The Cost of a Staff Hour

People are the most precious resource you have in your company. As a manager, you will spend more effort planning and estimating the costs of the people you work with than any other expense.  How you make these staffing decisions will affect everything from the culture of your company to the kinds of people you are able to attract and retain.  It will also define your cost structure.

For budgeting, you likely estimate projects in terms of staff hours.  And, you likely estimate costs based on a blended hourly rate.  This is not perfectly accurate.  Once you have accepted that you have a team of a certain size, the true cost of an hour is your price to buy another hour of work.

Consider these questions:

• How do you account for risk in your estimate?  
• Do you include a risk premium or some other pile of bulk hours to cover the unknown, or do you assume you’ll be able to “manage” it?
• How do you obtain additional help when a new opportunity presents itself?  
• Do you bring in additional limited term staff or do you wait for your team’s availability?

Your answers define your culture—and your cost of a staff hour.

If you consider contractors, your hourly rates can vary wildly. 

• What level of skill is needed to do the job?
• Do they need to be on-site?  Do they need to be on the same continent?
• How much of your team’s time will you need to devote to training and managing this temporary team?

With contractors, your goal is to maximize their efficiency—unless they will share the risk with you by providing a fixed bid on the work, you’re paying for every hour.  Work needs to be more completely defined and you need to manage scope aggressively.  If these don’t mesh perfectly with your model, you will need to budget for more hours than you may typically expect. 

As for your internal team, your base estimates likely assume a 40 hour week.  The dirty secret of many successful engineers and teams is that the marginal cost to your company of an extra hour is likely $0.  Assume a team of salaried engineers nominally costs $100/hr (including wages/benefits). As the team’s average hours per week increases, their annual blended rate decreases:

• At 45 hours per week, their rate would be $89. 
• At 50 hrs per week, their effective rate would be $80.

But, in all cases—whether the engineer works 1 hour or 100 hours—the salary and benefits are a sunk cost and the marginal hour costs $0.  The degree to which you can count on any “increased efficiency” will be capped more on the drive and commitment of your team, the culture of your company, and how often you ask everyone to push.

How you make these decisions will determine your company culture and, with that, will help you understand your true cost of a staff hour.