How to Calculate Real Wage Costs


The real cost of wages

Knowing the real cost of wages to your business is critical for being able to put together accurate quotes that ensure profits for every job. The cost of hiring staff is expensive in Australia so you must make sure you have everything covered.

There are a number of steps that need to be followed to work out the real cost of wages and the easiest way to explain it is with an example. Below is an example from a plumbing company I’m working with.  By going through this exercise with him, he now understands the real cost of his employees to his bottom line.

Let’s run through the wages for an employee on $36/hr

Hourly Rate $36 x
Hours/Week 38 x
Weeks/Year 52 =
Wage/Year $71,136

Now let’s look at the Hours Paid for with Wages

38 hrs x 52 weeks = 1976hrs
Minus Holidays 4 weeks x 38hrs = – 152
Minus Public Holidays 11 x 7.6hrs = – 83
Minus Sick Leave 10 x 7.6hrs = – 76
Actual Hours Worked = 1665 hours

Now let’s look at the Real Cost of Wages by taking into account other expenses.

Wages $71,136
Super @ 9.5% $6,758
Payroll Tax (@ 2.4% > $650k) $1,707
Coinvest LSL (@ 2.7%) $1,921
WorkCover  (@ 1.27%) $903
Recruitment $1,000
Workcover $600
Total $84,025

Real Cost of Work/Hr = $84,025/1665 =   $50.47/hr

This is 40% more than the payslip rate.  ($50.47/$36 = 1.4)

The example above is for a single employee and is right for any other full-time employees on the same payslip rate.  You will need to work the example again for employees on different wage rates.Also, you’ll need to double check the various percentages in the example to make sure they are accurate in your state or territory.  Some percentages may even vary depending on whether your business is metropolitan or country.
So keep these calculations in mind because we’ll use them in the next video when I discuss Cost Plus work so you can learn more about profitability.

Watch this helpful video above to better understand the calculations.

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Hugh Bowman is a specialist in business coaching for trade businesses and is a former engineer and technical expert. He has lived and worked in many parts of regional Victoria coaching tradie business owners.

Ph: 0409 402 474