Cost estimating needs to be a clearly defined process, and by following the proper steps we will achieve accurate estimates. So how do we identify the necessary steps?

Today we document a procedure that allows us to identify the number of labor hours available for sale. But first, can you guess how many billable hours you get from the average employee in one year?   Your estimate here: ­­­_________

Now put that costing hat on, open up your cost estimator notebook and we’ll fine tune that estimate!

In our example we have an employee who is paid 40 hours a week, receives 3 weeks vacation, 10 paid holidays, 8 paid sick, and as we are one of the more benevolent employers they also receive bereavement pay and a few days off for good behavior (no overtime in this example). We find that a sizeable portion of payroll is paid for hours not worked.

Total Hours Paid   52 weeks x 40 hours=   2080 hours    100%

To calculate the Non-Worked hours:

Vacation                      15 days x 8 hours =  120 hours

Holiday                       10 days x 8 hours =    80

Sick                             8 days x  8 hours =    80

Bereavement               3 days  x 8 hours =    24

Other time off              2 days  x 8 hours =    16

   Total Non-Worked Hours                     - 320             -18%

Leaving us with Total Available Hours of 

                                                                1700 hours      82%

So, we pay our employee 100% of the time while they are available only 82% of the time. 

But there is one final step in our labor hours costing process. At best we are in the position to bill 1700 hours to our clients (assuming we bring in enough business to keep the employee productive at all times), but this is rarely achievable. What other factors come into play? These vary depending on the type of business but would include non-billable hours committed to administrative tasks, clean up, tardiness, etc. Manufacturers face machine inefficiencies and machine downtime that are non-billable.  If we estimate these items require only 3 hours per week, we calculate:

Additional Unbillable Hours   52 weeks x 3 hours = 

                                                              156 hours           -8%

Total Billable Hours  (also known as Chargeable Hours)

                                                           1544 hours           74%

This analysis clearly points out how important it is for owners to bring in enough work to keep employees productive every hour they are available to us. Even if you are the only employee in your business, you should perform this analysis. Working IN the business rather than ON the business ensures there will be times when there is not enough work for our employees (the Billable % will further decrease), but we will continue to pay them. Hiring anything less than highly qualified individuals, not having well-trained and competent employees, and having outdated or inefficient systems and procedures will cause us to hire additional employees to offset these added inefficiencies. This further adds to our costs, further reduces our % Billable Hours and erodes our business outlook. Owners who surround themselves with experienced advisors and effective systems find it easier to maintain a pro-active approach and thereby ensure their company’s operational and financial success.

In Part II we’ll look at the true hourly cost of our employee. 

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