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Labor Burden and Profits: The Connection l BuildYourNumbers.com

If you’re struggling to understand or measure your labor burden and its effect on profit, let BuildYourNumbers.com help you with our accounting and job-cost tutorials.


Labor Burden & Profits: What’s the Connection?

Computing Labor and Burden CostsGot employees? If so…

  • What’s it cost to put them “into the field”?
  • What should you be charging for their time?
  • Should you avoid overtime? Or embrace it?
  • What the heck is labor burden and how does it affect your job costs and bottom line?

If you have employees and have to sign or authorize paychecks, you know that paydays and other labor-related costs represent a large portion of the cash outlay faced by your business.

Direct labor employees should be producing income and bringing far more into the business than they cost, while sales and admin staff members support the front-line employees.

In short, every employee should be contributing more to the company than they cost!

But what, exactly, IS that cost?

Although I’ve worked with clients for many years to help them improve their business by cleaning up and understanding their numbers, thus far – unfortunately – I’ve found that too many businesses (and business owners) don’t have access to reliable or accurate results regarding their employees’ true cost per hour for “production” work.

In accounting lingo, that info is called

“Fully-Burdened Labor Cost”
i.e., what it costs an employer for
an employee to produce work
for a specific period of time
(usually shown as a “per-hour” rate) 

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Without that fully-burdened labor cost information, it becomes tough for business owners and estimators to make the right decisions about markup and pricing. If markup and pricing is too high, there’s a chance of not being competitive and losing jobs. When markup and pricing is (more typically) too low, the bottom line suffers – and that’s no fun for anyone!

So, this is the beginning of a series of blog posts designed to help you explore and discover ways to access and use labor burden information to improve profitability for your company.

For instance we’ll look at:

  • An example employee and how labor burden would be computed for that person.
  • How to calculate what you should charge for direct labor employees to meet your target profitability.
  • Why your job cost reports probably aren’t right (and may be downright misleading).
  • How lost and/or wasted time can be measured, what it does to your bottom line, and what to do about it.
  • Ways to determine whether you’re achieving your desired ROI (Return on Investment) for individual employees.
  • Considerations:  When to use employees?  When to outsource?

To business owners with employees, the labor-burden topic is likely of immediate financial concern. I’ve also found that most company owners find it to be interesting, multi-faceted and, upon occasion, controversial  …
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Related Articles: Part 1 | Part 2 | Part 3


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