Loaded Labor Costs
By Glenn Felix, IPC
This is sort of a brushup review article on calculating true labor costs, which include wages, payroll taxes, paid benefits — and unpaid benefits.
Let’s begin with a standard productivity measure — Output per Labor Hour. Assume we’re getting 300 pounds of finished product per labor hour. Referencing the example “Load Factor Calculation,” our labor cost per pound is calculated as follows: Labor Hours per Pound = 1/300 = .00333 Loaded Labor Rate = $14.42 x (1+.5444) = $20.67 Labor Cost per Pound = Hours per Pound times Cost per Labor Hour = .00333 x $20.67 = $0.0742 This includes paid time off costs.
If we could improve labor efficiency by 10 percent, our labor cost per pound would change to: Labor Hours per Pound = 1/330 = .00303 Loaded Labor Rate = $14.42 x (1+.5444) = $20.67 Labor Cost per Pound = .00303 x $20.67 = $0.0675
The important insight here is, of course, the total labor cost savings realized by our 10 percent increase in productivity: A savings of $0.0067 cents per pound which, when multiplied by total pounds produced, adds up nicely.
The Calculation Unfortunately calculations aren’t quite as simple as shown in the example. Some numbers are universal and concrete like social security and medicare percentages. The approach to costing paid time off is a fairly standard calculation too.
But many numbers are going to be unique to individual companies: health care costs, 401k (or pension) expenses, life and disability insurance, state unemployment rates (also affected by experience), as are work comp premiums. You might use a married health insurance average rather than the family rate. Much depends on participation.
And some companies will have local taxes to factor. (Portland employers have a .662% TriMet (mass transit) tax to pay.)
Also of course your average wage rate will have a lot to do with calculating your load factor. (Higher wage rates yield lower load factors, mostly because health insurance is not a function of income).
Hopefully though, if you haven’t done so recently, the template shown will provide helpful guidance to figuring your current Loaded Labor Rate.
(If you’d like assistance with this, don’t hesitate to contact the IPC).
