If you’re struggling to understand and measure your Labor Burden and its effect on profit, these articles by Diane Gilson will teach you how to do it.
Labor Burden & Profits – An Example
What do your employees really cost? Let’s look at an example to determine Labor Burden.
We’ll start with an employee (“Pat”), whose hourly compensation is $17, or $35,360 gross annual payroll. As Pat’s employer, you do your research and find out that Pat has a variety of additional annualized costs “attached” to this position.
How much, in total, does it cost Pat to perform his job?
Pat’s additional costs (yes, this will help you determine Labor Burden) :
- $3,005 for payroll taxes (based on 2.7% state unemployment on the first $9,000, and no other state disability taxes)
- $3,536 for workers’ compensation insurance (at $10 per $100)
- $4,200 for health insurance ($350 per month)
- $1,060 for retirement benefits (3% of compensation)
- $720 for cell, telephone and/or Internet costs ($60 per month)
- $150 in uniforms (e.g., 4 company shirts at $25, 1 jacket at $50) or for office workers an equivalent amount in coffee(!)
- $6,000 in company vehicle usage (depreciation, gas and oil, maintenance, license, insurance, etc.), or for office workers an equivalent amount in equipment usage and maintenance. and office space
- $300 in small tools and equipment usage (at $25 per month) or for office workers an equivalent amount in office supplies
- $708 estimated annual bonus (2% of wages)
- $100 employer-paid snacks, meals, parties, entertainment
- $250 in training fees, seminars, etc…
Total additional costs: $20,029
How many hours is Pat actually available for work?
Pat is potentially available for 2,080 hours of company work (52 weeks/year x 40 hours/week).
Subtract Pat’s non-project paid time for the year: Labor burden – Time available
- 6 holidays
- 10 vacation days
- 6 sick or personal days
- 2 days of training seminars
This equals 24 days (192 hours), leaving 1,888 available working hours.
Subtract an estimated 2 hours per week from the 47 remaining work weeks for miscellaneous administrative meetings, timekeeping, general problem-solving or prep time, and so forth (breaks are assigned to jobs or projects). This reduces the available production time by another 94 hours.
Total time available for production/project work: 1,794 hours
The Final Results for Pat’s “Numbers”?
First, Pat’s additional Labor Burden Costs total just over $20,000. This brings Pat’s annual cost to $55,389.
Therefore Labor Burden Cost per Production Hour (or Fully-burdened Cost) to your company is $30.87 per production/project hour ($55,389 ÷ 1,794 hours) or $0.51 per minute.
To compute Pat’s Labor Burden Rate (%) per Production (work) hour, subtract Pat’s hourly rate from his/her fully burdened cost ($30.87 – $17.00 = $13.87) and divide the excess by the base hourly rate.
We see that our additional cost to have Pat “on the job”, when computed as a percentage, adds 82% to Pat’s base hourly rate.
The bottom line:
Pat is a truly costly and valuable asset whose time should be carefully assigned.
And his/her related costs (and resulting contribution) should be closely measured and monitored to understand Labor Burden!
Related Articles: Part 1 of Labor Burden Series | Part 2 | Part 3
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“We have been working with Diane since last summer and continue to have ongoing training several times a month for staff. we needed to ramp our reporting system (mainly job cost) for over 30 different companies. We appreciate the hand-holding that has been and continues to be required as we make this transition. Diane’s expertise and command of QBE and QB is excellent. We will continue to use her services.”