Calculating your true cost of labor seems straightforward: compensation plus benefits should equal how much you’re spending on labor, right?
Wrong.
Unfortunately, business owners don’t have it that easy. There’s more to determining whether an employee’s time is being used to achieve maximum benefits.
It’s a hard fact, but without a current, accurate true cost of labor, owners may find they’re paying too much for employees whose billing rates aren’t contributing enough to the company’s profits. Additionally, they may assign a costly employee to a project and bill them as if they were a basic-level employee.
How knowing your true cost of labor benefits you
To determine your true cost of labor for a project (which then dictates project pricing) you’ll need to think about:
- What are your current employees’ full labor-burden costs? (You should know this by employee and/or by the average rate for their position)
- Will overtime be an element of the job? If so, you should know each employee’s real (burdened) overtime rate
- Will employees need extra training for the job? If so, what will it cost?
- Will you need to hire more staff? Or would it be more cost-effective to outsource?
- Will job-related travel time be reimbursed?
- How much time will be assigned to project and/or client management?
- What is your gross profit goal in relation to employee time?
After assessing your labor burden costs, you can decide how to delegate tasks for each project. Your supervisory and direct labor employees’ time should be assigned first, with administrative and support staff following.
Determining whether to allow overtime or hire more resources can be made from there.
Where employees should fit in each project
However, if you don’t start with a clear analysis and picture of your current labor costs (and how they fit into a given project), you could make decisions that will end up costing more time and money than necessary.
Overtime and new staff may be costly, but they could be a better option than misapplying your employees’ time or assigning people to tasks that, based on cost analysis, don’t make the best use of their time.
If you have employees and take on projects that require their time, establishing reliable, useful, labor-burden calculations is absolutely critical to success.
These numbers create a ‘cost foundation’ that businesses can use to determine how to most effectively assign employees, what portion of estimated job costs will be labor costs, and how to price a quote to meet profit margin goals.
Without investing the time to compute the true cost of labor before taking on projects, businesses can easily under-price or spend a lot of time and money fixing after-the-fact mistakes.
If you’d like to learn more about labor burden and how to easily and effectively calculate YOUR labor burden, please CLICK HERE (or on the image) to learn more about our labor burden calculator.(opens in new tab)(open
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