Understanding the True Cost of Labour
Accountants Minute 469
For accounting firms, bookkeepers and business advisors working with trades clients, understanding the true cost of labour can provide an important starting point for a valuable advisory conversation.
Many trades businesses establish their charge-out rates by considering competitors' prices or applying a margin to employees' hourly wages.
However, the hourly wage is only part of the cost of employing a team member.
What Does An Employee Really Cost?
When determining labour costs, consideration needs to be given to the employee's wages or salary together with applicable labour on-costs.
These can include:
✅ Superannuation
✅ Annual and other leave entitlements
✅ Long Service Leave accruals
✅ Workers Compensation
✅ Allowances
✅ Other employment-related costs
Long Service Leave is particularly worth considering because the potential obligation can progressively build as an employee's length of service increases.
For a trades business employing several team members, failing to adequately recognise these employment costs can have a significant effect on the profitability ultimately generated from labour.
Paid Hours Are Not Chargeable Hours
There is another important distinction.
The hours for which an employee is paid are not necessarily the hours that can be charged to customers.
Allowances may need to be made for annual and other leave, training, professional development, administration and other non-chargeable activities.
The business can then estimate its net workable hours.
Even then, it may be unrealistic to assume that every workable hour will be invoiced. A realistic productivity percentage therefore needs to be established for each employee or employee category.
An incorrect productivity assumption can materially affect the charge-out rate required to achieve the business's financial targets.
Is The Client Charging Enough?
Once the true labour cost and realistic chargeable capacity are understood, the business can consider another fundamental question:
“What should we be charging to generate our targeted profit?”
A commercially calculated charge-out rate needs to consider more than labour.
It can incorporate:
Labour Costs + Labour On-Costs + Productivity + Overheads + Material Mark-Ups + Targeted Profit
This is where accountants and advisors can make an important contribution.
Rather than allowing a client to establish prices primarily by reference to competitors, the advisor can help the client understand what their own business needs to charge based on its individual cost structure and financial objectives.
How Does The Client Compare With The Top 20%
Charge-out rate analysis can become even more informative when combined with industry benchmarking.
The TaxFitness Top 20% Benchmarking approach compares a client's financial performance with the top 20% of businesses within the relevant industry category.
Importantly, the process can identify performance gaps and translate those differences into potential dollar improvement opportunities.
This can help the accountant move the conversation from:
“Your costs are higher than the benchmark.”
to:
“This performance gap potentially represents $X — what is causing it and what can we do about it?”
If labour, productivity or profitability emerges as an area requiring attention, a more detailed review of the client's charge-out rates can then be undertaken.
An Opportunity To Move Beyond Historical Reporting
Traditional financial statements tell clients what has already happened.
Understanding labour costs, benchmarking performance and reviewing charge-out rates can help accountants, bookkeepers and business advisors discuss what needs to happen next.
The progression can be:
HISTORICAL REPORTING → BENCHMARKING → IDENTIFY THE PROFIT GAP → REVIEW LABOUR COSTS AND CHARGE-OUT RATES → MONITOR PERFORMANCE → TAKE ACTION
This creates an opportunity for accounting firms to use information already available from their clients' financial records as the starting point for practical Financial / Commercial / Management Accounting Advisory Services.
Limited Time – 25% Off Subscription
If your firm works with trades clients, the ESS BIZTOOLS Trades Charge-Out Rate Calculator provides a practical framework to help clients determine charge-out rates based on their individual business circumstances.
The calculator enables firms to work through important considerations including:
✅ Labour costs and labour on-costs
✅ Available working and chargeable hours
✅ Productivity assumptions
✅ Overhead recovery
✅ Material mark-ups
✅ Targeted profit
It can help turn a discussion about “what should we charge?” into a structured financial calculation — while creating an opportunity for your firm to provide a valuable advisory service to trades clients.
For a limited time, ESS BIZTOOLS is offering 25% OFF the subscription to the Trades Charge-Out Rate Calculator.
This is an opportunity to add a practical resource to your firm's advisory toolkit and start helping trades clients examine whether their current rates are sufficient to recover their costs and achieve their targeted profitability.
FIND OUT MORE AND SUBSCRIBE HERE
A Question To Ask Your Trades Clients
At your next meeting with a trades client, consider asking:
“Do you know the true cost of employing your team — and are your charge-out rates sufficient to recover those costs and generate your targeted profit?”
The answer could uncover a significant advisory opportunity for both your client and your firm.
ESS BIZTOOLS provides the Trades Charge-Out Rate Calculator, practical systems, training and supporting resources to assist accountants, bookkeepers and business advisors in delivering these services to their SME clients.
Special TaxFitness + ESS BIZTOOLS Promotion
ESS BIZTOOLS is joining with our affiliate, TaxFitness, in a special promotion to help accountants, bookkeepers and business advisors introduce a range of Business Enhancing Services to their SME clients.
Overall Benefit: $453
This combination provides a practical opportunity to use Top 20% Benchmarking to identify potential performance and profit gaps, together with the Trades Charge-Out Rate Calculator to help trades clients examine their labour costs, productivity, overhead recovery, pricing, and targeted profitability.
FIND OUT MORE AND SUBSCRIBE HERE
This is a limited-time promotional offer. Make sure to enter the promotional code ESS100 on the subscription form to claim the offer.
25% Off – Limited Time Promotion
From 10 August 2026, ESS BIZTOOLS is offering 25% OFF selected annual packages for a limited time.
FIND OUT MORE AND SUBSCRIBE HERE
More Practical Business Advisory From ESS BIZTOOLS
Chief Financial Officer Services Package
Want to know more?
Visit www.essbiztools.com.au.
If you would like to have a discussion about how this concept of virtual CFO services can be supplied by Australian accounting firms please ring our Managing Director, Peter Towers, on 0418 190 181 and we will arrange a complimentary 30-minute Zoom meeting to discuss your firm’s position and to give you our advice.
We believe that this is the blueprint for the delivery of an enhanced range of services by Australian Accounting and Bookkeeping firms to assist SME businesses to add value to their businesses and to assist accountants and bookkeepers not only to attract but to retain outstanding talent who want to be involved in the delivery of “real accounting services”.
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