Direct labor is one of the most important line items in Greg Crabtree's Simple Numbers framework — and one of the most commonly misclassified in small business books. Getting it right is essential to calculating an accurate Labor Efficiency Ratio.
Direct vs. indirect labor
Direct labor is work that goes directly into the product or service you sell: a plumber on a job site, a designer working on a client project, a technician running a service call. A bookkeeper, receptionist, or sales manager is indirect labor — an operating expense. The distinction matters because only direct labor goes into the LER calculation.
Owner's pay as direct labor
If you as the owner are doing direct client work — which most small business owners are — a portion of your compensation should be classified as direct labor. This is one of the most common errors in small business bookkeeping.
Why it matters
Separating direct labor from the rest of your costs makes it possible to calculate LER accurately, which tells you whether your business generates enough gross profit per dollar of labor to sustain itself and grow.
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