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In my 3.5 years on the road as a small business consultant doing profit and expense control jobs for 126 companies, I rarely found a small business owner who had a handle on his real labor costs. This became a problem for contractors of any sort and for engineering and survey companies because they would usually bid the job based on their labor rate, not their burdened labor rate. The smarter ones would include some factor for labor burden though they rarely called it that and seldom knew how to calculate it.
Are your labor costs higher than you think? It's important to more than those who do bids. If you do any business planning, like the cost of manufacturing a new product, you must know your burdened labor costs If you intend to make a profit. You could be losing money on your jobs and not understand why or how to fix the problem. The key to this issue of financial management for your small business is to calculate your burdened labor rate.
True Labor Costs Are Your Burdened Labor Rates
This means you want to calculate your true labor costs. Labor burden refers to the hidden and not so hidden extra costs for an employee. One professional company had labor costs 85% higher than the hourly wage rate for a $15 per hour field employee, which meant he effectively cost $27.75 per hour.
Burdened Labor Rate Explained
Burdened labor rate is the base payroll hourly rate or salaried rate with the labor burden calculation added to it. There are actually two elements to your labor burden: the hard costs and the soft costs.
What to Include in Hard Costs
The hard costs are those that are obvious when you think about it. They are also the ones where you easily see the expense added.
Hard Labor Costs
The following are items to include in your hard labor burden cost calculations:- Taxes including FICA, Medicare, FUTA, SUTA, and Unemployment
- Workers' Compensation: Of the small business labor burden calculations I have seen, this is one of the mandatory costs that can be expensive for high risk employees.
- Benefits including medical plan, dental plan, life insurance, child care allowance
- Bonuses, such as Christmas or Holiday bonuses, performance bonuses
- Profit sharing, contributions to IRAs or 401Ks
- Various allowances, like uniform allowances, car allowance, gas allowance
- Overtime estimate: some businesses make a practice of paying overtime and know roughly how many hours a person will average per week
- Company parties, like Christmas party and summer picnics - be sure to include any entertainment charges
- Gifts to all attendees at a company event, such as jackets and baseball caps or souvenir mugs
Next, you adjust for soft labor burden, which means your costs for hours paid but not worked:- Breaks
- Travel time
- Holidays paid
- Sick days
You don't have to calculate every employee's burdened labor rate if several have the same pay rate. However, your labor burden does vary by person or at least by position. For instance, field personnel or equipment operators and manufacturing employees tend to have significantly higher Workers' Compensation rates than office bound people whose biggest risk is the stapler. Likewise, bonuses are rarely paid in flat percentages for all positions.
Some Uses for Burdened Labor Rate
Besides improving the accuracy of your quotes or estimates for the cost of new product manufacturing, as small business consultants, we used burdened labor rates to calculate the cost of wasted time so we could determine if it was worth the effort to make a change, such as in work flow. Deciding when to add a new employee instead of paying overtime is another reason to use burdened labor.
Are your labor costs higher than you think? If you are a typical small business owner or manager, I'm betting they are. Even those who think about adding hard costs may miss some of the less obvious ones like company parties and allowances or once a year bonuses. Most often forgotten are the soft costs of time paid but not 'worked' at the primary tasks. Using your burdened labor rate in your planning and calculations for quotes will improve your profitability.