Book 15 with TomBy Dr Tom Hitchcock, founder of Mr Purple (LinkedIn)
Working out the true cost per hour care business owners carry is not glamorous, but neither is discovering that a busy service is quietly losing money. Revenue can look healthy while the real cost of delivering each hour remains hidden beneath wages, travel, supervision, systems and gaps in the roster.
This guide gives you a practical management method. It is not accounting, tax, industrial relations or compliance advice. Ask your accountant, bookkeeper and relevant professional advisers to confirm the figures and obligations that apply to your business.
Why the true cost per hour care business figure matters
Your hourly cost is more than the wage paid to the person delivering support, therapy or care. The business also has to recruit them, prepare them, coordinate the work, keep records, manage changes, invoice correctly and maintain the systems around the service.
If those costs are ignored, three curious things happen. A full roster can feel strangely cash poor. A service that looks profitable can consume management time without creating a return. Growth then magnifies the problem rather than solving it. More volume is not always more progress. Sometimes it is simply a faster leak.
A reliable cost per hour helps you:
- compare different services on a consistent basis
- spot work that is busy but commercially weak
- test whether staffing and rostering choices are sustainable
- understand the effect of cancellations, travel and unfilled time
- make calmer decisions about pricing, capacity and growth
Start with the direct cost of employing someone
Begin with the costs directly connected to the team member who delivers the hour. Their ordinary wage is only the first line. Depending on the role and employment arrangement, the business may also carry superannuation, leave, workers compensation, allowances, loadings, training, uniforms and other employment costs.
Create one annual employment cost for each role or sensible group of similar roles. Use actual payroll and accounting records rather than an estimate from memory. Memory is marvellous for birthdays and old song lyrics. It is less dependable when a margin is on trial.
Keep assumptions visible. If a cost varies by employee type, shift or service, record that difference instead of blending everything into one comfortable average. The purpose is not perfect complexity. It is a number useful enough to support a decision.
Use productive hours, not paid hours
This is where many hourly calculations wander off course. An employee may be paid for many hours that cannot be billed or directly attributed to service delivery. Meetings, training, administration, travel, leave and gaps between appointments can all reduce productive capacity.
Calculate realistic productive hours for the same annual period as your employment cost. Start with paid hours, then remove the time that is genuinely unavailable for delivery. Use roster, payroll and service data to ground the calculation.
The basic formula is simple:
Direct hourly cost equals annual employment cost divided by annual productive hours.
When productive hours fall, the direct cost of each delivered hour rises. That is why better rostering can matter as much as a pricing discussion. It does not mean squeezing people or skipping important work. It means seeing where paid capacity goes and designing operations deliberately.
Add the costs that make delivery possible
Next, account for the support structure around frontline delivery. These are real costs even when they never appear on a client roster.
- service coordination and scheduling
- leadership and supervision
- recruitment and onboarding
- finance, payroll and bookkeeping
- software, phones and office costs
- insurance and professional services
- marketing and business development
- vehicles, travel administration and equipment
Choose a sensible method for allocating these costs. One approach is to divide relevant annual overhead by the realistic total productive hours of the service. Another is to allocate costs to each service line using a consistent driver, such as staff time or activity. Your accountant can help you select a method that fits your records and business model.
The management formula then becomes:
True cost per hour equals direct hourly cost plus allocated overhead per productive hour.
Do not add every expense blindly. Separate costs that belong to another service, project or part of the business. A useful figure should reveal reality, not create fog with a spreadsheet.
Stress test the number before trusting it
One calculation is a snapshot. Care businesses move. Rosters change, employees take leave, travel expands and client demand shifts. Test the result against a few realistic operating scenarios.
- What happens if productive hours are lower than planned?
- What happens when travel time increases?
- What happens when a role needs more supervision or training?
- What happens if cancellations create unusable gaps?
- What happens when a service grows and coordination time rises?
You are looking for sensitivity, not a prediction carved in stone. If a small movement turns a healthy result into a loss, the service needs closer attention. That might lead to better scheduling, a different service mix, clearer capacity rules or a conversation with professional advisers about pricing and structure.
For NDIS and aged care businesses, market prices, contracts and programme settings may limit what can be charged. Treat your cost calculation as management information, not permission to change a price. Check current rules and agreements with the appropriate compliance, legal and financial professionals.
Turn the calculation into a monthly habit
A beautiful spreadsheet opened once and forgotten is mostly digital furniture. Put the figure into a simple monthly review alongside productive hours, delivered hours, cancellations, travel, labour cost and overhead.
Give each service line an owner. Ask what changed, why it changed and what action is sensible. Avoid blaming the team for a number created by poor scheduling, unclear processes or unrealistic planning. The calculation should improve decisions, not become a new stick to wave around.
At Mr Purple, the useful question is not merely, “What did the business earn?” It is, “What did the business have to carry to earn it?” That question often reveals the next practical improvement.
Make the number useful
Your true cost per hour will not make every decision for you. It will make the trade offs harder to hide. Start with actual employment costs, divide them by realistic productive hours, add a fair share of overhead and test the result under different operating conditions.
If you would like a second pair of eyes on the business thinking behind your numbers, book a 15 minute call with Tom. Bring the messy spreadsheet. They are usually the interesting ones.
Common questions
Is the hourly wage the same as the true cost per hour?
No. The true cost also includes employment costs, non productive paid time and a reasonable share of the overhead needed to deliver the service.
How often should a care business recalculate its hourly cost?
Review it monthly as a management measure, then recalculate whenever wages, staffing, service design, overhead or productive capacity changes materially.
Should travel time be included in the calculation?
Yes, when the business carries that time or related cost. Keep the treatment consistent and confirm any accounting or contractual questions with the appropriate adviser.
Can one hourly cost be used for every service?
Usually not if services use different roles, travel, supervision or systems. Separate service lines where the cost drivers are meaningfully different.