Business owners and HR/finance professionals in every industry occasionally feel an intuition that inefficiencies in their employee management, time-tracking and project estimates may be leading to losses in company-wide profitability. The issue is that correcting those issues often feels like starting a figurative thousand-piece puzzle.
One crucial and time-tested method for locating and addressing inefficiencies is calculating the true cost of employees. How you do or don’t calculate what’s often referred to as “fully loaded” employee pricing impacts your earning efficiency and ultimately the profitability of your individual projects. By performing a comprehensive calculation of the fully-loaded cost of each of your employees, you stand to locate highly efficient employee performances and less efficient ones – information that you can use in both cases to address what’s working well and which processes need to be refined.
This process should never be pursued as a time-management or employee-related “inquisition,” but instead as a genuine opportunity to highlight and applaud projects that have worked well while pinpointing areas where employee or workflow efficiency needs to be revisited. In fact, the best version of this process simultaneously empowers both the employer and employees, creating greater clarity about what to prioritize while working, or even generating new ideas for streamlining workflows and further supporting employees’ work processes across all projects moving forward.
Steps for Calculating True Costs of Employees
Although we might think of an employee’s flat hourly rate or salary as the foundational basis for determining their “fully loaded” cost, it’s easy to neglect overhead costs that often surpass those wage-related costs. For instance, beyond an employee’s rate or salary, you should accurately determine all of the following overhead costs: benefits; insurance; training & development; equipment; company incentives & amenities; stipends (travel and otherwise); state unemployment costs; paid time off; other health care costs; and any other overhead costs that can reasonably be expected within your industry.
We recommend that once you accurately tally these costs, which typically account for 15-30% of an employee’s salary, drop them into a structured chart on a per-employee basis, with the understanding that – despite some semi-predictable averages – some of these overhead costs will fluctuate employee to employee.
Another important step in the employee cost calculation process is to determine an employee’s work capacity for each year. For part-time or contracted employees, the capacity may shift based on needs throughout the year. For full-time employees, we can fairly expect approximately 2080 hours of capacity. In this case, you’ll also want to include hours for any compensated paid time off, including vacation days, sick days, holidays, etc. Depending on the range of employee types within your business, you’ll want to adapt your expectations for gross margin targets (for projects) appropriately – in a way that accounts for margin losses based on time off, utilization gaps, and the overhead costs we covered above.
Fortunately, to determine the hourly cost of each employee, you simply divide an employee’s fully loaded cost (salary + overhead) by their yearly gross capacity. For example, if you determine that a full-time member of your staff has a fully loaded cost of $85,200 and a capacity of 2080 hours, their hourly cost is $40.96 per hour.
With this information in hand, you can easily determine your gross margin on projects, evaluate the cost (and cost efficiency) of internal projects and evaluate your employee investments on a case-by-case basis.
For further insights into project-by-project direct labor costs, we recommend taking the additional steps required to determine your company’s pass-through expenses, adjusted gross income, and gross margin. By mining for this information, you can accurately calculate your direct labor costs. Check out this excellent article on WallStreet Mojo for a more comprehensive take on this particular phase of the process.
And, if our foray into the world of employee costing has piqued your interest in streamlining and clarifying other aspects of your company’s time-tracking and accounting work, please explore our recent articles on “Why Accurate Job Costing Is So Important” and “Understanding the Difference Between Job Costing and Process Costing.”
How Workforce PayHub Can Help
Calculating the true costs of employees for hourly billables is a navigable but complex process. Fortunately, we can offer the guidance, expertise, personnel, and software necessary to transform a complicated endeavor into one that provides you with timely insights, improved earning efficiency, and increased profitability across your individual and company-wide projects. Our Human Capital Management and Time and Labor Solutions can not only help you identify areas where payroll, human resources, and time & labor management can be improved, but also guide your efforts to expedite employee skills development, acquire new talent, facilitate productive management-employee dialogue, and turn employee “weak spots” into opportunities for learning and development that benefit the employee and the company alike.
Please contact us today to discuss the true hourly cost of your workforce and leverage those insights to improve your business operations.
