As a small business owner, have you ever wondered how to determine service charges? It is important to know exactly how much an employee is costing you per hour to do so. When calculating the hourly cost of an employee you need to be using the “Burdened Labor Rate.” This is actually different from the rate you pay an employee per hour. The burdened labor rate is an individual’s wage plus all the benefits that you give an employee or pay on the employee’s behalf.
Let’s work through an example of this! It is generally accepted that an average employee will work 40 hours a week for 52 weeks or 2080 hours in a year. A base pay of $15 per hour would result in total wages of $31,200 for the year. Having said that you now must subtract (estimated values in this case):
- Vacation hours -40
- Paid holidays (8)-64
- Sick days (5)-40
- Training Days (2)-16
- Idle time (15min/day)-60
The above example would bring the hours available to work down to 1,860 for the year.
Now add to the individual’s compensation all the employers’ contribution to:
- Social Security-$1900
- Medicare -$450
- Unemployment Ins.-$150
- Workman’s Compensation-$1200
- Health Insurance-$3000
- 401K -$500
- Bonus $250
- Vehicle usage or car allowance -$3600
- Uniforms $100
The benefits paid on behalf of the employee totals $11,150.
You would then take the benefits and add this to the base rate of $31,200 which gives a total of $42,350 of compensation. Having determined that the actual hours of work would be 1,860 you would now need to divide the total burdened compensation by the reduced hours. This gives us an hourly rate of $22.77. An increase of $7.77 an hour for all the benefits we provide. It represents a 52% increase over the base wage.
You must know exactly what each employee costs the company per hour when “on the job.” On the job can vary by company, since it could mean preparation time, marshaling, equipment repair all of which may be off the job site itself. However, the “burdened rate” is the base rate we need to be using when starting an estimate. It is what the employee really costs you, and you need to recover that money for the hour they work.
To take this even further, add the Overhead Recovery Rate as you need to recover your fixed expenses. But, that’s a subject for another day! This is just a quick example of taking the concept of the burdened labor rate and applying it to a real-life scenario.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: