The Hidden Costs of Labour

Do you know the actual cost of labour per hour for your workers?

It might be more than you think. If you pay an employee for 52 weeks of the year, they only work roughly 41-42 weeks of the year when you factor in time off.

Let’s break this down:

Actual Labour Costs

It’s common to calculate employee costs at face value based on their hourly wage, but this approach can significantly underestimate the actual cost of labour. If you’re not factoring in key overhead costs and recoverable hours, you may be underquoting jobs and losing money.

The reality of recoverable hours

While you pay an employee for the full 52 weeks per year, the actual number of recoverable hours, the time they can work to earn your business revenue, is only about 41-42 weeks per year when accounting for:

• Annual leave

• Public holidays

• Sick leave

• Trade school (for apprentices)

• Any other non-chargeable downtime

For a 38-hour workweek, this significantly reduces the total billable hours, meaning the cost per hour of your employee rises considerably.

Example: Qualified Employee

Let’s say you pay a qualified employee $36 per hour. This might seem straightforward, but you also need to account for on-costs, including:

• Superannuation

• WorkCover

• Payroll tax

• LeavePlus or CoINVEST entitlements

Once you include these, the actual hourly cost becomes $44.66 per hour. But even this isn’t the whole picture.

Since the employee is only producing recoverable hours for 41-42 weeks of the year, you need to recalculate their cost based on the actual hours worked. This brings the real cost per hour to $56.64.

Now, if you’re quoting jobs using their $36 hourly wage or even the $44.66 cost with on-costs, you’re likely underestimating your total labour costs and cutting into your profits.

What about Apprentices?

Using the same scenario with an apprentice (at an equivalent hourly pay rate), the recalculated hourly cost, factoring in on-costs and recoverable hours, is slightly lower but follows the same principle.

Why this matters for quoting jobs

When quoting, make sure to use the actual hourly cost of labour, not just the base rate. For the example above, this means quoting at $56.64 per hour for a qualified employee. From there, you can add your desired gross profit margin to price your jobs accurately and ensure you remain profitable.

Don’t leave money on the table

Misunderstanding the actual cost of labour can lead to underquoting and hurt your bottom line. If you have questions about calculating recoverable hourly costs or would like to improve your job quoting process, I’m happy to help; click here to book a time that works for you, or feel free to call me on 0439 030 850.

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Tim Goode

Managing Director | Ignite Accountants