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How to make $25 per hour = $40 per hour

With the introduction of another paid holiday, the Mondayising of another and extending sick pay to 10 days, I was reflecting a conversation that I often have with a clients.  The conversation goes something like this….

I pay my worker $25 per hour

I charge them out at $45 per hour (*plus GST they say with a smile 😊)

I’m making $20 per hour from them 😊

That’s $800 per week –  even bigger smile 😊😊

But I don’t seem to be making any money – sad face ☹

It's then that we have a little conversation about the real cost of an employee.

Yes you do pay your worker $25 per hour

You are paying them 2,080 hours per year

That’s $52,000 per year

But they are only working for 1,300 hours.

What happened to the other 780 hours?

No, they are not lazy or shirking their responsibilities. Potentially they are getting a bunch of time off, up to 42 days in fact. The maths goes like this:

Working days p.a. = 2,080 hours (40 hours per week x 52 weeks)

Sick pay (maximum)       80 hours (8 hours x 10 days)

Annual holidays              160 hours (8 hours x 20 days)

Statutory holidays           96 hours (8 hours x 12 days)

That’s a total of 336 hours (42 days) to be deducted from the available hours leaving 1,744 hours to actually do some work.

Oh yes, then there is the paid half hour per day breaks (we used to call this P & T time but that is probably hate speech or something now). That’s another 109 hours of no productivity.

So now we have 1,635 hours available. That means for the hours they are actually at work you, are paying $31.80 per hour.

But wait, there is more! Often we are only 80% productive. By that I mean we can only charge out 80% of the time we actually pay a team member.  What takes up that 20% of lost time? Non-chargeable customer facing tasks, breakdowns, rework, training, travel time etc.

At 80% productivity, that means there is only 1,308 hours of productive time. Actual cost of the $25 per hour is now $39.76!

When you charge out at $45 per hour with a true cost of nearly $40 per hour - $5 per hour is not a very good margin. 

That’s before we factor in overtime, extra leave allowances, training, penal rates for working on public holiday, KiwiSaver, private use of a vehicle, cell phones etc etc.

Takeaways from this article:

As a rule of thumb, add 60% onto the base pay rate to get an idea of the actual cost of labour.

Review your margins in light of the true cost of labour.

Make sure you take all your holidays!!