The Marginal Hour
The cost of one more hour from people already employed. When it is the right number, when using it is dangerous, and how to use it without habit setting in.
The marginal cost of an hour from a salaried person already employed and not fully occupied is close to zero in cash. The full rate on the rate card is an average that includes costs already incurred whatever happens next.
The record examined in “The Marginal Hour” is strongest when it is created close to the work and remains open to correction. A team evaluating a structured way to handle fte meaning for fte meaning can connect time with projects and work categories, provided people can review entries before they influence payroll, billing or cost reports.
Both numbers are correct and they answer different questions. Using one where the other belongs is the most expensive confusion in labour costing, in both directions.
Additional context for “The Marginal Hour” is available from CISA operational guidance. Current legal, payroll, tax and accounting requirements should be confirmed for the relevant jurisdiction.
When marginal is the right number
Accepting work that would otherwise not happen, with spare capacity, for a limited period, where no additional cost is triggered.
- Work that would otherwise not happen.
- Spare capacity that is genuinely spare.
- A limited period with an end date.
- No additional cost triggered by the extra hour.
Four conditions. All four must hold, and the fourth is the one that fails.
What triggers additional cost
Overtime. Agency cover. Recruitment. Displacing other chargeable work. Equipment or licences. Anything that makes the extra hour not actually free.
If any of these applies, the marginal cost is not zero and should be computed.
The displacement test
The most important of the five. An hour spent on the marginal job is an hour not spent on something else. If the something else was chargeable, the marginal cost is the margin forgone.
An operation at capacity has no marginal hours at all.
Why it is dangerous
Because it is addictive. A job taken at marginal cost once is a sensible use of spare capacity. Taken routinely, it becomes the price the market expects, and the full cost is never recovered.
Within two years the operation is busy and unprofitable.
The discipline
Marginal pricing is a decision with a named approver, a stated reason and an end date. Not a rate on a card and not a discount anybody can apply.
Where it is not controlled this way it spreads, because it always looks like the right answer on the individual job.
Recording it
The job carries both figures: cost at the full rate, and cost at marginal, with a flag saying it was priced marginally and why.
Otherwise the job appears in next year's profitability analysis as evidence that this kind of work is unprofitable.
The portfolio view
Marginal work is defensible when the portfolio as a whole recovers the full cost. The relevant number is total recovery, not any individual job.
Which means somebody has to be watching the total, and in most operations nobody is watching it until the year end.
Where it is genuinely correct
A quiet quarter with a known end. A customer whose work fills a gap between committed projects. Work that builds a capability or opens a market.
Three cases, all time-limited, all with a reason that can be written down.
The reverse error
Refusing marginal work because the full rate says it loses money, while paying people to do nothing.
That refusal has a cost too, and it is the wage bill of the idle hours. Stating both numbers in the decision is what makes it a decision rather than a reflex.
Marginal cost is not zero in the long run
People leave, equipment wears, goodwill is consumed. The costs that look fixed within a quarter are variable within three years.
Which is why the end date on a marginal pricing decision matters more than the decision itself.
The approver and the register
Marginal pricing needs one named approver and one register: job, date, reason, end date, and the gap between the marginal price and the full rate.
Read quarterly, the register shows how much of the operation is being sold below full cost. That total is the number that matters, and without a register it does not exist anywhere.
Marginal in a downturn, full in a recovery
The transition is the hard part. Prices set marginally during a quiet period become the reference price when work returns, and raising them is a commercial conversation the operation has already lost once.
Which is why the end date on each decision matters more than the decision: it forces the conversation at a time of the operation's choosing rather than the customer's.
What to tell the people doing the work
That the job was taken at a price below full cost deliberately, and why. Otherwise the job appears in their own performance data as an underperforming piece of work.
It is a short note on the job and it prevents a decision taken upstairs being read downstairs as a failure.
Publishing both rates
The marginal rate alongside the full rate, both labelled, with a one-line statement of when each applies.
Two numbers, one sentence. Published together, the choice between them becomes visible. Published separately, one of them quietly becomes the rate.