Why hourly cost is the most important number
Every quote, every job, every margin calculation starts from one question: how much does an hour of this person's work cost the company?
Get that wrong and everything after it is wrong too. An underestimated hourly cost makes loss-making jobs look profitable.
What goes into the cost of an employee
Gross pay is only the most visible part. The annual cost to the company usually includes:
- annual gross pay, including any extra monthly payments set by the contract
- employer social security contributions
- severance pay accruals (in Italy, TFR)
- overheads attributable to the person: training, equipment, company car, phone, meal vouchers
Contribution and accrual rates depend on the collective agreement and the job grade: your payroll adviser can give you the exact figures.
The hours that really count
The second typical mistake is dividing by theoretical hours. A 40-hour week makes 2,080 hours a year on paper, but holidays, public holidays, leave and an estimate for sick days have to come off.
Then there's one more step: not all hours worked are productive. Internal meetings, travel, training and admin are necessary, but they can't be charged to a job.
A step-by-step example
Here's an example with hypothetical figures, just to show the method.
Annual cost to the company:
- gross pay: €30,000
- contributions and severance accrual (assumed for the example): €11,000
- overheads: €3,000
Total: €44,000.
Annual hours:
- theoretical hours: 40 hours × 52 weeks = 2,080 hours
- less holidays, public holidays and leave (assumed for the example): 300 hours
Hours actually worked: 1,780.
Hourly cost = €44,000 ÷ 1,780 hours = €24.72 per hour
If productive hours, the ones that can be charged to jobs, are 75% of the total, useful hours drop to 1,335. The cost per productive hour rises to €32.96.
That's the number to use when you prepare a quote: non-productive hours still have to be paid, and something has to cover them.
The most common mistakes
- using net pay, or gross pay alone
- dividing by the theoretical hours in the contract
- forgetting overheads
- using the same hourly cost for everyone regardless of role
- not updating it after contract renewals or pay rises
From hourly cost to job cost
Once you know each person's hourly cost, the labour cost of a job is the hours logged multiplied by the hourly cost of whoever worked them. That takes two ingredients: correct hourly costs and accurately logged hours.
How Tymex helps
In Tymex, the hourly cost is set in each user's profile. Hours logged in timesheets are costed automatically, and the dashboard shows hours and costs by job, customer and person. So the real cost of a job is always up to date, with no spreadsheets to keep in sync.
In short
The right hourly cost is calculated on the full cost to the company, divided by the hours actually worked, or better still the productive ones. Recalculate it at least once a year: it is the basis of every reliable quote.