The importance of labor cost in project cost management
The responsibility for managing projects is quite substantial. Most of the time, even working on projects is not always easy to carry out. Regardless if you are the project manager, a marketeer, a software developer, or a designer, within a team, there are still many objectives to pursue and achieve. There are also multiple aspects that need attention from the respective company departments. Businesses should pay attention to financial metrics such as employee labor costs in projects, for improved project financial management.
In the COVID-19 world of limited resources, investments, budgets, and labor costs, we should think wisely, plan, and monitor our affairs. In this blog post, we will discuss the information that makes up employee labor costs leading to employee cost estimation and their significance in project cost management. Before registering any project costs that may occur during working on a project, a project manager should always concretize the scope around a project and put together a project proposal.
It’s essential to have a clear understanding of your employees’ labor costs related to projects. Then, the project cost estimation can result in better project budgeting, no revenue decrease or discount in the quality of products/services. In project terms, it can also minimize overspending or the percentage of misplaced priorities.
Most ideally, you can achieve the total project cost estimation, with the help of the right software. Preferably, one that has invoicing, time-tracking, and project management features for optimal business results. So, it is about time we dive deeper into how to calculate employee labor costs that can affect a project’s cost estimation and management. But first of all, let us refresh all the variables that comprise direct and indirect costs around a project, before moving on to labor costs.
Direct costs VS Indirect costs
Starting with the distinction between costs and expenses sounds fitting to clarify this complex duet. Cost relates to the act of acquiring something while expense refers to the usage of the bought product/service. It seems like these two terms are the two sides of a coin; you cannot have an expense without first paying for it.
Costs that relate to projects and you cannot omit, form the direct costs. They are integral and necessary to the completion of a project. They can vary and be linked to different aspects of a project. A basic kind of project costs is the payments that professionals are getting when working on a project. Τhe totality of equipment, materials, the preparatory phase, and tasks around a project compose the direct costs.
Additionally, business outsourcing subcontracts are also considered direct costs. Therefore, if you run a 3D design team, then your costs can be the team’s salaries, 3D printers, printing material, as well as the whole design and actual printing process.
On the other hand, indirect or overhead costs are not be directly linked to a specific project. They may be administrative costs, general office equipment as well as employee benefits, insurance, utilities, and supplies. Not only those but also any cost that supports a business and workforce in total and not a particular project per se.
The labor cost definition
The gross salary that an employee receives for their work is called labor cost. Along with the sum of billable hours, a variety of other expenses are included. Joseph G. Hadzima, a senior lecturer at the MIT Sloan School of Management, states the real cost of an employee is about 1.25 to 1.40 times base salary range. For instance, the true labor cost of employees with salaries of $20.000 yearly, ranges between $25.000/28.000. Thus, the actual cost of an employee is more than meets the eye. So let us go through which added expenses come into play.
What constitutes the true cost of an hourly employee?
As seen above, direct and indirect costs comprise an employee’s actual cost. Thus, in order to find out an employee’s labor cost with an hourly rate, working in projects, you have to dig deeper than their wages. To the business, hourly employee costs include payroll taxes, social security, medical insurance, paid leave, and benefit payments. Thus, an employer has the responsibility to cover employee about their mental, physical well-being and retirement plan. Regardless if a professional is on an hourly rate or steady monthly salary, most of these extra costs apply to both categories.
Discover the hourly employee costs
For the sake of finding the employee cost per hour, we will introduce Jessica. She is a graphic designer working for a creative agency as a full-time employee. Her hourly rate is $50, and this past year she worked for 2080 hours in a year. Thus, Jessica’s yearly labor cost is $104.000, before taxes. Taking into consideration her 20-day paid vacation or 160 hours of work, her total working hours fall to 1920. Then, her hourly rate is closer to $54.
Therefore, you should take your employees’ labor costs into account when calculating the total project costs. This way, you will get better at project cost management for every single project that your team works on.
The importance of project cost management
If you run or own a business that delivers project-based labor, then you are in need of an invoicing software with time-tracking and project management features. Software like Elorus can help you manage time, money, and the working hours your team puts in the projects. By setting up both an hourly rate and the employee cost per hour (as we discussed above), you provide Elorus with all the necessary information to calculate the total costs of a project and generate accurate invoices for your clients.
In combination with the project expenses, Elorus can determine how much a project really costs your business without the need for extra calculations. Setting the right project costs and expenses will greatly facilitate the procedure of organizing and monitoring your project budgets. At the same time, detecting, gathering, and categorizing project spending will likely result in better budgeting for futures projects. For the complete project management experience, create a free account and witness its financial benefits for yourself.
To sum up, successful projects require well-planned budgets. In turn, project costs are composed mainly of procurement expenses, hourly employee costs, amongst others. The ability to concretize and monitor expenses and costs will result in more accurate (or even increased) revenue. As a business owner, getting hold of your project costs will give you a chance for more comprehensive control of the financial route of your ventures. Of course, it is probable that unexpected extra expenses may come up. However, careful project cost management will prevent unforeseen expenses from driving you off-budget and off-road.