Now it’s easy to calculate true labour costs

Powerful ERP software package a bonus for business

Misconceptions, faults and outright mathematical errors exist in the minds of many contractors when it comes to using margins and markups in their estimating systems.

Conventional wisdom can get the contractor into serious trouble if he does not understand the limitations of both when used in the bidding process.

When it comes to knowing your true labour costs as a business owner or manager, calculating your hourly or weekly wage costs is just part of the picture.

A more complete picture includes your “labour burden.”

A powerful software package, ERP VISUAL Enterprise, from LSA Australia, includes labour
costing techniques to identify these costs.

Consisting of all those “extra” costs above and beyond the pay scale of your employees, labour burden is primarily comprised of payroll taxes, unemployment taxes and various forms of insurance.

Field labour burden also includes general liability, workers’ compensation insurance, paid holidays, sick days, and vacations and medical insurance benefits.

Both field labour burden and office labour burden are calculated as percentages and should be added to your payroll costs.

Field labour burden is a direct cost, while office labour burden is an indirect G&A (general
and administrative) cost.

Prevailing Rates
Check your bid documents and specifications, or call your contract administrator to ensure that the figures you’re using are correct. Most labour burden items are assigned to you as a fixed percentage that will vary little when calculated into your labour burden.

This doesn’t change, whether you’re calculating labour burden for prevailing wage projects or non-rated ones.

Other labour burden items, such as sick pay, paid holidays, and vacation time, are based on accumulated paid non-work time (usually measured in days or hours) and need to be calculated differently when bidding rated or non-rated jobs.

The typical range for labour burden is between 12 and 15 per cent for office personnel, and 20 to 35 per cent for field personnel, depending on the amount of workers’ compensation insurance for each job classification.

Reviewing ‘Budget’ to ‘Actual’
Labour burden calculations should be reviewed every four to six months and adjusted whenever your insurance rates change, or you find that your profits are thinning.

You should also review your labour burden calculations if you’re bidding on rated jobs and you have not done so in a while.

Accounting software is available that enables managers to produce financial statements that display labour burden “budgeted” for actual field and office payroll, compared to “actual” accumulated expenses for labour burden items.

This is an excellent method for ensuring that your calculated labour burden percentages are adequate.

Consider establishing a labour burden checking account, into which you deposit and accumulate labour burden funds.

This amount is determined simply by multiplying your payroll (eg $3000) by your labour burden per cent (eg 32 per cent).

That amount ($960) is then deposited into a labour burden checking account. These funds are accumulated, and all labour burden items (including holidays and vacations) are paid from that account.

If your percentages are correct, you should be able to pay all labour burden expenses from that account. If you can’t cover labour burden expenses from it, your calculations need to be revised.

View Labour Burden as an Incentive
Should contractors provide certain labour burden items, such as vacation/holiday/sick pay, or medical/dental insurance as an incentive to productivity? The answer is no, because these benefits don’t significantly increase productivity by themselves. They should be viewed as a reward for work well done.

So if you want to increase productivity, provide your people with well-defined, reasonable goals and budgets, timely and accurate feedback, fair-market wages and results-oriented incentives.

Final Thought – Plan Ahead
Future labour burden costs are often overlooked, which can jeopardize your business’s health.

For instance, if you double your field work force, your workers’ compensation insurance bill will double and you will have to pay the increase when you get audited — usually at the end of the year. Labour burden costs should be monitored and accumulated in a savings account. Otherwise, they may be forgotten and the funds spent elsewhere.

How do I calculate my Labour Burden rate?
The basic formula to calculate a company’s labour burden rate for an individual employee is:

Total cost of employee ÷ the number of actual work hours = Employee labour burden cost per production hour

Of course, finding the total cost for the employee can be the tricky part. Unless you have an extremely simple employee compensation model or have already sat down with your accountant and know your fully burdened numbers, you probably won’t have all the
needed information at hand. The key here is to locate and include those “hidden” costs
outlined previously.

Assuming you have all the “hidden” cost information available, the following is an abridged version of the labour burden calculations:

Start by calculating the number of hours an employee (let’s call our employee “Pat”) is
potentially available to work.

We’ll start with 2080 hours (52 weeks per year x 40 hours per week). But then, for Pat,
you would subtract the following non-working
periods for the year:

  • 10 public holidays
  • 20 recreation leave days
  • 5 sick or personal days
  • 2 days of training seminars

This comes to a total of 37 days or 296 hours, leaving 1784 available working hours.

Then subtract about two hours from each remaining work week (47) for miscellaneous
administrative meetings, timekeeping, shop time and so forth (breaks are charged to jobs).

This reduces the available production time by another 94 hours, so now Pat is actually
available for production work for approximately 1690 hours.

Pat’s $18-per-hour compensation computes to $37,440 per year.

In addition, Pat’s employer has additional costs that are “attached” to this employee’s job:

  • $1778 in payroll taxes (4.75% if not exempt)
  • $3745 in workers’ comp (at $10 per $100)
  • $3370 superannuation (9% of wages)
  • $150 in uniforms (four logo shirts at $25, one logo jacket at $50)
  • $300 in small tools and equipment usage (at $25 per month)
  • $100 employer-paid snacks, meals, parties, entertainment
  • $250 in training fees, seminars, etc.

This totals just over $10,443 in additional costs and brings Pat’s annual cost to $47,883.

So, Pat’s real cost to his employer is $28.33 per production hour ($47,883/1,690 hours).

That’s a 57 per cent increase on Pat’s hourly rate.

Pat is a costly and valuable asset whose time should be carefully allocated to projects
and tasks. And his related costs should be closely measured and monitored.

It is only with sophisticated ERP software like Visual Enterprise that a company can track
its labour recovery of costs accurately. This can be done in real-time on a job-by-job basis.

LSA Australia
Ph: 02 9687-6600