Calculate labor costs for ROI

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Jun 11, 2022
Return on investment (ROI) is often associated in financial reporting with the ratio of return to amount invested. It is also an indicator when analyzing ROI and ROE in terms of evaluating a company's leverage among other valuable information. In terms of projecting a potential outcome on a proposed project, calculating ROI is a critical step in determining the feasibility of executing that project. Essentially, but calculating an ROI and providing a time frame of when a company can see a return on invested capital can determine if the project is worth it or at least when the company is worth the investment it can go bust. It is also a valuable part of gaining the trust of project stakeholders. In summary, calculating the ROI of a project is an important first step in the project management and execution process. It is also an essential part of the Six Sigma management strategy used by many companies around the world.

An important part of this process that is often underestimated or overlooked is the calculation of labor in the total cost of the project. When looking at how ROI is calculated for a project, it is clear that it is essential to include labor costs on the project as an important resource, such as hardware/computer hardware or other types of equipment. There are a few methods to consider when calculating labor costs as part of ROI.

Calculate return on investment

First, it is important to understand the ROI calculation of a project. This can be classified at a high level into the following components:

ROI = [(Financial Value - Project Cost)/Project Cost x 100

financial value

Many people view the financial value component of ROI as intangible or subjective value. It does not have to be. The key is to break the project down into known values, define those values, and then compare them to what is expected of the project. These values have the same main components: time, volume, and dollars or costs, and apply to both the present value and the projected value once the project is complete. This results in the following equation:
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