PROCESS PRODUCT MANUFACTURING
LABOR COSTS
Labor costs, particularly in a labor-intensive process, may be
the dominant cost factor in an operating or manufacturing
cost estimate. To properly estimate these costs, a staffing
table must be established in as detailed a manner as possible.
This table should indicate the following:
1. the particular skill or craft required in each operation,
2. labor rates for the various types of operations,
3. supervision required for each process step, and
4. overhead personnel required.
It is not always possible to determine the extent of supervi-
sion and overhead personnel required. In such cases, alter-
nate methods of estimating these costs may be used as dis-
cussed later in this book. However, if sufficient data are avail-
able, these factors should be included in the staffing table for
maximum estimate accuracy.
Table 10.2 is a typical staffing table for a complete estimate.
This table illustrates the detail required in a complete staffing
table. Note that the table includes general and administrative
personnel, production workers, maintenance workers, and
direct supervision.
Once the staffing table is developed (at a minimum including
all direct production labor), labor costs can readily be esti-
mated from company records of wages and salaries by posi-
tion, union wage scales, salary surveys of various crafts and
professions, or other published sources. Because labor rates
are prone to rapid inflation, often at rates sharply different
from general inflation rates, care must be taken to obtain cur-
rent figures and to properly project future wage rates.
Generally, data on wage rates includes shift differentials and
overtime premiums. If not, these factors must be added to the
extent applicable.
Further, when estimating around-the-clock, 168-hr/wk oper-
ations, allowance must be made for the fact that a week
includes 4.2 standard 40-hr weeks. Even with four work
crews on “swing shift,” one crew must work 8 hr/week of
overtime to keep the plant in steady operation. Depending
upon local custom, laws, and union contracts, this overtime
is generally payable at 1.5 to 3 times the normal hourly rate.
An alternate method of calculating labor requirements, if suf-
ficient data are not available to establish a staffing table, is to
consider a correlation of labor in workhours per ton of prod-
uct per processing step. This relationship, which was devel-
oped by Wessell [6], relates labor requirements to plant
capacity by the following equation:
10.8
AACE INTERNATIONAL
(equation 10.5)
number of
Operating workhours =t processing steps
tons of product (capacity, tons/day)0.76
where
t = 23 for batch operations with a maximum of labor,
t = 17 for operations with average labor requirements, and
t = 10 for well-instrumented continuous process opera-
tions.
As pointed out previously, the relationship between labor
requirements and production rate is not usually a direct one.
The Wessell equation recognizes that labor productivity gen-
erally improves as plant throughput increases. It can also be
used to extrapolate known workhour requirements from one
plant to another of different capacity.
Another shortcut method of estimating labor requirements,
when requirements at one capacity are known, is to project
labor requirements for other capacities to the 0.2 to 0.25
power of the capacity ratio.
A significant factor to be considered in estimating labor costs is
overtime. As mentioned earlier, around-the-clock, 24-hr/day, 7-
day/week operations have an inherent overtime penalty of 8
hr/week. With this exception, and occasional overtime to cover
for absent workers, overtime is usually not a major considera-
tion in manufacturing and production operations.
However, in estimates involving construction projects, or
those which anticipate regular scheduled overtime, these
costs can be substantial and must be carefully evaluated.
Scheduled overtime over an extended period can result in
substantial decreases in worker productivity resulting in a
major cost penalty for productivity losses in addition to the
higher direct costs of premium pay at 1.5, 2, or even 3 times
normal hourly rates.
Scheduled overtime involves a planned, continuing schedule
for extended working hours for individual workers or even
entire crews. It is not occasional overtime caused on an irreg-
ular basis by absenteeism, equipment malfunctions, etc.
Unfortunately, scheduled overtime rarely saves money or
accelerates production. Two articles which appeared in the
AACE Bulletin in 1973 [2, 5] amply illustrated this point.
These articles, prepared by representatives of the
Construction Users Anti-Inflation Roundtable (now the
Business Roundtable), clearly demonstrated that scheduled
overtime rarely, if ever, is beneficial, and that overtime
should be avoided in favor of additional employees working
normal shifts or partial shifts.