How is it calculated?
- Annual cost = monthly employer cost × salaries paid per year + monthly extra costs × 12
- Paid hours = weekly hours × 52 − hours of leave and holiday days
- Billable hours = paid hours × productive time ratio
- Hourly cost = annual cost ÷ billable hours
The figure to use when quoting and working out a job's profit is the cost per billable hour. What matters is not how many hours the team works in a year, but how many of those hours are billed to a job or customer. The cost of the rest of the time has to be covered by the jobs too.
The way to know this ratio by measuring rather than guessing is to log hours against jobs every day. More on this in the article how to measure project profitability.
Frequently asked questions
Where do I find the employer cost?
The payslip shows a total: the employee's gross salary plus employer social contributions and other statutory charges. Get the "total employer cost" line from your accountant or payroll software. If you don't know it, you can start with roughly 1.2 times the gross salary.
What does productive time ratio mean?
Not every paid hour can be billed to a job: meetings, travel, waiting, training, admin. In the field and in the workshop this ratio is usually 70–80%, and lower for office-heavy work. If you don't log your hours against jobs, 75% is a reasonable starting point.
Why isn't dividing the salary by the hours in a month enough?
That calculation leaves out extra costs, leave, public holidays and non-billable time. The result comes out too low, and a quote based on that low figure leaves less profit than expected when the job is done.
How do I calculate the team average?
Divide the team's total monthly employer cost and total extra costs by the number of people and calculate for an average employee. If there's a big difference between skilled workers and apprentices, do two separate calculations.