Last Updated: October 31, 2025
If profitability is a metric you're struggling to boost, the cost of labor could very well be your culprit. They're notoriously difficult to measure. As Paul Graham, founder of Y Combinator, once famously said, "What is measured, improves." Only by tracking all your labor costs can you correctly calibrate your cost of goods and services, and if you're tracking them incorrectly, you may be worse off than if you had no data. In either case, you will be unable to cut overhead and allocate your human capital where it is most profitable. While knowing the benefits of modern, cloud-based timekeeping, you also need to know how to track the cost of labor. Here's a look into the ins and outs of accurate labor calculations.
Why Track Cost of Labor?
The cost of labor, or the percentage of gross revenues spent on payroll, varies from industry to industry, ranging from under 10 percent in categories with high automation, such as oil refineries, to over 60 percent in a labor-intensive business such as long-haul trucking. Given the percentage of total outlay, closely tracking this data can reap considerable rewards, regardless of how challenging it may seem.
First and foremost, if you're moving from a lack of accountability to tracking labor costs for the first time, you're bound to see improvements because employees will know that they're being tracked. This isn't a matter of "Big Brother looking over their shoulders" and certainly should not be positioned as such; it's a matter of your team taking pride in their work, with perhaps a few performance incentives thrown in.
Consider the data you receive from your tracking system as an opportunity to top your performance on a day-after-day basis with the accompanying visualization of labor costs to back it up. This data from real-time tracked labor costs will provide the capability to pinpoint where you're most efficient and where you need to improve. Bloated processes can be identified in real time, so you can shift workers to ensure that they are spending time on the most profitable tasks.
The Basics of Tracking the Cost of Labor Correctly to Improve Profitability
Managing labor doesn't have to be difficult or costly. As with most things in life, knowledge is power, so the key to getting a handle on one of your business's highest expenses lies in keeping just a few things in mind.
- Know the formula for tracking the cost of labor: A key formula that's at the heart of tracking your cost of labor is the Labor Cost Percentage Formula, also referred to as the Labor-to-Revenue Ratio. The formula is as follows:
Total cost of labor in dollars/revenue in dollars x 100 = Labor cost percentage
If you're operating a business with a point of sale system that features an integrated time management component, this system may already be calculating this percentage for you. Maybe all you need to do is a little digging in the manual or help screens to unearth the data you need. - Break down jobs into small tasks: While there's seldom a need to apprise clients of the many small jobs that go into completing their project, from the standpoint of providing accurate estimates as well as identifying inefficiencies, it's essential to break down a larger job into its parts. Coding these jobs-within-a-job in a way that makes sense for your company and your workforce will provide an easy and streamlined means of data visualization on a move-forward basis and ultimately also play a role in forecasting completion timelines.
Utilize modern solutions for mobile devices: Mobile HCM solutions can be a tremendous asset in gaining a clear picture of the cost of labor, especially if you have a business with many field employees or an organization with manufacturing employees distributed around a sizable shop floor. These Mobile HCM solutions solve modern business challenges with existing enterprise planning and management systems, allowing employees to track their time remotely. This saves time wasted in transferring data back and forth from timesheets and time management systems or eliminates the need to travel to a time clock or desktop computer to log in and out, and otherwise reduces systemic errors. Additionally, by their nature, they can monitor efficiency in real time, which can be a tremendous asset in tweaking profitability.
What to Do with The Labor Cost Data You Get
Data is only as good as what you choose to do with it. If you're going to be satisfied with some pretty charts on the computer and some numbers you can point to when asked by your accountant, then you will be dramatically underutilizing your cost of labor information. Here are many better ways to apply your new knowledge:
- Reconcile labor against production. Are you capturing all of your labor costs - both direct and indirect? With this data, you'll be able to quickly identify gaps and determine if the profitability numbers you've compiled without this data have been as accurate as you thought. For example, time logged in payroll but not accounted for in the labor cost system is time you're not capturing. Where is that time going, and to what projects does it need to be attached? Should that time be chalked up to overhead? Now, your cost of goods numbers and your overhead projections will be much more accurate.
- Rethink schedules as necessary. If your business is service-oriented, you'll soon be able to spot trends in scheduling that can enable you to adjust workflows. Perhaps your business is seasonally oriented, or maybe there are times of the day when your manufacturing workforce is more efficient than others. Don't be constrained by what's traditional in your category; instead, use your data, in combination with employee feedback, to overhaul your schedules to conform to maximize efficiency and profitability.
- Play to your strengths. Though it may require a more anecdotal assessment, chances are your labor data will also reflect your employees' strengths and weaknesses, both on an individual level and as a whole. Use this information to confer with your team and redistribute them to satisfy their wants and needs, thus improving employee engagement while also boosting your bottom line.
While tracking your cost of labor may require an investment of your time on the front end to get organized, being able to effectively monitor this substantial cost will enable you to reap countless rewards. Having a cloud-based time and labor software to help with accurate time capture while providing real-time reports on employee time can help manage your company's cost of labor all in one place. If your company is looking for help in managing labor costs to boost profitability, contact us today.
