Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Labor Burden & Profits – Employees Real Cost and How Much You
Should Charge
By Diane Gilson
Employee compensation and related costs are often the largest, and riskiest, cash
outlays that business owners face. As Sleeter Group Consultants, ProAdvisors,
and accountants, one of the key ways that we can deliver a tangible, valued
service to our clients is to help them compute and fully understand the various
aspects of labor cost and exactly what they need to charge for employee-based
products and services.
The Qlean$tart® Labor Burden Calculator – an Excel-based product developed by
one of our Certified Sleeter Group Consultants – can help you quickly and easily
deliver bottom-line-value services to your clients.
- Doug Sleeter
We all know that employees are an expensive, but necessary, component of doing business.
We count on them to deliver an honest day’s work for an honest day’s pay. We try to charge
appropriately for direct labor employees so that we can make a profit on the services they
deliver. We expect excellent service and value from our staff employees in return for their
compensation.
But calculating the true cost of employees can be a challenge. This article looks at this
challenge and explores Qlean$tart® Labor Burden Calculator. This Excel-based product helps
your clients understand and compute the full, true cost of their employee labor and determine
exact amounts they should use to estimate, and charge for, labor-related services or products.
Qlean$tart® Labor Burden Calculator uses QuickBooks® to automatically post fully-burdened
cost to jobs so that they can see true labor costs. This enables you to creatively use employee
cost and potential billing rate information to positively impact their bottom line.
As a consultant, you can add valuable coaching services to your company through support
and maintenance services using this Excel-based analytical tool. Please note that a 20%
alliance discount is available to Sleeter Group Consulting Network members.
The Problem from the Business Owner’s Perspective
Employee payroll and employee-related costs comprise an extremely large portion of most
business entities’ non-recoverable cash outlay. And the potential for labor-over-runs can be
the riskiest element of any project undertaken. Yet, over years of
working with clients, we’ve found that most businesses (and business
owners) have never actually taken the time to compute the true, total
expenses associated with each employee. As a result, those businesses
have not been able to take advantage of the many beneficial ways in
which they could use that information.
What is Labor Burden?
Like most business owners, you are probably in fairly close touch with
each employee’s hourly wage or salary, and may have a good idea of approximately what
payroll taxes cost. But you may not have taken the time to research and compute all of the
additional “hidden” costs associated with each individual, including (but not limited to):
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Paid time off
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Health insurance
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Worker’s compensation insurance
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Uniforms or special work clothes
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Training
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Usage of equipment and vehicles
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Workspace (e.g., office or floor space) costs
So how do we refer to these extra employee-related costs? Here are some of the terms and
calculations frequently used by businesses who closely track employee costs:
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Labor Burden: The costs, above and beyond gross compensation, that you incur in order
for an employee to perform the work that you hired them to do.
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Labor Burden Cost per Production Hour (or Fully-burdened Cost): (Labor Burden Cost + gross
payroll labor cost) ÷ the number of actual work (production) hours.
•
Labor Burden Rate per Production Hour (%): The additional total labor burden cost,
expressed as a percent, above and beyond regular hourly payroll. I.e., Labor Burden Cost
per hour ÷ hourly payroll cost.
After you compute an employee’s fully burdened labor cost and then divide it by the number
of hours that employee actually works on projects, businesses often find that workers typically
cost the company from 50% to 150% (or more) above their gross hourly labor rate.
Understanding and carefully managing employment-related costs can make the critical
difference between succeeding or failing in business.
Employee’s True Costs
Let’s look at an example. Pat’s hourly compensation is $17, or $35,360 gross annual payroll.
As Pat’s employer, you do your research and find out that Pat has a variety of additional
annualized costs attached to this position:
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$3,005 for payroll taxes (based on 2.7% state unemployment on the first $9,000, and no
other state disability taxes).
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$3,536 for workers’ compensation insurance (at $10 per $100).
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$4,200 for health insurance ($350 per month).
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$1,060 for retirement benefits (3% of compensation).
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$720 for cell, telephone and/or Internet costs ($60 per month).
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$150 in uniforms (e.g., 4 company shirts at $25, 1 jacket at $50) or for office workers an
equivalent amount in coffee.
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$6,000 in company vehicle usage (depreciation, gas and oil, maintenance, license,
insurance, etc.), or for office workers an equivalent amount in equipment usage and
maintenance as well as office space.
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$300 in small tools and equipment usage (at $25 per month) or for office workers an
equivalent amount in office supplies.
•
$708 estimated annual bonus (2% of wages).
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$100 employer-paid snacks, meals, parties, and entertainment.
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$250 in training fees, seminars, etc.
Total additional costs: $20,029.
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Employee’s True Hours
Next, let’s determine how many hours Pat is potentially available for company work. You’ll
start with 52 weeks/year x 40 hours/week = 2,080 hours.
Then you will subtract Pat’s non-project paid time for the year:
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Six holidays.
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10 vacation days.
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Six sick or personal days.
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Two days of training seminars.
This equals 24 days (192 hours), leaving 1,888 available working hours.
You’ll then subtract an estimate of two hours from the 47 remaining work weeks for
miscellaneous administrative meetings, timekeeping, general problem-solving or prep time
and so forth (breaks are assigned to jobs or projects). This reduces the available production
time by another 94 hours, leaving a total of 1,794 available working hours.
The Final Results
Pat’s additional Labor Burden Costs total just over $20,000. This brings Pat’s annual cost to
$55,389.
Labor Burden Cost per Production Hour (or Fully-burdened Cost) to your company is $30.87
per production/project hour ($55,389 ÷ 1,794 hours) or $0.51 per minute.
To calculate Pat’s Labor Burden Rate (%) per Production (work) hour, subtract Pat’s hourly rate
from his/her fully burdened cost ($30.87 - $17.00 = $13.87) and divide the excess by the base
hourly rate ($13.87 ÷ $17.00). We see that our additional cost to have Pat on the job, when
computed as a percentage, adds 82% to Pat’s base hourly rate.
The bottom line: Pat is a truly costly and valuable asset whose time should be carefully
assigned. And the related costs (and resulting contribution) should be closely measured and
monitored.
A Solution: Labor Burden Calculator
Before I created the Labor Burden Calculator, I had construction industry clients who would
call and ask me to help them calculate their true production costs for each employee. Since
they didn't know how to compute those figures accurately, they had guessed at the amounts
they should charge for their employees' time. Though they thought they were profitable on
each job, when they tallied everything up they were losing money.
These clients knew something was wrong with their job costing, and asked me to help. I
computed my client's labor and labor burden costs by building a new spreadsheet and entered
a lot of numbers, such as each employee's basic hourly rate, overtime hours, vacation, sick
time, benefits, support costs, and more. I had to charge companies with multiple employees as
much as $1,200-$1,500 (or more) for this customized consulting service, because it could take
eight to ten button-pushing, spreadsheet-design hours to pound out each employee's real cost
per hour.
Once that was done, if we wanted to include those results in their job cost reports, we had to
manually enter the results into QuickBooks using more calculations and lengthy, complicated
journal entries.
There had to be a better way. I searched but couldn't find a single product on the market that
could help my clients.
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
Finally, I realized how to “trick”
QuickBooks into posting my clients'
additional labor burden costs into
each job – automatically.
Then I created and designed an
efficient way to build the underlying
employee costs and labor burden
calculations. After four years and
more than 300 hours of
development, I created the
Qlean$tart® Labor Burden
Calculator.
This Labor Burden Calculator offers
two distinct solutions, the Calculator
itself, and the QuickBooks posting
technique. The Calculator can be
used by anyone (regardless of their
accounting software) who wants to
understand their employee costs or
who needs to increase the accuracy
of their pricing model. The
QuickBooks posting technique
eliminated the need for timeconsuming, repetitive, and complex
labor-burden computing and journal
entries. Just provide QuickBooks
with the data from the Calculator
(using the method included with the
product) and your labor burden costs
will appear automatically as you post
your regular payroll.
17 ways the Labor Burden Calculator can
help the bottom line:
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More accurately estimate job costs
Price jobs to achieve desired profit margins
Assist with standard costing calculations
Assign the right employees to the right tasks
Streamline the workflow by automatically
assigning fully-burdened costs to jobs in
QuickBooks®
Head off labor over-runs before they get out
of hand
Determine when overtime can be beneficial
Measure productivity and create objective
employee goals and evaluation criteria
Make better compensation and benefit
decisions
Compute the potential payback on
improved office or production equipment
Place a dollar value on hiring decisions
Use fully-burdened employee cost results to
make “Outsourcing” Decisions
Review costs as workloads change
Determine splits between direct labor and
sales & admin labor costs
Compute fully burdened labor costs for
business owners
Assist in determining inter-company
employment cost assignments
Help employees understand the value of
their time and the cost of errors and wasted
time
The Labor Burden Calculator is easy
for bookkeepers and business owners to use and learn. Many customers are able to get the
calculator up and running within two hours, and every package includes specific instructions
on how to integrate the Calculator's results into QuickBooks.
Even though many clients are shocked when they see their employees’ cost results, they have
confidence in the numbers because they have built them on their own. By seeing true
employee production costs they have the specific information they need to more accurately
price their jobs. Some clients share the results with their employees to help them see how
valuable their time is as well as understand the reasons for the difference between their billing
rate and their salary.
Although I started by building this product for construction clients, any employee-based
business can benefit from using this calculator, including (but not limited to) manufacturing,
doctors', attorneys', and architects’ offices, tech support services, retail stores, banks, and a
wide variety of other professional and technical services.
A series of online demos to illustrate how the Calculator works can be viewed at
http://www.infoplusacct.com/productdemo.html.
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Adding Bottom Line Impact as a Trusted Business Advisor
As an accountant, ProAdvisor, or consultant, Qlean$tart® Labor Burden Calculator can help
you offer more to your clients. By creating and delivering on-target management and
decision-making information you can integrate more effectively into your client’s
management team. You can use the calculator to offer additional services that move you into
the role of management advisor and financial resource by providing the types of value-added
services that justify not only additional hours, but higher billing rates.
The Labor Burden Calculator also enables you to create a standardized delivery system. You
can offer a repeatable process that is cost-effective, understandable, and consistent. The
spreadsheet provides a reliable method to provide accurate and clearly documented answers
to your clients’ questions about labor costs that is both low-maintenance and easy to update.
Finally, your clients will be more deeply involved and knowledgeable regarding their financial
information (including production and employment costs), so they will not only survive, but
prosper. Healthy, profitable clients who understand the value of the financial information
that you help them achieve, are more likely to willingly ask for (and pay for), your services.
19 Ways to Support Your Clients with the Labor Burden Calculator
Here are some of the ways you can use the Labor Burden Calculator to further your practice
and help to improve your bottom line, as well as your client’s:
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Walk through some real-life examples and calculations with clients (even if they don’t
currently perform job-costing) to illustrate why they need to thoroughly understand
employment costs and that they must be carefully controlled if they are to achieve
desired profit levels.
Help your clients understand that their job costs are actually misleading unless the
employment costs are properly burdened.
Help your clients prepare their Reference Sheet and Labor Burden calculations the first
time. Although they could technically do this themselves, many clients appreciate
your assistance when completing the spreadsheet the first time.
Help your clients iron out “unusual circumstances” related to employment cost
calculations (e.g., employees split between different kinds of work, how to obtain
underlying data, multi-locations, multi-pay levels, etc.).
Help your clients understand the differences between different types of overhead
(labor burden vs. “corporate overhead”).
Create “results review” time to present results to, and consult with, company owners.
They are typically extremely surprised. Also, they should also check the results for
accuracy.
Help your client organize their QuickBooks® Chart of Accounts and Payroll Items to
split out compensation, payroll taxes, and burden/benefits between different types of
employees (Direct, Sales, Admin, Owners). This immediately provides more useful
management reports. Note: This will require periodic re-assignment of payroll taxes to
specific accounts. You can create memorized reports and memorized transactions to
assist with those entries.
Help clients use the correct employment costs for Estimating so that their estimating
process is more accurate and their Estimate vs. Actual reports will show “apples to
apples”. This may include updating current estimating tools, and/or training
estimators.
Help clients understand and establish correct markups to achieve desired profit
margins. (This may require your assistance in “weighting” different elements of
individual job costs such as materials, subcontractors, other job costs, and labor.)
In cooperation with the business owner or company management, you could
coordinate a presentation for employees to illustrate the value of “production” time,
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
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Labor Burden & Profits – Employees Real Cost and How Much You Should Charge
and the heavy cost of lost & wasted time. Note: Turn this into a light-hearted event by
asking employees to provide data for a “sample employee”. If you are the presenter, it
adds validity to the results and the owner doesn’t have play the “heavy” role. It sets
the stage for subsequent meetings between the owner and individual employees when
the employee’s specific costs and results should be discussed.
11. Help your clients use calculated burden results in their QuickBooks® file by:
a. Using the payroll system. The payroll system is the “engine” that drives
automatic burden postings. If they aren’t using this, and the information is
important to them, you can help them set it up.
b. Using job costing rates if they are using another method ($0 checks, etc.).
c. Using the information as a primary driver in standard job costing (primarily for
manufacturing applications).
d. Establishing the correct Accounts and Payroll Items or Service Items needed for
the process.
e. Creating memorized reports and transactions to make the single, simple
monthly entry (if required).
12. Help your clients establish a system to regularly review job cost reports.
13. Help clients fully understand the timing difference between time worked/time reports
and when payroll & labor burden costs show up in reports.
14. Check regularly to see that they’ve updated their burden calculations and assist if they
are behind.
15. Although results won’t be finalized until year-end, you can help to monitor amounts
“over-allocated” or “under-allocated” on a year-to-date basis. At year-end, if the over
or under-allocation is significant, you can assist by investigating reasons for the
difference, and course-correct.
16. Assist with inter-company cost transfers and/or billing rates.
17. Assist with job hiring calculations and establishing employee production goals.
18. Assist with measuring actual employee production results. Often owners will ask for
assistance in establishing productivity and bonus programs to incent employees.
19. Sleeter Group Consultant Network members can earn 20% on Labor Burden
Calculators that you order for your clients (e-mail help@infoplusacct.com for
information on the Alliance Program available to Sleeter Group members.)
These kinds of burden analytics are the types of services that many high-priced industry
consultants provide. You can use the Labor Burden Calculator to provide the same types of
services – the big difference is that you can help your clients incorporate their results into
their ongoing, day-to-day operations, in contrast with other consultants who may perform a
one-time, on-the-side service, and who are then no longer available for ongoing support.
And if you don’t want to provide any of these supporting services? Suggest to your client that
they investigate and use the Labor Burden Calculator. If they do, you can be assured that they
will become more knowledgeable and more aware of their employment costs and what they
need to charge to achieve their desired profit margins!
For a series of online demos to illustrate how the Calculator works, visit
http://www.infoplusacct.com/productdemo.html.
Diane C.O. Gilson, President, Info Plus(+) Accounting®, Inc. Diane is also a Certified Advanced
QuickBooks ProAdvisor, Certified QuickBooks Enterprise ProAdvisor, and Certified Sleeter Group
QuickBooks® Consultant. She is an author, trainer and construction accounting coach as well as a
frequent speaker at The International Builders’ Show. Her firm (www.InfoPlusAcct.com), located in Ann
Arbor, MI offers Internet-based QuickBooks® training and accounting support services for companies
with a focus on job-costing.
She is the developer of the Qlean$tart Worksheet: Labor Burden Calculator, an Excel worksheet designed
to perform comprehensive labor burden calculations. To view on-line demos go to
http://www.infoplusacct.com/productdemo.html. Contact Gilson via email at help@infoplusacct.com or
contact her at 734-544-7620.
Labor Burden & Profits – Employees Real Cost and How Much You Should Charge