Ratio Of Labour Cost In A Job Contract - CiteHR
Asso.prof.(commerce & Management) Pg
Hr, Ir, Law, Disc. Matters
Hr Officer

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Dear All,
In case of a Job Contract, is there any guideline or statute about how much the labour cost should be. For eg. if a civil job contract of Rs. 15 lakhs is given to a civil contractor, then is there any guideline of how many labours to be engaged and how much should be the wage cost? Any specific responsibility that the PE should ensure.

Dear Member
There can not be a thumb rule for the labour cost as required by you. The cost of labour will depend on many factors like :-
1. Nature of work - if it is a specialized job then the cost would be more as compared to a normal civil job.
2. Type of work :- it will decide how many workers may be needed,
3. Place of work - easy of accessibility to the place of work
4. Minimum wages in the area :- rate of minimum wages in the state.
As far as responsibilities as PE are concern :-
1. Ensure payment of Minimum wages and overtime , if any.
2. Ensure timely payment of wages
3. Deduction and payment PF contributions
4. Deduction and payment of ESI contributions
5. Certification of wage register of the contractor.
6. Provision of safety, health and welfare measures as applicable
hope this helps
Preetam Deshpande

Dear Saptarshi: There is no universal formula for determining labour cost in a job contract. It varies from contract to contract and depending on the nature of work, machinery used, safety equipment needed, level of automation, profitability, capital cost involved etc. There are different thumb rules applied by different authorities. While PF commissioner assessed 25% of contract value as labour component, the ESI authorities assessed it to be 40% for the same job. But in case the employer produces record of attendance and register of wages of contractor, it would help in settling the matter, but this is a very difficult task. KK
Thanks for your responses. I want to clear some of my doubts on the same;

1. In case we issue a job contract of Rs. 15 lakhs to a civil contractor having his own PF and ESI code and if the contractor shows a labour cost of Rs. 30000 - Rs. 40000 ( as per wage register) including PF & ESI cont. (i.e. shows 4-5 labours worked on an avg. 6-7 days each) and argues that in that particular work involvement of materials are on higher side than labour than can it be justified. though justifying the proportion of engagement of labour do not lie upon the HR dept. but still can it be safe from the compliance angle.

2. as Mr. KK Nair stated that PF dept. assess 25% of contract value as labour component, and ESI authorities assess 40% for the same, but as the contractor maintains separate wage register though of much lesser value and deposits PF, ESI accordingly against his own codes then it can be assured that PE will not be held responsible to fulfill any gap between the difference in two amounts.



Dear Member
If the contractor is able to produce a proper wage register and a corresponding attendance register then it is also advised that the contractor be asked to give a bifurcated bill i.e. for cost of labour and for cost of other activities. This will help in case there are any doubts by the PF & ESI authorities. The authorities can not compute wages as per their liking if the bills / invoices are well supported by the documentation.
It is a normal practice of the authorities to compute wages at 25% or 40 % in the absence of the supporting documents or absence of clear bifurcation of bills .
Preetam Deshpande

Dear friend,

I would suggest that before coming to a conclusion you should have computed your own cost estimate considering the nature of work, the realistic environment, earth work involved, moving-in-cost, cost-of-winding up, cost of finance, cost of inputs like materials (using appropriate ISI/BIS specifications), machine-hour rates or cost of hire of m/c, no.of labour shifts involved, supervisory cost, materials & labour over heads(should include statutory payments), incidentals, notional interest for gestation, erection & commissioning cost, works contract tax,VAT/Excise & other taxes and certain amount for the unexpected liquidated damages/cost of rework/repair. By this you will arrive at the total cost and add certain %age of margin then you'll get a reasonable minimum project cost which will help you to decide what should be the price for off-loading to the contractor. And it's upto you to negotiate a price without compromising the quality of work. Of course it's your responsibility that all labour related statutory payments are properly complied with as a "Principal Employer". I am not sure what is position in the hierarchy, you are in the planning level or simply at the execution level. If you are at the execution only these estimation may not bother you except that you will be held responsible for cost and time overruns if you are not completing the project within the target time and cost. But if you are responsible only for the labour management as a HR you have to take care of those pointed out by many of our friends as above in addition to providing sufficient labour at right mix and at right time working out appropriately the labour cost, however the quantum varies depending on the nature and volume and moreso on the specifications.

Dear all, As suggested by Kumar.S please evaluate the bill w.r.t. your estimation, how the two compare? If there is no marked difference, then the same can be defended. Otherwise pl. ask your contractor to obtain PF & ESI inspecttion done before settling the final bill. We encountered a lot of problem in a similar situation as ESI authorities refused to reduce the labour component in assessing the ESI liability. We produced the attendance and wage register to prove our point. In another matter PF authorities sought our internal estimates and they were produced to prove the point. In many cases, as the PF/ESI inspection of PEs take place after considerable period of time, it becomes difficult to retrieve records at a much later date to prove the point. So the better option is to insist on PF & ESI Inspection certificate of the contractor before the final bill is cleared. KK
Dear friends,

What is said by Mr.KK Nair is very much true. PF & ESI authorities include almost everything, let it be salary or loading/U/L charges, incidentals, freight, conveyance, AMCs or for that matter any expenditure involving labour and raise demand. Don't be carried away thinking that only salary part is subjected to these levies. We land up either just pay up as per demand or go for appeal spending lot of money for nothing beneficial to employees. Remember these unscientific demands knock your door not the next day but after a few years when you may not find any paper to defend your case resulting in across the board levy without any rationale arriving at labour component arbitrarily.What is pathetic in the ESI scenario is that none of our employees are going to be benefited as these are belated levies one has to pay retrospectively which only going to fill the coffers of ESI dept. So friends dealing with matters involving labour components should be careful enough to manoeuvre the implications.

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