(I love this stuff so please excuse the double posting)
Here's another way of looking at it:
Suppose a subcontract job that requires hiring specialist (and expensive) equipment takes 770 manhours to complete and has to be done within 16 days otherwise penalty payments are enforced but if the contractor brings the job in early he gets a small bonus.
Let's assume that the hourly rate is $6.66/hr and the plant-hire is $500/day, and lets also add an additional $500/day penalty payment for being late and $500/day bonus for being early.
The cost of the job is therefore calculated at 770 x $6.66 +16 x $500 = $5,126 + $8,000 = $13,128
Suppose the contractor has a 5 man team, so assuming a 7 hour day the job will take his team 22 days to complete at a cost of $5,128 in wages but he will incur a 6 day penalty plus 6 days extra plant-hire, and he's $6,000 out of pocket.
He could employ an extra two men to work on the contract, so he gets the job done on time and incurs no penalty costs but this sets his wage bill at $5,221 and he is now $93 out of pocket.
Now consider what happens when he pays the 5 man team for 3½ hours a day overtime. Now he can get the job done in 15 days with only 14 days overtime, giving a total wage bill of $5944 but it earns him a $500 bonus because he's completed the job a day early, and he's saved another $500 on plant-hire so now the job has cost him $12,944 instead of $13,128 he has $184 left over.
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Hourly or Salary?
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Dean wrote:
