3 Critical Questions To Ask About Employee Costs & Billing Rates

A Certified QuickBooks ProAdvisor offers expert advice for business owners

We all know that employees cost more than their hourly wage. To calculate an employee's true cost per hour you'll need to include related costs such as payroll taxes, benefits, tools, equipment and small supplies they need to perform their job, paid time off, etc. and assign those additional costs to their actual 'production' hours.

Determine the True Cost of an Employee

Why is knowing each employee's TRUE cost per production hour so important? Here are 3 critical "knowledge-based-decision-making" questions faced by business owners.

  1. What do I need to charge for each employee's time to meet my gross profit goals?

    For example:

    • Your $18/hour employee truly costs you $28.80 per hour.
    • Does your $18/hour empoyee really cost you $28.80 per hour? Tweet This

    • Your company goal is to achieve a gross profit on employee labor of 30%.
    • You will need to mark up that employee's time 43% to equal $41.18/hour.
    • If your goal is 30 percent gross profit on employee labor you have to mark up his hourly wage 43 percent. Here's why Tweet This

    • If you charge this employee out at a lower rate, you will not meet your gross profit goal.
    • If you charge this employee out at a higher rate, you may risk losing work to other companies who know exactly what their employees cost, and bill their time at a lower rate.

    When you know each employee's true cost per production hour (accountants call this a "fully-burdened labor rate"), you can compute exactly how much you need to charge per hour for that employee to meet your gross profit goals.

  2. Which employees should be assigned to which jobs and which tasks?

    With objective information about what each employee truly costs, you will be able to decide which employees should be assigned to which tasks and projects. Assigning the right level of employee to the right jobs and tasks helps to prevent costly labor-assignment mistakes and resulting labor over-runs.

    You'll want to ask, and answer, questions such as:

    • What's the most cost-effective mix of supervisors to front line workers?
    • What's the most cost-effective mix of supervisors to front line workers? Tweet This

    • Who are the lowest-cost employees to effectively and efficiently perform specific tasks?
    • You will need to mark up that employee's time 43% to equal $41.18/hour.
    • Do we need to bring in temporary sub-contract labor to help out with work-load spikes or lower-level tasks?
    • Do we need to bring in a temp subcontractor to help with work-load spikes or lower-level tasks? Tweet This

  3. How much money am I losing when employees work overtime?

    Many business owners have strict "no overtime", or "overtime only when it's absolutely necessary" rules. Surprisingly, when fully-burdened labor costs are computed for both regular time and overtime, many companies find that the overtime premium is fairly small OR overtime actually costs less per hour than regular time!

    Why? Although wages at 1.5 times regular rates intuitively appear to be a huge cost increase, certain fixed costs (such as unemployment taxes or health insurance) don't change. Another consideration: it can be costly (and risky) to recruit and train new staff members vs. paying current (known) staff to work a reasonable amount of overtime.

    If you want to see what overtime actually costs for each employee - so that you can make the best decisions about overtime - you'll need to run the numbers.

    Want to see what overtime actually costs for each employee? Run the numbers! Tweet This

Summary

Time Tracking and Job Cost Training

Computing your true cost of labor per individual employee is one of the most profit-enhancing and cost-saving analyses you can make for your company. A labor-burden analysis will provide you with the decision-making information you need to make the most accurate job cost estimates and pricing decisions. It's one of the best tools you can use to help finish jobs on time and within budget.

If you'd like more information about how you can easily and accurately calculate YOUR employees' true hourly costs and billing rates, see the employee Cost & Pricing Analyzer (eCPA) developed by Info Plus Accounting or click here for a series of short videos.

© Diane Gilson President, Info Plus(+) Accounting® Inc.

Trainer, product developer, author, Intuit Premier Reseller, multi-certified accountant & Intuit ProAdvisor specializing in QuickBooks, Enterprise and job-cost solutions for construction and manufacturing. Contact Diane at BuildYourNumbers.com or InfoPlusAccounting.com

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