How to develop a meaningful labor cost estimate

Fixing the price of a product or a service is easy but when it comes to developing the labor cost, it can be a real challenge. It is important to be just with the workers, they must be paid according to the time and effort they are putting in the demanded work. However, you also do not want to go in loss, keeping your profit on one side is also important. If you start paying the employees more than you areearning then you will be facing some serious problems because you can increase the employee’s salary but once increased you cannot decrease it. So, it is better to plan everything beforehand rather than getting into trouble afterwards.

On the other hand, if you under pay the employee, lesser than the job deserves then you will be unjust and moreover your organization will not attract much applications from employees. There are many things that are required to be kept in mind while estimating a labor cost including the labor time, sources, energy and a few more that will be addressed in this article.

Direct and indirect labor cost

The direct labor cost is the cost of the total labor used to get the product ready. For example, the labor cost of a worker in a factory, or an IT worker or a developer developing different projects in a software house. Indirect labor mostly refers to supervision of labor and maintenance of equipment. However, in business direct labor costs are mostly used and are preferred.

Components of labor cost

  • Number of hours workedThe number of hours that the worker is working for makes a major part of his labor cost. Typically, these hours are calculated based on five days a week, making 52 weeks a year and hence 2080 hours per year. However, this number might differ for different companies and different countries according to the work requirement being demanded by the provider. For example, in US the working hours of an average worker are observed to be much higher as much as 47 hours per week.You can set different costs for per hour work.
  • Manage the expensesThe expenses of the company refer to the services provided to employee for example social security, medical facilities or any other facility depending on the company. These services depend on the position of the employee and the organization and can add up to 20-40 percent of the direct salary costs.
  • Productive hoursApart from the working hours specified by the company the number of productive hours should also be considered because they both might differ from each other. The workers may not be productive for all the hours they are in their office. Time may be consumed in meetings, administrative works or just on a discussion on the last night’s football match. According to a study published by The Center for Management and Organization Effectiveness, it has been observed that out of 45 hours a week, 17 hours are unproductive. Another survey stated that even the most productive employee takes a break of about 17 minutes every 52 minutes. So, the unproductive time accounts for 25-38 percent of time in a week.
  • Some unnoticeable expensesThere are many other expenses that go unheard for example the computer, telephone, office space, professional development and training. Such expenses might look minor but if collected together they become major expenses. These expenses also become a part of the internal staff cost and hence affect the paychecks of employees.
  • The position of employeeThe paycheck will differ for various positions in the organization. The higher the position the higher the paycheck.
  • Keeping the actual labor in mindThe actual labor of the workers differs from each other and hence the paycheck shall too. While deciding for the pay the labor of the position to be put in must be kept in mind otherwise the it will be unjust to the worker and you might have to face objections from them.

These are the major points that need to be kept in mind if you want to develop a meaningful, just and well-deserved labor cost. Keeping a good labor cost is necessary for the organization because it not only attracts more people to work for your organization it also boosts up the confidence of the existing employees and encourages them to work better and with more dedication for the company.

If the paychecks are not according to the labor of the employees they will lose interest and might not work with the efficiency that they would if the they are getting the right pay because we all know that with the pressures of the present economy and expenses it is very hard to keep focused if you are not getting the money you deserve for your labor.