouldn’t a better metric always be the profitability per hour, effectively this tells you the potential profit per year of doing that task and the cost opportunity compared to another job.
(Vs. If you were just considered profit vs profit of jobs, this may seem like one job is more profitable since it’s a higher payout but if it’s 3x the time, then you’re actually making more by doing the lesser job if you can pickup more of them).
Is my way of thinking sound?
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Metrics are only as good as they reflect the thing you are trying to improve. If you want to improve how much profit you can get each job because your sales staff can only get 30 sells a quarter. Then tracking per job would be great. If profit is limited by hours worked then you should hire another employee.
In the service world, you’re selling a product, but the product is time. So yes, you should absolutely be looking at profit per hour, because that hour is what you’re selling.
Think of it this way, a plumber that is repairing a short section of building drain that was damaged for some reason. The only items that went into that repair would be 2’ of 4" PVC, 2 couplers, and some glue. Let’s say $20 in material.
But, he’s got an hour in running a camera snake to locate and diagnose the fault. 2 hours of digging with a $60k mini excavator, 20 minutes of pipe repair and then an hour of backfill/cleanup. 4.5 hours, plus drive time.
If he charged $200, he’s got a 1000% markup on this job. Looking at it as gross profit per job, he’s killing it. But as gross profit per hour? He’s out of business next week.
Taking it a step further, he can’t just look at it per hour. That 4.5 hours plus drive time? The next job is an hour away, and will take 6 hours. Needs to be done in one day, as it requires customer’s water to be shut off for the duration. It’s winter and gets dark at 4:30. Does he have time to complete the next job, or was that first one all he does in a day? For that reason, best also consider things by the day, week, etc, otherwise he could be profitable on the 4.5 hour job, but still be in the red when looking at that particular Monday.
Would this still apply in manufacturing? As in, of course mfg is producing goods and your main goal is efficiency and producing more units, but considering it’s not your product and your manufacturing for others, units per hour would still be a good metric to track and show overall efficiency and capacity but moreover, tracking profitability per hour would still be a good metric as it would at least tell you the profit potential over time, the cost of opportunity in comparison to other jobs, etc. right?
Yes. When you refer to manufacturing for others, that sounds like job shop work to me, and that’s exactly how that kind of business calculates prices in most cases.