How does MSPCFO differentiate between labor and product in a FFA agreement?

MSPCFO receives invoices from clients via downloads from the PSA. On the invoice level, all MSPCFO knows is that there was an agreement and the gross dollar amount of the invoice. From that invoice, MSPCFO needs to determine how much is labor and how much is product. We do this by looking at the line items (agreement additions) of an invoice that adds up to the total invoice. Sometimes, an invoice will supply the name of the line items, the quantity and the unit cost. Other times, all we get is the total invoice amount and we need to make certain assumptions that will help us differentiate between labor and product.

What we know is that product values are fixed. Labor is the variable component. We back into the labor number by knowing the other components of the invoice.

MSPCFO has some rules about how we look at Unit Cost and Unit Price,  In the Options Table there are settings under Agreement Additions which can override how the product/labor differentiation is made.  Under Options>Agreement Additions the options to look at are Minimum Cutoff Margin, Cutoff Price and Margin. Click here to go to the documentation on the Options Table.

Let's look at some examples:

Pure Product

In the case of anti-virus, there is a cost (Unit Cost) to purchase the item from a vendor. The MSP in turn sells it to a client. Because there is a unit cost, we say it is a product. In the example below, the product value for the anti-virus is $2.

Total Product Cost
20 X $1 = $20  
Quantity X Unit Cost = Total Product Cost

Total Product Value
20 X $2 = $40
Quantity X Unit Price = Total Product Value

In the example below, the first row are the values that are downloaded from the PSA; the second row are the values calculated in MSPCFO.

Item Quantity Unit Cost ($) Unit Price ($) Unit Product Value ($) Unit Labor Value ($) Total Product Cost ($) Total Product Value ($) Total Labor Value ($)
Anti-Virus (from PSA) 20 1 2          
Anti-Virus (MSPCFO calculations)


2 0 20 40 0

Pure Labor

In the case of an agreement with a Unit Price but no Unit Cost, MSPCFO says the line item is labor.  There is no cost on the invoice so we will assume there is no product component to this line item. The Unit Price becomes Labor Value.    Since there’s no cost, there is not product value.  Labor Value is the Unit Price.

Total Labor Value
1 X $4.000 = $4,000
Quantity X Unit Price = Total Labor Value

Item Quantity Unit Cost ($) Unit Price ($) Unit Product Value ($) Unit Labor Value ($) Total Product Cost ($) Total Product Value ($) Total Labor Value ($)
Agreement (from PSA) 1 0 4,000          
Agreement (MSPCFO calculations)


0 4,000 0 0 4,000

 

The next example is also pure labor with a quantity of 20 but no Unit Cost. The Total labor value is (quantity X unit price). The Labor Value is equal to the Unit Price.

Total Labor Value
20 X $45 = $900
Quantity X Unit Price = Total Labor Value

Item Quantity Unit Cost ($) Unit Price ($) Unit Product Value ($) Unit Labor Value ($) Total Product Cost ($) Total Product Value ($) Total Labor Value ($)
Seat Support (from PSA) 20 0 45          
Seat Support (MSPCFO calculations)


0 45 0 0 900

Blend of Product and Labor

 A line item can be a blend of both product and labor. For example, if there is a client who asks you to cover their machines as well as provide other services. In this case, let's say a client asks you to oversee 20 machines as well as provide ancillary software services to them (i.e. Microsoft 365, anti-virus, etc.). These items may not be listed separately on the invoice, but we know they are there because there is a unit cost listed. Once again, because there is a unit cost provided, we know there will be a product value. Once we figure out product value, we can then get labor value (remember, labor value is variable).

To determine what the product and labor proportions are, we have to make certain assumptions regarding costs.  In the Options table under Agreement Additions, we set a COGS Cutoff Margin (Options>Agreement additions/COGS Cutoff Margin). Let’s assume the percentage is 15%.  If the COGS is below 15% of the price, then there is probably a labor component.  Otherwise, you are getting a wildly large mark up on the product.  In this case, the product value should be some portion of what you sold it for.  In the example below, within the $75, you sold two things: labor and product ($10 is less than 15% of $75).  Now, given the criteria/assumptions above, let’s figure out how much is labor and how much is product.  Total product cost would be 10 x @20, or $200. Total labor value would be 20 x $75, or $1,500.

Product value is the difficult one to figure out.  Once we know this, we can then figure out labor value.  In the example below, we know that the company spent $10 to buy whatever product they are selling.  There is another setting for Margin (Options/Agreement Additions/ Margin). Let’s assume the margin is 30%. We assume in our software that the MSP is getting a 30% mark up on reselling the product.  So the product value then equals $10/(1-.3), or $14.29 (Another way of presenting this calculation is if we take off the margin of 30% from $14.29 price, we get $10 cost).

Now that we know the product value, we can then figure out the labor value.  In the example above, it would be $75-14.29, or $60.71

Product Value  
$14.29 = $10 / (1 - .3)
Product Value = Unit Cost/(1  Margin)

Labor Value
$60.71 = $75 - $14.29
Labor Value = Unit Price  Product Value

Total Product Cost
$200 = 20 X $10
Total Product Cost =  Quantity X Unit Cost

Total Product Value
$285.80 = 20 x $14.29
Total Product Value =  Quanity X Product Value

Total Labor Value
$1214.20 = 20 x $60.71
Total Labor Value  = Unit price  X Product value

 

Item Quantity Unit Cost ($) Unit Price ($) Product Value ($) Labor Value ($) Total Product Cost ($) Total Product Value ($) Total Labor Value ($)
All-in Seat Pricing (from PSA) 20 10 75          
All- in Seat (MSPCFO calculations)


 14.29 60.71 200 285.80 1214.20