GlossaryKind of term: Cost and economicsLabour rate
What is a labour rate?
The labour rate is the cost of one productive hour of a person's time, built up from employment costs and possibly a share of overhead, excluding the machine.
The labour rate is the cost per hour of a person whose time you charge to an order: an operator, setter, programmer, fitter or inspector. It is kept apart from the machine hour rate, which covers the cost of the machine itself. Labour hours and machine hours thus become two separate cost sources, each with its own rate.
What does the labour rate depend on?
The starting point is the annual employment cost: gross pay, holiday allowance and any annual bonus where they apply, plus the employer's on-costs such as social security and pension contributions. That total is divided by the hours you expect to book to orders, not by contracted hours. Leave, public holidays, sickness, meetings and training are then carried by the rate, because they shrink the divisor. Whether you also include a share of overhead, such as workwear, course fees or supervision, is a choice in your costing system. If that share is in the labour rate, it does not belong in a mark-up on cost as well.
How does the labour rate work in practice?
A machine rate with the operator built in holds as long as one person runs one machine. Once a machine runs unattended for part of the time, or one operator minds two or three machines, a combined rate charges for labour that is not there, or for the same person more than once. With a separate labour rate, machine time is charged to the machine and handling to the person who does it: setup, programming, inspection, deburring, assembly. How much operator time you attach to each machine hour then becomes a separate assumption, for example a fraction of an hour when one person runs several machines. Which split fits depends on how the shop is staffed and how hours are recorded.
What is the labour rate often confused with?
The labour rate is not the hourly wage: pay is one component, alongside employer's on-costs and the hours that cannot be booked. Nor is it the machine hour rate, which covers the machine and includes the operator only if you build that in. In quotes and in some trades, labour rate also means the charge-out rate per hour, mark-up and margin included. Say whether you mean the cost rate or the charge-out rate.
Frequently asked questions
Should labour go into the machine rate or be costed separately?
Separately gives a cleaner cost once machines run unattended or one operator minds several. If each machine has its own dedicated operator, the operator can sit in the machine rate. Either way, count labour once, in one place.
How do you calculate a labour rate?
Add up the annual employment cost: gross pay, any holiday allowance and employer's on-costs. Divide it by the hours you expect to book to orders. If you include a share of overhead, leave that share out of your mark-up on cost.
Does a programmer have a different labour rate from an operator?
Often, yes. Pay, premiums and the ratio of bookable to non-bookable hours differ by role. A programmer may, for example, book part of the week to orders and part to general production engineering.