The direct labor rate is the cost of the labor of your employee per hour. It’s the cost of paying the employee and does not include the Overhead and General & Administrative costs of running your business.
The cost is derived by taking the total number of hours paid in a year and dividing it into the total amount paid to the employee. In most cases, the number of hours paid is 2080.
So, in the case where someone is paid $50,000, it would be calculated as:
$50,000 ÷ 2080 = $24.04 per hour
A question I get asked often is what do you multiply by then to get the Direct Labor Cost to a contract?
Isn’t it 2080?
And here is why.
The Direct Labor Cost per hour is based on the number of hours PAID. Once you know the Direct Labor cost per hour you then need to multiply by the total number of hours the employee will work on the contract and then add the associated Indirect Costs.
So, in this case, it is estimated the employee will work 1920 billable hours on the contract.
Hours Total in the Year 2080
Vacation – 80
Holiday – 80
Total Hours Billed 1920
The total hours (1920) is then multiplied by the Direct Labor Rate ($24.04) to get the Direct Labor Cost:
1920 x $24.04 = $46,156.80
So, while the employee is paid a total of $50,000 per year, the amount of his salary allocated to hours serving the customer actually only costs $46,156.80. The rest is allocated to Vacation and Holiday which would be covered under Indirect Costs in the Fringe Pool.
For more information on how to calculate the total cost to charge the customer on a Cost Reimbursable Contract, see Developing Rates for Government Contracts.