Indirect Labor Cost
What is indirect labor cost?
Indirect labor cost is pay for people whose time is not charged to client projects, such as administrative staff, management, and the non-billable part of billable staff's time.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that separates direct and indirect labor in payroll records, so overhead can be measured and recovered.
How to manage it
- Record indirect labor in its own accounts, apart from direct labor
- Track the share of each person's time that is non-billable, see non-billable time
- Recover it through billing rates and overhead allocation
A worked example
The figures below are illustrative. A firm pays $150,000 a year to an office manager and a controller who do not bill time. That indirect labor is added to overhead and recovered through the rates charged for billable work.
Common mistakes
- Treating all of a manager's pay as direct or all as indirect
- Not tracking non-billable time
- Setting rates from pay alone
Why it matters for service firms
Indirect labor is a real cost that must be paid by the work. Understanding it explains why a billing rate must be higher than a consultant's pay.
Frequently asked questions
Is a manager who also bills time indirect labor?
Partly. The billable portion is direct labor, and the rest is indirect. Track time so the split is based on records, not estimates.
How is indirect labor recovered?
Through billing rates and overhead allocation. If rates only cover direct pay, indirect labor is paid from profit. See overhead rate.
Related terms and guides: non-billable time, overhead rate, overhead allocation, fully loaded cost, and indirect costs.