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Direct Labor Rates

Dear Dave
Is it more correct to calculate the direct labor percentage rate on an hours basis or on a dollars basis?

Dear LR
Some firms keep track of both, but to be most accurate, the direct labor percentage rate should be calculated on a dollars basis.

The hours basis assumes everyone is paid at the same rate and therefore does not take into account the significant differences in pay rates that occur between individual staff members. Since higher paid staff typically have more required indirect time (usually for management and marketing activities) than lower paid employees, use of the hourly method generally results in a higher reading of the direct labor percentage rate than use of the more case sensitive dollars basis.

Recent financial performance surveys place the average direct labor percentage rate for all firms around 63% on a dollars basis. This rate has remained fairly constant for several years. It seems that no matter how busy firms may be, there is simply no getting around a certain amount of time for vacation, sick, holiday, marketing, general office and other administrative activities.

Wahby and Associates