I Wish Customers Were Smarter #2

MoneyYou’d think annual wage increases for employees would be a no-brainer. However, there’s a difference when it comes to whose employees get an automatic cost-of-living raise. Customers or contractors.

Customers’ employees expect their annual wage increase. Something for the increased cost-of-living. Plus a little (or big) something for performance.

In Bad Times, Really Bad Times

Customers’ employees don’t receive cost-of-living increases when they’re shutting down plants and laying off 1,000s of their own. Contractors should expect the same. Not a justification, but understandable, a fact of life.

In Moderate to Good Times

However, when customers’ businesses are clickling along – customers’ employees are getting cost-of-living raises.

Customers give increases to retain their own employees. Wouldn’t it be logical for contractors’ site-based employees to receive the same?

Both customers and contractors want to:

  • Avoid turnover costs
  • Receive consistent value
  • Eliminate lagtime between learning work & becoming proficient

Contracts Have Language For Increases, But…

Contract language often covers increases for city, state and federal taxes. But increases for benefits, workers comp, and wages – that’s another story.

Even unions and some public agencies have to fight for wage increases. With a higher degree of public accountability and visibility, compared to the private sector, wage increases are still hard to come by.

Funny Thing About Financial Forecasting

I’m not a financial analyst. However, I know today’s dollars are more valuable than tomorrow’s. Because of inflation.

When employees are paid the same amount this year as they were last, they’ve received a pay cut. Inflation makes things cost more, but employees have the same amount to spend. A pay cut.

Same’s true for customers’ employees.

Who Should Pay for Cost-of-Living Increases?

>>> CUSTOMERS believe Contractors Should Pay

Customers have the power of payment – when & how much. And they can use this power to pushback requests for cost-of-living raises.

I’m not saying all customers refuse to give cost-of-living increases. But in the private sector, contractors have a tough road.

Here are some reasons customers may be against cost-of-living increases.

1) Customers believe contractors keep some or all of the increases for profit

2) Customers believe contractors have high margins – raises should come out of their profits

3) Customers struggle with budgeting. Who hasn’t had to reverse-engineer a budget to meet a boss’ number? If not budgeted for, wage increases require customers to ask their boss for more money. And how many customers have the guts to do that?

Customers who do ask their boss for cost-of-living increases for contractor employees:

  • See value in retaining employees
  • Recognize costs associated with turnover & lower level workers

>>> CONTRACTORS Believe Customers Should Pay

Contractors almost always have skinny margins. There’s never enough profit. They bid to win work, not necessarily guarantee automatic wage increases the next year.

If customers’ contracts include automatic increases – so much the better. Follow its terms and the contractors’ employees get annual raises.

However, if customers don’t include automatic cost-of-living raises – contractors have to make choices, sometimes tough ones.

A) Ask customers for full increase (gutsy)

B) Split increase with customers (take the hit on margins)

C) Ask, don’t ask, or split increases AND then try & offset raises with efficiencies (tough when low hanging fruit is gone)

D) Don’t ask customers AND give raises (margin evaporates)

E) Don’t ask customers AND don’t give raises (suffer turnover costs: lower margins & risk contract)

How Much Is A Cost-Of-Living Raise?

Wikipedia defines Consumer Price Index (CPI) as “a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and considered by some a cost-of-living index”

So, the ideal is a service contract with explicit language stating:

  • Automatic, annual increase to contractors’ employees wages
  • Based on the CPI
  • From customers who see value in retaining employees

What could be easier? But you know it isn’t.

How Do You Get Cost-Of-Living Raises for Your Site-Based Employees?


Chris Arlen
President & Senior Consultant / Service Performance


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4 problemswith performance-based contracts