# How to calculate / estimate the cost for one man hour?

I want to know what are all the things need to add for one man hour costing. How to calculate / estimate it?

• I guess you need to look at WBS (Work break down structure) and bottom-up estimation techniques - those are effectively what's been suggested by David and Pawel!
– PhD
Dec 5, 2011 at 2:15

You have to build the rate up from the ground. You are going to have both a cost rate and a sell rate. Start with cost. You need to bundle your resources into labor categories. To determine your cost rate, you need to determine all the direct salary and benefit costs of a particular labor category, including the average hourly rate plus benefits. As Pawel suggested 1.2, in the U.S., I find it closer to be 1.5. This rate will can have two values, one for work on your site, the other for work on the customer's site. These two values represent your base cost rate. Your further burden this with general and administrative costs and overhead costs. This has to be calculated based on your historical costs and then spread evenly across your labor. That value represents your burdened cost rate and is the rate against which you can measure your gross profit margin per individual or labor category. Your sell rate is established based on the gross profit margin you wish to have and can go up and down based on competition. Here's the math for an example:

Hourly rate for labor category: \$34.00 (assuming a salary of \$70K or so) Rate with benefits assuming 45% add on: \$52.31 (\$34/.65) On site include 10% add on: \$58.12 G&A assuming 12% add on: \$66.04 OH assuming 5% add on: \$69.52

\$69.52 is your fully burdened cost rate.

Assuming a 40% gross profit margin: \$115.87 would be your sell rate (\$69.52/60%)

The percent add ons I have here are completely made up. You have to work with your accounting department to arrive at these. These are true costs spread across labor based on how you categorize your business costs.

You can't possibly answer this question without knowing (very) specific context.

Things you should take into consideration:

• Salaries of your people. And I don't mean gross salaries only but also including all the salary-related taxes, e.g. in Poland where I live employer's real cost is about 1,2x of what employee's gross salary is (and about 1,7x of what employee's net salary).
• All the costs not directly related with salaries, meaning renting office space, paying for media, amortization of all the stuff you buy etc.
• How many people actually do billable work. After all they should earn enough to cover all the costs.
• Expected profitability.
• Potential risks, e.g. forfeits.

All these factors would be specific for each individual situation.

As an alternative you can just take overall cost of running the company, estimate how many billable hours you're going to do, and you pretty much have your bottom line cost of man hour. Then add mark-up which makes you feel comfortable and voila.

Either way, you won't avoid talking to accountants.