The Hour You Pay For
Paid hours are the authoritative cost figure and the wrong divisor. Where the number comes from, what it includes, and what it quietly leaves out.
Paid hours are the authoritative figure for what labour cost, because they correspond to money that actually left the organisation. They are also the wrong number to divide that cost by, and using one figure for both jobs is the commonest structural error in labour costing.
The record examined in “The Hour You Pay For” is strongest when it is created close to the work and remains open to correction. A team evaluating how can teams improve time reports for invoicing? for time reports for invoicing can connect time with projects and work categories, provided people can review entries before they influence payroll, billing or cost reports.
This note is about the numerator: what paid hours are, where to get them, and what they do and do not contain.
The assumptions behind “The Hour You Pay For” can also be checked against Australian Taxation Office business resources. Record which guidance applies to the real workflow and which points require professional advice.
Where the figure comes from
Payroll, not the time system. Payroll is reconciled to bank payments and to statutory returns; the time system is reconciled to nothing.
- Payroll — reconciled to money and to statutory returns.
- The time system — reconciled to nothing.
- The difference between them is the subject of its own note here.
Any costing built on time-system hours is built on an unaudited source, and the difference between the two is the subject of its own note here.
What paid hours contain
Contracted hours, approved overtime, paid absence of every kind, paid breaks where they exist, and any hours paid under an averaging or annualised arrangement.
All of it is cost. None of it is optional. All of it has to be recovered through whatever work is actually chargeable.
What they do not contain
Work done and not claimed. This is real, it is common in salaried populations, and it makes the apparent cost per unit of output look better than it is.
It also means that a drive to reduce recorded hours can succeed completely without any work being done differently.
Salaried people do not have paid hours
They have a salary. Converting it to an hourly figure requires choosing a number of hours, and that choice is a decision with consequences.
Dividing by contracted hours understates the real hourly cost wherever people routinely work beyond them; dividing by actual hours rewards long hours with a lower rate, which is a strange incentive to build into a costing system.
The convention worth writing down
Salary divided by contracted annual hours, with a note that the figure assumes contracted hours are worked.
It is defensible, it is stable, and it does not move when somebody has a hard month. What is not defensible is leaving the choice unstated.
Annualised and averaged arrangements
Where hours are averaged over a period, the paid figure in any one month is not the worked figure, and monthly costing will swing for reasons that have nothing to do with the work.
Costing on the averaging period rather than the calendar month removes the swing entirely.
Part-time, and the trap of the headcount
Headcount is not hours. A team of six that includes two part-timers has the hours of five, and every per-head cost in the rate is being spread over six.
This is one of the few errors in labour costing that is both common and trivially fixable: express everything in hours and the problem does not arise.
Leavers and joiners
A person who left in week three contributed three weeks of cost and a full head to any per-head calculation. Over a year with normal turnover, this moves the rate by a measurable amount.
Full-time-equivalent hours, computed from payroll dates, is the fix, and it is a query rather than a project.
Employer on-costs are not in this number
Paid hours are hours. The cost that sits on them — contributions, pension, insurance — is a separate layer, and it is the subject of the next section of this collection.
Confusing hours with cost at this stage produces a rate that is wrong by roughly the on-cost percentage, which is rarely small.
Getting the extract right
Hours by person by period, with the pay element split out: basic, overtime, premium, absence. One extract, run the same way every period.
Where the extract changes definition between periods, every comparison over time becomes meaningless and nobody notices for a year.
Two populations in one payroll
Most payrolls contain people whose hours mean different things: employees on contracted hours, people on zero-hours or casual terms, and apprentices whose paid time includes study.
Averaging across them produces an hourly cost that describes nobody. Splitting the extract by employment type costs nothing and is the first thing to check when a rate looks implausible for a team that everybody agrees is ordinary.
The month that has five Fridays
Calendar months contain different numbers of working days, which means monthly paid hours swing by up to ten per cent for no reason connected to anything.
Costing monthly without adjusting makes alternate months look efficient. Either cost on a four-week cycle or divide by the actual working days in the month; what does not work is comparing raw monthly totals and drawing conclusions from the pattern.
The figure to publish
Total paid hours and total paid cost, by team, by period, from payroll, with the date of the extract. Two numbers and a date.
Everything else in this collection is built on them, which is why they are worth getting from the audited source rather than the convenient one.