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Download the Excel file of job cost and labor cost calculating spreadsheet

Figuring theTrueCost of Labor

You probably have a good handle on what materials are costing per job as long as any scrap is included in the amount of materials used for a job.

Labor costs can be deceptive.

It is complicated to truly figure it out but once done, assuming there are not many changes it will be simple to figure on a job to job basis.

You need to have three figures.

1) Total management and overhead costs.

2) The direct labor salary for the person doing the job.

3) How much work you are doing.

It makes the most sense to do this in a well noted spreadsheet so that any change can be made instantly.

  1. Overhead costs include ALL non-direct labor costs. Rent, management salary, supervisors salary, insurance, loan payments, transportation, gas, and employers contributions to paychecks. There are other hidden costs, leases on equipment, advertising, phone, electric, window washers, etc. Include EVERYTHING that is not direct salary to employees that are directly doing the work. Include salary that you get for management not for producing items.
  2. The total per hour salary of the employees doing the actual labor. Include in this the portion of your salary, if any, that you put into direct labor at a rate that you think you deserve on an hourly basis.
  3. The percentage of actual production capacity that you are using. This is what you can do in a normal shift verses what you actually do. Do not figure this at top speed for capacity, occasional spurts can be much higher than every day of the week production. I usually figure that an employee can continuously produce about 80% of what I can, I am much more motivated.

What to do.

Divide the overhead figure in 1, by the direct labor cost in 2. Then divide this number by the capacity (in decimal 80%=.80) used in 3.

This is the magic number.

It usually runs between 4 and 10. Four is good, 10 or higher means that the overhead is high. High overhead is OK if the markup is very high.

To figure the true labor cost of a project add up all the direct labor hours multiplied by their per hour rate. Multiply this by the magic number.

This is what the labor is really costing the business. Remember that this is your cost, without markup!


Losing money on a job can be beneficial at certain times. If you are very slow and do not want to lay someone off, getting cost of materials and part of employees salary is better than not getting part of the employees salary. If this lasts for LONG periods out of the year then you are in BIG trouble.