Why You Need to Know Your True Cost of Labor

Calculating labor costs 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 much more to figuring out whether an employee’s time is being put to maximum benefit for a business, and without a true cost of labor that is current and accurate, owners can find they’re paying too much for employees who aren’t contributing enough to job profits – or they may assign an employee who is too costly to a project.

How knowing your true cost of labor benefits, you

To determine your true cost of labor (note:  the true cost of labor should include all appropriate labor burden costs) for a given project – which then dictates project pricing – you will 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 there be reimbursed job-related travel time?
• How much time will be assigned to project and/or client management?
• What is your gross profit goal in relationship to employee time?

After you have an assessment on your existing labor and labor burden costs, you can decide how to delegate tasks on a given 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.

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 the best decision rather than misapplying your employees’ time or assigning people to tasks that don’t make the best use of their time based on cost analysis.

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 for labor costs, and how to price a quote in order 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.

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