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Better Model, Lower Costs:Why Cost-Per-Unit Labor Pricing is Superior to Traditional Hourly Pricing

How much are you paying for labor? In large part, the answer to that question is dependent upon the answer to another question: how are you paying for labor?

The pricing model you use for your labor makes a huge difference to the final dollar figure that actually leaves your pocket. Traditionally, temp labor providers have used an hourly pricing structure. That model has serious flaws that leave businesses paying too much for labor, and often getting too little in return.

By contrast, cost-per-unit pricing (CPU) is designed to eliminate the flaws of traditional hourly pricing. Not only does CPU result in lower costs, but it goes hand-in-hand with budget predictability and improved labor performance.

How can CPU do all that?

CPU Defined

Cost-per-unit labor pricing is a model that assigns a fixed labor cost to each kind of product that a given line works on. All you need to know to calculate your labor cost is how much of each item was produced in a given time period. Multiply those figures times the appropriate labor cost, and voila, your total labor expense.

The Predictability of CPU

Let’s look at a scenario together, shall we? Last quarter, your labor expense was lower than you were expecting. That’s good news, because last year it was higher than you expected. As long as the rollercoaster averages out, things will be OK.

If you’ve ridden the labor expense rollercoaster, you know what we’re talking about. Even if you haven’t, you can imagine how chaotic it would be if any of your most major expenses experienced that kind of unpredictable fluctuation. 

Making labor costs easy to predict is one of the key advantages of CPU pricing. Because the labor cost for each piece of product is fixed, it’s incredibly easy to forecast labor expenses for the future. By determining production targets for a given month, quarter, or year, you can easily calculate the amount you’ll have to spend on labor to reach those targets.

Performance Improvements from CPU

Speaking of production targets, wouldn’t it be nice to have confidence you’ll always hit those targets? Again, CPU provides an answer to a problem that hourly pricing can’t address — and sometimes even makes worse.

In an hourly pricing structure, the labor provider charges for the amount of work that was performed. Whether that work actually got you to your production targets or not, you are on the hook for the billable hours. There’s nothing inherently guaranteed about the nature of what you paid for.

On the other hand, CPU is built around hitting certain targets. Because the labor provider only earns revenue based on the amount of actual production, the provider is automatically incentivized to maximize performance. To do that, the provider must have extensive engineering and technological capabilities.

A provider with the right team will be able to evaluate the performance of a production line down to an incredibly granular level. That makes it possible for the provider to improve processes on the line, cut the number of steps in a cycle, and even re-engineer the entire operation to create the greatest opportunities for efficiency.

Traditional temporary labor providers, who only use hourly pricing structures, possess neither the inherent incentive to improve performance, nor do they have the capabilities needed to make improvement possible. Conversely, a provider using CPU effectively will be able to maximize productivity in order to reach a pre-agreed production target.

Why nGROUP Uses CPU

For us at nGROUP, the advantages of CPU are simply too enormous to pass up. The predictability and stability it brings to labor expenses, combined with improved performance at a lower cost, make it the right pricing model for so many of our partners.

The industrial engineering expertise we use to operate CPU models is the same expertise our partners benefit from in terms of increased productivity. Our skilled managers know how to use technological insights to drive change, and our supervisors know how to implement all our knowledge on the production floor in the most effective way. 

How much you pay for your labor is very much dependent on how you pay for your labor. That’s why nGROUP makes it easy for our partners to use only the most advantageous pricing models. If your labor expense is unpredictable, or if your labor isn’t driving the results you need, talk with us today