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nGROUP Performance Blog

Understanding Your Labor Costs & How To Reduce Them

Posted by Jim Zimmerman on May 6, 2019 8:59:00 AM

What if you could find savings in your business by better understanding one of your largest costs. One of the first items nGROUP investigates is the true hourly cost of labor. Many companies have a cost line in the P&L, a labor report, or some calculated cost for their personnel. This often times lead to missed opportunities or misunderstood results.

Time Vs Cost

The only way to accurately evaluate these costs is to get granular with the data. This does require a little digging but is relatively simple to calculate. I will start with a common situation that is often the approach for companies looking at their labor cost. In my experience, no one I have assessed in the last 20 years has properly evaluated the actual costs of their labor in a discrete way.

The Process In Action:

Company Y has a line item in their report, P&L, or labor flash that has a blanket burdened rate of 35% for their facility/company/region; or the company provides a “burdened pay rate” for all GL positions; or simply utilize a blanket budget number. While these rates may be accurate for the global business, it fails to recognize the opportunity at different levels of pay. For instance, each dollar of insurance cost is a much higher percentage burden for a $10/hr employee than it is for a $100,000 manager; 5 times as high to be precise. In other words, each dollar of fixed benefit cost increases the general labor burden by 5 times vs. the $100,000 salaried staff.


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In addition, Workers Compensation Insurance has much higher rates for general labor compared to office staff, managers, and executives. When separated to better understand actual costs, opportunities arise for better cost management, planning, and outsourcing of risk and expense. Understanding the true dollar cost of labor provides insight into the world of marginal cost improvement. These marginal improvements add up to large sums when you consider that general labor is typically the 2nd largest line item on the P&L in most businesses.

If you break down labor costs and associated burdens and costs, it is easier to identify costs that can be minimized, scaled, or better utilized.

Looking at the drivers of cost in your labor:

  • Pay-Rates: obvious #1 component, can be driven by state and local forces such as minimum wage, unemployment rates, etc.
  • Taxes: FICA, FUTA, SUTA, employer portions
  • Workers Compensation Insurance: Based on risk factors, claim histories, losses
  • ACA compliance/Healthcare: This has become a mandatory cost and is a high proportional cost at lower pay rates. Often these costs are increased in full-time staff due to class protection requirements. The magnitude of these costs can also be managed with specific strategies but require administration, reporting, and maintenance.
  • Retirement benefits: Optional retention strategy for staff.
  • PTO and Holiday Pay: Employees expect PTO after a certain time of service. Retention requires certain items, and this is one. The specific accounting of time off, paid holidays, and accrual of these should be applied properly.
  • Training Costs: How long does it take for your employees to reach productive status? What is the lost opportunity cost? Who trains them & how does this training affect other’s performance?
Warhouse Worker Engagement
  • Turnover: What is the cost when a position is open? Could it have been prevented or recognized prior to occurring? Do you have a program that sees trends in attendance, productivity, or overall performance?
  • Recruiting: There is an overhead cost to recruit. Advertisements, staff, paperwork, space.
  • Administration: HR costs money. EEOC complaints require people to attend, Legal representation, and potential losses. Payroll administration entails a team to run a process weekly, to track time, and be compliant with a myriad of legal requirements.
  • Risk and Liability: Employment Practices Liability Insurance (EPLI), General Liability (GL), Professional Liability (PLI), and other costs associated with your workforce that is usually based on payroll dollars. Insurance is costly and doesn’t cover all issues. Employment claims are rising and costly *.
  • Facilities: Cost of equipment, office space (rent), services.
  • Performance: Overall performance drives cost in many ways. If your workforce performed 10% better, your unit cost would be reduced by that same AND take less parking, require less space in restrooms, break rooms, and potentially fewer shifts which in turn reduces power requirements and facility maintenance.

Improve Your Labor Management eBookAs stated earlier, most companies do not look at their GL costs with this much granularity or specific insight. Many of these costs are fixed, and some are not. Even with modest efforts and changes in strategy, savings in the range of 3-5% are easily obtainable. When combined with general performance improvements, and more advanced strategies, these savings can increase to 10-20%.

nGROUP is focused on identifying labor cost improvements through strategic design and engineered performance management to increase the financial performance of labor-intensive operations.

Topics: performance partners, Labor Cost Solution, Labor Solutions, Management Impact, Employee Impact, Operational Support, Reduce Cost Per Unit, Warehouse Management, Understanding Labor Costs