Direct Labor Calculation
Direct Labor represents the actual cost of an employee's time on a project, based on their pay rate. It's calculated as:
Time Slip Direct Labor = Hours × Hourly Pay Rate
How the Pay Rate Is Determined
Each time slip is stamped with the employee's equivalent hourly rate at the moment it's created:
- For hourly staff, this is their actual pay rate.
- For salaried employees, this is their equivalent hourly pay rate, derived from their salary.
Because the rate is stamped at creation, a time slip retains the pay rate that was in effect when the time was recorded, even if the employee's pay changes later — keeping historical Direct Labor costs accurate to the period the work was performed.
Rolling Up Direct Labor
Direct Labor is calculated at the time slip level, then summed upward:
- Time Slip Direct Labor = Hours × Hourly Pay Rate
- Phase Direct Labor = sum of Direct Labor from all linked time slips
- Project Direct Labor = sum of Phase Direct Labor across the project
Why It Matters
Direct Labor is a foundational figure that feeds directly into other calculations, including Overhead (Direct Labor × Overhead Factor) and Fee Burn (which combines Direct Labor and Overhead against your Target Profit Percentage). Accurate Direct Labor is what makes those downstream profitability figures meaningful.
Caution: Sensitive Data
Because Direct Labor is a direct product of hours and pay rate, anyone with access to both time slip hours and Direct Labor figures can use basic arithmetic to reverse-engineer an individual employee's pay rate. Be thoughtful about who has access to this data within your firm — reports or views that expose Direct Labor alongside hours should be limited to those who should reasonably have visibility into compensation.
Summary
Direct Labor is calculated as Hours × Hourly Pay Rate, with the rate stamped on each time slip at creation based on whether the employee is hourly or salaried. Time slip values sum to phase, and phase values sum to project. Direct Labor feeds directly into Overhead and Fee Burn calculations, and because it can be used to back into individual pay rates, access to this data should be limited appropriately.