What is the labor cost percentage?

The labor cost percentage expresses total labor costs as a percentage of revenue. If your firm generates $2 million in revenue and spends $1.2 million on compensation and benefits, your labor cost percentage is 60%. This metric reveals how much of each dollar earned goes to people costs, the largest expense category for most professional service firms.

Benchmarks for professional services

Professional service firms typically run 50 to 70 percent labor cost. Lower percentages indicate either premium pricing or lean staffing. Higher percentages suggest pricing pressure or overstaffing. Compare against firms of similar size and service type. The right target depends on your business model, market position, and growth stage.

Managing labor cost percentage

Numerator levers: compensation levels, headcount, benefits costs, contractor mix. Denominator levers: pricing, utilization, service mix. A 5% improvement either reduces costs or increases revenue. Model the impact of hiring decisions before committing. Understand how each new role affects the ratio at current and projected revenue levels.