The Real Cost of Labour
In our discussions with clients we have found that a number do not fully understand the cost of employees.
Questions which are common are:
- How much per hour does an employee cost an employer?
- How much should be charged for labour by a service organisation?
The answers are, of course, different for each employer. We have set out the basic calculations to assist clients in considering their own situation. The calculations are set out by way of examples.
Cost of Labour
Assume a full-time employee earns $70,000 per annum ie. $1,346.15 per week for a five day, 38 hour week. This is $269.23 per day or $35.43 per hour. Also assume superannuation of 9.5% is paid by the employer, WorkCover is 3% of salary and superannuation. No fringe benefits are included in the employee's remuneration package.
| Total costs are: | |
| Salary | $70,000 |
| Annual leave loading | $942 |
| Superannuation (9.5%) | $6,740 |
| Workcover (3%) | $2,330 |
| Payroll tax (4.85%) | $3,845 |
| $83,858 | |
| The number of days worked is as follows: | |
| Days per year | 365 |
| Weekends | 104 |
| Public Holidays | 10 |
| Sick Leave | 10 |
| Annual Leave | 20 |
| 146 | |
| Actual days worked | 219 |
| Real cost per day worked | $382.91 |
| Real cost per hour worked | $50.38 |
This is 42% higher than the base hourly rate of pay detailed above of $35.43 per hour. This type of calculation is relevant where an employee is not directly producing income.
For employees who produce income (by manufacturing, construction or services), allowance should be made for unproductive time. If the employee is only productive 90% of the time whilst at work, the cost per productive hour would be $55.98 per hour, and for 80% productive time would be $62.98 per hour.
How Much Should Be Charged For Labour?
Clients who are service organisations need to be aware of the real cost of labour in determining their charge rates. Allowance must also be made for business overheads, including non-productive staff, and profit.
Assume a business with five productive employees earning $1,346.15 per week as above. Also assume that the annual overheads of the business are:
| Overheads | |
| Rent |
$50,000 |
| Telephone | $5,000 |
| Electricity | $2,000 |
| Repairs | $10,000 |
| Motor vehicle expenses | $20,000 |
| Accounting | $5,000 |
| Administration, supervisor wages and on-costs | $60,000 |
| Other | $8,000 |
| Total | $160,000 |
If the employees are 80% productive, the number of productive hours is:
Five people x 219 days x 7.6 hours x 80% = 6,658 hours
| The total cost per productive hour is: | |
| Direct labour | $62.98 |
| Overheads ($160,000/6,475 hours) | $24.08 |
| Total | $87.01 |
Therefore, in order to break-even you would need charge a rate of $87.01 per hour. To earn a profit, a higher rate must be charged than $87.01 per hour.
Conclusion
Whilst the above figures are fictitious, it is obvious that the real cost of employment and the necessary charge for labour services are much higher than the actual salary. These facts should be borne in mind when making business decisions about employment or charge rates. Clients are encouraged to review their own costs using the above examples as templates. We could be please to assist with the exercise or with interpreting the results; please do not hesitate to contact us.
Advice
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Disclaimer
The information provided in this information sheet does not constitute advice. The information is of a general nature only and does not take into account your individual situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.
