Optimising labour costs and employee productivity in integration businesses

Understanding labour burden

Accounting for labour costs involves calculating the ‘labour burden’. While staff may only think about take-home pay, business owners need to consider the other ‘burdens’. These can be anything from employee benefits to training costs.

When we add all of this up, we have the ‘fully burdened labour rate’, which impacts our pricing. This is usually 1.25 to 2 times higher than the hourly labour cost, which needs to be covered in the final billing rate. It’s important not to confuse this with the final bill, as the amount the customer pays needs to cover all costs and generate a profit.

Typical labour burdens and how to calculate them

To calculate this, you need to assess each staff member’s cost per hour. Be mindful that your location may impact taxes and employment costs.

Payroll taxes

These are government-imposed social contributions, such as national insurance in the UK or social security in the US. These can account for 13 to 15% of labour burdens each year.

Worker’s compensation and liability insurance

You’ll need insurance to protect the health and safety of your staff. These can be considered variable labour costs as they will depend on the jobs carried out. You should use your own calculations rather than the insurance company’s to ensure all costs are covered.

Paid Time Off (PTO)

Paid time off for full or part-time staff may include holidays and sick leave. Perks such as paid vacation can increase labour burdens by up to 15%.

Health insurance contributions

To maintain employer competitiveness, many companies offer some type of health insurance package. This may include dental or vision insurance, and can be treated as a fixed cost as it’s not impacted by the number of hours worked.

Company assets and additional burdens

Other costs may rise in line with the number of employees you have, such as:

• Mobile phones or communication equipment – around 2% per year
• Small tools – costs to replace broken or lost tools, adding around 1% per year
• Vehicle costs – it’s important to categorise these into fuel, maintenance, insurance and depreciation.

How to calculate the fully burdened labour rate

To calculate the fully burdened labour rate, business owners should: 

1. Code actual costs to overhead accounts.
2. Allocated incremental amounts for labour costs, using percentages of labour as a final monetary value.
3. Deduct this monetary value from the overheads to balance the books.

Accounting for employee costs: best practices

You should always track and allocate the full cost of payroll burdens to secure a fair, profitable hourly rate. To track costs throughout the year, allocate an incremental amount.

For example, you may have allocated 5% for an employee’s vehicle burden. Variable costs such as fuel should then be allocated to appropriate overhead accounts. You can apply this burden through payroll, creating an overhead contra account (or negative overhead account) for vehicles.

As you approach the end of the year, take the actual costs incurred and subtract it from the amount in the negative overhead account. If it’s a negative number, you’ll have allocated too much. If it’s positive, you’ll have allocated too little. The books will still balance, but you can apply these learnings to the next year.

Labour utilisation and its impact on profitability

While labour burden is helpful for cost control, it doesn’t allow for labour utilisation. No employee can be 100% productive 100% of the time – and so we need to account for this with billable hours. Non-billable hours may be the perks mentioned above, as well as commuting, attending meetings or other ‘non-productive’ time.

We can use this formula to calculate labour utilisation:

Total number of billable hours/total number of hours paid = employee utilisation.

We can then determine a true hourly cost for an employee. Let’s assume they’re 70% utilised:

Burdened rate/utilisation = true hourly cost.

So, an employee with a burdened rate of £55, divided by 70% utilisation, would cost £78.57 in reality. Our billing needs to reflect this, while we also need to drive efficiencies to get the best from our staff without putting up costs.

Strategies to improve employee utilisation

The good news is that we can get more from our staff without risking dissatisfaction or even putting up sales prices. For example:

Setting utilisation targets and tracking progress

List key metrics to track to identify where time could be spent better, or where expenditure is too high. By regularly revisiting your labour utilisation, you can identify areas that inhibit staff productivity – such as driving too far to complete jobs.

Employee engagement

Getting regular feedback from your staff will help them feel more valued and increase productivity. Communicate expectations regularly to avoid any unseen costs, and provide reports to compare hours to estimates.

Process optimization

With your feedback sessions, turn insights into actions. For instance, you could consider asking staff where they think they’re wasting time, such as unnecessary project management calls.

Incentives and performance-based rewards for technicians

Employee incentives may help to keep total labour costs down. For example, you could offer bonuses for jobs that come in under budget from a time perspective, as long as these do not impact quality.