Calculating loaded labor cost for ROI?
I'm curious if any of you calculate 'loaded' labor costs for use in ROI calculations, and what multiplier you use vs the salary.
The 'loaded labor' cost attempts to reflect the true cost of a person to the company (not just salary, but benefits, overheads, etc as well).
i.e. Let's say you had a labor-saving product that allowed your customer to not hire 1 minimum wage worker. Therefore, you could estimate the value that of your product at $7.25 (Federal min wage in US) x 40 x 52 = $15,353 per year. But that's not the true value saved, since the true cost of employing that employee is actually much greater (due to the fact that the employer pays benefits, holiday pay, extra taxes, provides an office and computer, etc).
I've used both 1.5x and 2x as multipliers before in previous start-ups, but various industries have different multipliers - I'm curious if there are any rules of thumb out there.
By the way - I'd hesitate to make ROI calculations like this the only focal point of your sales efforts - you need to wrap these numbers in narrative and value. Stuff like this works best, in my experience, as supporting evidence to the overall narrative. Resist the engineer's impulse to make it all about spreadsheets and numbers!
Thanks!
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You can also add in the fixed costs of office space. The issue though is the cost goes up like steps rather then linear to new labor (rent an office there is x space). So I suggest seperating but accounting for the fixed and variable costs relating to labor. – John Bogrand 14 years ago
3 Answers
I have done business operations in technology, consulting, and entertainment industries, so I am only aware of knowledge worker companies.
For a salaried with 10% employee contribution towards health insurance (Premium HMO plan as a base), average employee in mid-30s with 1 child (60/40 male/female employee ratio), excluding profit sharing and 401k contribution I budget 1.4x for a sub-$100K employee. Those over $100K are somewhere in 1.3x.
Depending on your demograpic, that multiple can be as much as .2 higher (rarely lower)
The typical benefits and overhead for a technology company is 30% of your salary (1.3x). It's a rough number but good enough for simple calculations.
You can probably apply that to minimum wage as well but I am sure the factor might be a little higher.
I have worked for a company where there was so much work to be done that could generate extra revenue. In this company our ROI calculations were based on the potential revenue an employee could generate if that employee was available for i.e. back-office work.
As a comment on the other ways of calculating the overhead, you should also calculate the risk of an employee being away from work, due to things like courses that are planned months ahead, strikes, illness or that the employee is taken off the main task to work on a more urgent task in another division (very frequent in large companies). IF such things occur four days in a row, the cost might be really high for some types of work.
