Topaz Publications Blog

It’s a good idea to establish and nurture a relationship with a reliable vendor, so there’s help available when you need it. Try them out on small projects and weed out the ones that don’t perform. Don’t wait until you’re slammed to decide you need to find a suitable vendor. Plan for the eventuality and have the necessary resources in place.

Many companies use vendors as a cost-management strategy. At Topaz, for example, we consider our independent contractors as part of our labor pool, and have been working with some of them for many years.

Some companies have taken to outsourcing almost all of their technical writing and instructional development work. Two of our accounts at Topaz use us as their primary development staff, and have done so for years. They maintain a skeleton in-house staff to manage the work, and they hedge their bets by giving other vendors a small percentage of their projects.

What is the true cost of a labor hour? Let’s start with salary. Maybe the average tech writer in your organization makes a little over $60,000 a year. For convenience, we’ll say it rolls out to $30 an hour. In order to get to the number some companies call “total cost” (it isn’t), you need to multiply the direct labor cost by a number that represents additional costs such as employee benefits, vacation, and holidays, along with overhead costs such as facility rent, liability insurance, workers comp, etc. Companies generally use a multiplier between 2.5 and 4 to get to the total cost level. We’ll use 3. So now our $30 an hour just became $90. But that’s not all. On top of this number, companies will generally layer G & A (general and administrative) cost and profit. Let’s say G & A is 10% and profit is 15%. That brings us to $113.85 per hour (90 x 1.1 = 99; 99 x 1.15 = $113.85)

When you’re running out the numbers, don’t forget that there are 52.1667 weeks in a year and 4.3 weeks in a month. Don’t short yourself by rounding these numbers down.

The discussion of labor cost provides a natural segue into the discussion of captive vs. contract labor. For one thing, when a vendor tells you their labor cost is $80 an hour, you won’t be tempted to say “But we’re only paying $30 an hour for captive labor.” On the other hand, the $80 number is not what you are really going to pay. Your company’s accounting department will probably treat outside labor as a material expense and will therefore apply a tax to cover administrative costs. Someone in the purchasing department will have to act as the subcontract administrator; the accounting department will have to process the vendor’s invoices and send out the checks to pay the invoices, so there is added cost. Some companies apply a 30% “ME” adder, which would bring the $80 rate to $104.

Dollar for dollar, in-house vs. captive labor roughly trades off, so when is contracting a good idea? Outsourcing is effective on short-term projects when you don’t have enough resources in house. Outsourcing may also be necessary when your in-house writers lack the necessary technical background for a particular project. The biggest advantage of outsourcing is in the ability to manage your operating costs. You have to pay for captive labor whether there’s work or not, but contract labor is on the “payroll” only as long as you need them.

Keep an accurate record of the labor hours and material costs you invest in every job. Sooner or later, you will have a basis for parametric (bigger than a breadbox) cost estimating. (Gadget A cost x and Gadget B looks to be about 10% bigger than Gadget A. Therefore the cost of Gadget B should be about 1.1x. This method is easy to do, easy to revise, and easy to defend. Even a big job can be costed in minutes using this method.

Bottoms-up costing – how many pages, how many hours or minutes per page for each labor category, etc – is no more accurate; it just looks accurate because it takes so much calculating to get to the bottom line. The fact is that your page counts, productivity rates, and labor rates are all just guesses, anyway. Any manager worth his or her salt can poke holes in this type of estimate. The first question you hear will be: “Where’s the empirical data that supports these productivity rates?” Moreover, even if you’re using a spreadsheet program, last-minute revisions to a bottoms-up estimate can result in some long workdays.