labor rate / overhead calcs

I am having a disagreement with a non-technical manager that maybe
some of you gurus could help with.

He is telling me our labor costs are $30 per hour, but our average pay
rate is $11 per hour. I can't see where a man hour would cost us more
than $20 per hour.

Anybody have any formulas out there? This is a small operation, 20-30
employees.

Sorry this isn't strictly Solidworks related, but I need opionions
from folks that have their heads screwed on straight and all wiring
terminations tight.

 

Consider the hours you bill (production), and everything necessary to make
it work:
- Hours: commercial, accounting, your boss.... On top of that, add social
security (health), unenployment, retirement,... (where that applies)
- Fix costs : building, heating, light, insurances,...
- Taxes,
-...

 

1) $11/hour for pay rate + insurance costs + benefits + social security and
other employer payed "taxes."

2) Equipment overhead and depreciation + utilities + mortgage expenses +
insurance.

3) Profit.

Add up all the expenses from 1+2+3 above and that will dictate the minimum
per hour charge assuming something less than a full 2080 work year because
of sick leave, vacation, overhead charges (meetings, for example), and the
general break time throughout the day.

If the average pay rate is $11 / hour and he thinks his labor costs are
about $30 / hour, I'm guessing he is greatly underestimating his expenses,
or he's got a great business model.

 

Sorry the button got hit somehow in the prior post.

The other comments above seem to ring true.

The amount of general overhead costs is key, and that is where all the
variables come in, from gov't req'd expenses, leases, insurance,
benefits, management and amortized equipment etc.



Bo

 

I am only looking for costing so we can evaluate profit on past
projects. We are not a job shop, but a builder of custom automated
equipment.
Our guys have to pay half of the insurance premium. Retirement is not
provided, other than a 401K that the company contributes little to.

I am only looking for labor costs, not labor rate to quote to a
customer. This is not for estimation, but for evaluation of profits
from a project already accomplished.

 

You can't "estimate profits" without "estimating costs".

Tom

 

I'm getting the feeling that the question comes from not having an
explicit description in a contract of how things are to be "accounted
for". Been there, done that, and I dislike legal disagreements as all
the profits disappear into lawyers' condo payments.

FWIW, I recommend trying to get everyone to realize it is in the best
interests of all concerned for the future benefit of the company to
make reasonable and honest solutions to the prior outstanding issues,
so everyone is motivated to move forward in the best possible way.

Bo

 

Any catch-all formula you employ will be pie-in-the-sky unless
accounting has already been done throughout the project. This is
fruitless excerise, especially if your company has depended more on
actual cash flow than accounts receivable in the past. It would be
better to set up accounts now and determine costs from this point on
rather than looking to the past and throwing guesses at it. This is
all just my humble opinion, of course.

Matt
http://sw.fcsuper.com

 

For an engineering consulting office of similar size we've used the
following numbers for years. These have been borne out by end of year
reviews of actual costs.

Burdened labor (health care, industrial insurance, vacation, etc.) =
2.4 x direct labor cost (employee pay rate)

General office costs (rent, power, computers, etc.) = 1.3 x burdened
labor cost

Resulting billing rate = direct labor cost x 2.4 x 1.3 = direct labor
cost x 3.19

So a billing rate of 3+ times your pay rate doesn't seem out of line
at all and believe me only results in modest profit to the office.

Best regards,
Craig