How to calculate the true cost of an employee, and why salary alone does not show your workforce cost

A company may see an employee's salary as the main cost it pays for their work. But the actual cost of an employee does not stop at the figure in the employment contract or the amount on the payroll register. There are other items and costs tied to the employee and their work, and as departments, projects and working hours differ, the actual cost can vary from one employee to another even when their salaries are close. That is why cost management and analysis has become an important tool for companies that want a more accurate reading of their workforce spending.

In companies with many employees, or that work across several departments, branches and projects, knowing total payroll is not enough to see where the workforce budget goes. Management needs to know what each employee costs the company, how that cost is spread across departments and projects, what actual working hours cost, and which cost centres carry the largest share of expenses.

This is where the question shifts from "What is the employee's salary?" to a more precise one: "What does the employee really cost the company?"

What is the true cost of an employee?

Employee cost is the total of the expenses a company bears in connection with an employee over a given period, not just the basic salary or the total monthly salary.

Depending on the company and its policies, it can include salary, allowances, benefits and the operating costs tied to the employee, along with other items the company bears because of the role, the place of work and the way the business operates.

So calculating employee cost means gathering the financial and operational data tied to the employee, rather than relying on the salary figure alone.

For example, a company may have an employee on a monthly salary of SAR 10,000. When the cost is analysed more broadly, other items tied to that employee may appear, such as the company's share of social insurance (GOSI) contributions, the end-of-service benefit accrual, health insurance, allowances, and costs tied to operations or to the project they work on, along with other expenses that vary from company to company.

So the final figure management needs is not necessarily the salary, but the actual workforce cost for the period.

Why is salary alone not enough to know what an employee costs?

Relying on salary alone gives management a partial picture of spending.

If a company has 100 employees with an average salary of SAR 10,000, total monthly salaries may appear to be SAR 1 million. But that figure alone does not answer important questions:

• What do the employees in each department cost?
• What do the employees working on a given project cost?
• What do actual working hours cost?
• Do some departments carry a higher cost than others?
• Is employee cost rising because of overtime?
• How large are the variable costs tied to the workforce?
• Does the annual workforce budget match actual spending?

That is why companies need to analyse what employees cost rather than only reviewing payroll records.

You can use payroll in Dawmt to understand the salary and entitlements side, while cost analysis needs the wider picture of spending on the employee.

What goes into calculating employee cost?

There is no single fixed value that applies to every company, because costs vary with the sector, the size of the company, the roles, the projects and company policy.

But cost items can be grouped into a few main categories.

1. Basic salary and wage

Salary is the starting point for calculating employee cost, but not necessarily the end point.

Management needs to know the basic salary and the pay components tied to it under the company's approved pay structure.

2. Allowances and benefits

Employee cost may include various allowances and benefits depending on the role and company policy.

When analysing workforce cost, it is important not to treat every employee as costing the same to employ, because the value of benefits and the costs tied to each role can differ.

3. The employer's share of social insurance contributions

In Saudi Arabia the employer pays a share of social insurance (GOSI) contributions, calculated on the contributory wage. According to GOSI, that is the basic wage plus the housing allowance, up to a ceiling of SAR 45,000 a month. This share does not appear in the employee's net salary, but it is part of what they cost the company.

According to the General Organization for Social Insurance (GOSI), the employer's share is made up of:

• Occupational hazards branch: 2%, paid by the employer alone. It applies to all workers, Saudi and non-Saudi.
• Unemployment insurance (SANED): 0.75% on the employer and 0.75% on the employee. It applies to Saudis only.
• Annuities (pension) branch for a Saudi employee: 9% on the employer and 9% on the employee. For those under the new Social Insurance Law (employees with no contribution periods before 3 July 2024), the rate rises gradually by 0.5% a year from the second to the fifth year after the law took effect, reaching 11% each for the employer and the employee.

So for a Saudi employee under the previous law with a contributory wage of SAR 10,000, the employer's share is 11.75% (9% + 0.75% + 2%), or SAR 1,175 a month. For a non-Saudi employee, the employer pays the occupational hazards contribution. For the rates and employee categories in detail, see our guide to social insurance in Saudi Arabia.

Dawmt calculates GOSI contributions as part of payroll calculation.

4. End-of-service benefit accrual

Article 84 of the Labour Law provides that when the employment relationship ends, the employer must pay the worker a benefit for their period of service, "calculated on the basis of half a month's wage for each of the first five years, and one month's wage for each of the following years". The last wage is the basis for the calculation, and the worker is entitled to a benefit for parts of a year in proportion to the time worked.

Because the benefit is paid when service ends, leaving it out of the monthly calculation makes the employee look cheaper than they are. So it helps to count what builds up each month as an item in employee cost: half a month's wage divided by 12 in the first five years, and one month's wage divided by 12 after that. If the wage the benefit is calculated on is SAR 12,000, about SAR 500 a month builds up in the first five years.

This is an estimate to revisit whenever the wage changes, because the last wage is the basis of the calculation, and the amount actually paid can be lower if the employee resigns, under Article 85 of the Labour Law. In Dawmt, end-of-service benefit settings are configured in Payroll. To estimate it for one employee, use the end-of-service calculator.

5. Employee-related costs

A company may bear operating costs tied to the employee, such as health insurance, uniforms, or certain fees and other costs depending on the nature of the work.

In Dawmt's cost management and analysis module, each employee's monthly cost is recorded, including items such as visas, insurance and uniforms.

6. Overtime

Overtime hours can become a significant factor in what an employee costs the company, especially when they recur over long periods.

An employee on a fixed salary who regularly works extra hours may cost more to employ than another employee on the same salary who works within planned working hours.

That is why you need to look at the cost of actual working hours, not only the monthly salary.

7. Project-related costs

In project-based companies, knowing each employee's cost on its own is not enough.

You also need to know how much of the employee's cost has been charged to each project.

If an employee spends 50% of their time on one project and 50% on another, splitting the cost helps management understand what each project costs more accurately.

How do you calculate employee cost in practice?

You can start with a simple formula:

Employee cost = total wage and direct costs + employee-related costs + allocable operating costs

This is not a standard accounting formula for every company, but a practical way to understand the idea.

To illustrate, assume a Saudi employee under the previous social insurance law receives salary and benefits worth SAR 12,000 a month, of which SAR 10,000 is the contributory wage, and is in their first five years of service. The company bears for them:

• Employer's share of GOSI contributions: SAR 1,175.
• End-of-service benefit accrual: SAR 500.
• Other employee-related costs, such as health insurance: SAR 800 (an assumed figure).
• Variable costs charged to the employee: SAR 500 (an assumed figure).

In this example the cost becomes:

SAR 12,000 + 1,175 + 500 + 800 + 500 = SAR 14,975 a month.

So the salary alone was SAR 12,000, while the employee's cost under the items used in this example came to SAR 14,975.

The point of the example is not to set a fixed amount for every employee, but to show the difference between salary and the full cost management needs to analyse.

Employee cost by department: why does this analysis matter?

Knowing the company's total workforce cost matters, but knowing how it is spread matters more when making decisions.

Suppose a company has:

• A sales department
• An HR department
• An operations department
• An IT department
• A customer service department

If management knows only that total employee cost is SAR 2 million a month, it will not necessarily have a clear picture of what drives that figure.

But once employee cost is spread by department, it may turn out that one department takes a large share of the cost while another runs at a lower cost.

This is where the real analysis begins.

A higher employee cost in a department does not mean it is inefficient. The department may be responsible for larger operations, employ specialists or work on high-priority projects.

So cost should be compared with workload, results, working hours and productivity, rather than judging a department on cost alone.

What are cost centres, and why do companies need them?

Cost centres are a way of organising expenses and linking them to the unit, department or activity that bears them.

Instead of every employee cost appearing as one total, a company can divide it into different centres according to its organisational and operational structure.

A cost centre can be:

• A department.
• A branch.
• A project.
• An operational activity.
• A business unit.

Cost centres matter more when a company is large, has several branches or runs more than one project at a time.

For example, if a company has three projects, it needs to know how much of its workforce each project used, the number of working hours, and the employee cost per project.

This lets management read costs more realistically.

Employee cost by project

In project-based companies, the biggest mistake can be treating an employee's salary as an overhead that cannot be allocated.

An employee may work on one project or several during the month, so allocating their cost by working hours, or by the company's approved allocation method, shows what each project actually costs.

That makes employee cost by project an important indicator for financial and operational management.

If a project needs many more working hours than planned, its cost can rise even if employee salaries have not changed.

And if the company does not track working hours and project allocation, a project's cost can look lower or higher than it really is.

Dawmt's Project Management add-on shows how employees are allocated to projects, and the hours and HR cost logged to each project.

See workload management and task allocation to understand the link between allocating resources, working hours and HR cost.

Cost per working hour: an indicator not to ignore

A company may have an employee with a known monthly cost, but sometimes the more important question is:

What does one working hour of this employee cost?

This indicator matters more when a company works on projects or services priced by effort and time.

In simple terms, the cost per working hour can be estimated as:

Employee cost for the period ÷ actual working hours in the period

For example, if an employee's monthly cost is SAR 15,000 and their actual working hours in the month are 150, the estimated hourly cost in this example is:

SAR 15,000 ÷ 150 = SAR 100 an hour.

This is a simplified example and does not necessarily reflect the accounting method each company uses, but it shows why employee cost should be linked to actual working hours.

This is where operational data proves its value: hourly cost cannot be analysed well if the company has no accurate working-hours data.

What does attendance have to do with employee cost?

Attendance may seem far from financial analysis, but it is in fact an important source of operational data.

Actual working hours, late arrivals, absence, overtime and shifts are all data that can affect how you read workforce cost.

If a company analyses employee cost without knowing actual working hours, it may be missing an important part of the picture.

To see what attendance software needs in order to measure working hours accurately, read how to choose attendance software.

When time data is combined with payroll and cost data, management has a better basis for analysing workforce cost.

Does a higher employee cost mean the employee is unproductive?

No.

This is one of the most important points to keep in mind when analysing employee cost.

A high cost for an employee or a department does not automatically mean a performance problem.

The employee may be a specialist working on high-value projects, and a department's cost may be high because the work needs rare skills or because it is responsible for large operations.

So the aim of analysing employee costs should not be simply to find the "most expensive" employee.

A useful analysis links:

Cost + working hours + workload + job type + project + results.

That way management can tell high costs with an operational justification from high costs that need review.

How do cost centres help detect rising expenses?

When costs are recorded as a single total, it can be hard to identify the source of an increase.

With cost centres, expenses can be compared across departments, projects and branches.

For example, if the company's workforce cost rises by a certain percentage in a month, management can review:

• Which cost centre's expenses went up?
• Is the increase due to headcount?
• Is it due to more working hours?
• Is there recurring overtime?
• Is there a new project?
• Have any cost items changed?
• Is the increase temporary or ongoing?

This way cost data turns from financial figures into a tool that helps explain what is happening inside the company.

How do companies use workforce cost analysis in budget planning?

A realistic workforce budget cannot be built on current salaries alone.

Management needs to consider likely changes in headcount, variable costs, new projects, expansion and changing departmental needs.

So analysing employee costs helps build a more realistic picture when planning the budget.

In Dawmt's cost management and analysis module, employee costs are linked to cost centres and spending is compared against the budget.

This kind of analysis helps management compare planned with actual spending instead of waiting until the end of the year to find a large variance.

From total cost to actual employee cost

A common mistake is treating every employee the same way.

But employee cost can vary with:

• Job title.
• Department.
• Work location.
• Contract type.
• Number of working hours.
• The project they work on.
• Role-related costs.
• Overtime.
• Benefits and operating costs.

So the average employee cost can be useful for general planning, but it does not replace detailed analysis when management has to decide about a specific department or project.

How do digital systems help manage and analyse costs?

Manual analysis gets harder as headcount grows and departments and projects multiply.

Management may need to gather data from:

• Employee records.
• Payroll.
• Attendance.
• Projects.
• Departments.
• Cost centres.
• Expenses.
• Working hours.

Then try to connect all this data to arrive at the employee's actual cost.

This is where integrated systems prove their value.

Instead of data spread across different files and systems, operational and financial data can be connected in one system, with reports and analytics used to review the results.

How Dawmt handles employee cost analysis

Dawmt offers a cost management and analysis module as part of its HR system. It covers:

• Cost centres, with employee costs linked to them.
• Each employee's monthly cost, including items such as visas, insurance and uniforms.
• Hourly cost per project.
• Spending compared against the budget.

The Project Management add-on shows the hours and HR cost logged to each project, which helps you move from knowing total expenses to understanding the relationship between time, cost and your workforce.

You can also look at reports and analytics in Dawmt to see how HR data can become reports that help management follow indicators and make decisions.

Why link employee cost to productivity?

The aim of analysing employee cost is not to cut costs at any price.

Cutting workforce cost without looking at productivity can backfire.

If a company cuts headcount at random, overtime may rise, projects may slip or pressure on the remaining teams may grow, so the company may not get the savings it expected.

What you need is to understand the relationship between cost and results.

If a team's cost is high, ask:

• What are we getting for this cost?
• Does the team deliver more projects?
• Does it work on high-value projects?
• Are working hours well distributed?
• Are there unused working hours?
• Is there overtime that could be reduced?
• Does the company need to reallocate resources?

With these questions, employee cost analysis becomes a decision-making tool rather than just a financial report.

5 indicators that help you understand workforce cost

Management can track a number of indicators, such as:

1. Average employee cost

Used to compare workforce cost across periods.

2. Employee cost by department

Shows the cost each department carries, read alongside workload and results.

3. Employee cost by project

An important indicator for project-based companies, because it shows the HR cost used in each project.

4. Cost per working hour

Helps you understand the relationship between employee cost and actual working hours.

5. Budget vs actual variance

Helps you spot the differences between what was planned and what was actually spent.

Common mistakes when calculating employee cost

Relying on salary alone

The company sees part of the cost and misses the rest of the picture.

Collecting costs without classifying them

One large total does not help you find the source of a problem.

Ignoring working hours

An employee's cost may be reasonable while their hourly cost is high, because of low actual working hours or poor resource allocation.

Not linking cost to projects

This makes it hard to know how profitable projects that rely on your workforce really are.

Not reviewing costs regularly

Analysing cost once a year is not enough in companies where projects, headcount and expenses change all the time.

Deciding on cost alone

Cost should be read alongside productivity, results and workload, not on its own.

How can a company build a better way to track employee costs?

Start by listing every item the company wants to include in employee cost.

Then define the cost centres, departments and projects that need tracking.

Next, link each cost to the right employee, department or project according to company policy.

After that, gather actual working-hours data and compare it with cost.

Finally, use regular reports to compare results month to month and spot trends.

This way calculating employee cost becomes an ongoing process rather than a calculation done only when the budget is prepared.

Employee cost is not a fixed number

Treat employee cost as a value that can change.

Cost can change because of:

• More working hours.
• Overtime.
• The employee moving to another project.
• A change of department.
• Changes to some benefits.
• New cost items.
• A change in how the employee is split across projects.
• A rise or fall in workload.

That is why companies that track cost regularly can spot changes early, rather than finding them after they have affected the budget.

Salary tells you what you pay; cost tells you what you actually spend

Knowing the salary matters, but on its own it is not enough to understand workforce cost.

The true cost of an employee needs a wider set of data, covering wages, employee-related costs, working hours, projects, departments, cost centres and variable costs.

Employee cost should also not be just a number management uses to compare employees, but an indicator that helps it understand how the workforce is used and where the budget goes.

By analysing employee costs and linking them to cost centres and projects, a company can get a clearer view of spending, compare the budget with actual cost, analyse the cost of working hours and make better-informed decisions about allocating resources.

Dawmt's cost management and analysis module links employee costs to cost centres, tracks each employee's monthly cost and compares spending against the budget, along with hourly cost per project.

If a company wants to move from knowing "How much do we pay our employees?" to knowing "What does our workforce actually cost us, and where does that cost go?", cost analysis is an essential step towards a clearer financial and operational view.

Sources

• Labour Law issued by Royal Decree No. M/51, with amendments up to Royal Decree No. M/44 dated 8/2/1446 AH, Articles 84 and 85, Ministry of Human Resources and Social Development (in Arabic)
• GOSI awareness platform: the employer journey under the new Social Insurance Law (1445 AH) (in Arabic)
• GOSI: frequently asked questions for employers

Rates reviewed in October 2026. Rates can change, so check the GOSI website before relying on them.