Employee Cost Analysis – A Primer

Determining the actual, total cost of labor -whether contingent or full time – is not always so easy to accomplish. Similarly, determining what type of contractor will be best (from a cost perspective) to achieve a business goal can also be a challenge. What is needed to arrive at the most effective and appropriate staffing decision? Read more to find out!

The key to making the best decisions in this regard is achieving spend and performance visibility throughout the workforce management process. For those organizations utilizing a VMS software solution, achieving the required levels of visibility is fairly easy. VMS solutions are excellent for capturing rates and measuring performance across all worker types. For organizations engaging an MSP or other outsourced partner to manage their talent acquisition and related processes, there are reports available to track the costs and efficacy of contingent workers brought in to address business needs.

Whichever means for capturing workforce spend data your organization may prefer, visibility is the key to making determinations rooted in reality and not on best guesses and other anecdotal evidence. Armed with workforce spend visibility, an organization can perform what the industry refers to as “employee cost analysis”. The common mistake involves measuring rates for contract workers against those for full time employees or full time equivalents. It seems elementary, but there is a “loaded cost” for a full time worker or FTE – the costs above and beyond pay rate such as benefits, insurance and other expenses – that are simply not incurred when engaging contingent labor or independent contractors.

The best practice for attaining an accurate and complete perspective on the most efficient and effective use of any type of worker is the performance of a rigorous employee cost analysis. Beyond the pay rate, be sure to consider the following labor-related expenses in your analysis.

Examine the cost of employee benefits:

• Retirement
• Healthcare
• Sick/vacation pay

Look at onboarding costs:

• Advertising
• Agency fees
• Referral fees
• Travel costs
• Relocation fees
• Recruitment costs
• Training
• Payrolling

Factor in facilities costs:

• Office space
• Equipment
• Communications costs

Taking the time to weigh and measure these financial costs is critical to deciding whether or not to hire a new employee and determining the proper classification of worker is best suited to the role.  The employee cost analysis helps workforce management programs maintain leaner spend levels without sacrificing on talent quality.  There are some rudimentary employee cost analysis calculator tools available online, but you’re probably better off engaging a partner like nextSource to perform a more detailed and accurate analysis for your company.