Dilution is the method of calculating an effective cost rate for salaried employees in order to determine effective cost across projects. Accurate dilution calculations require accounting for all time, both direct/billable and indirect/internal.
For employees who are paid hourly, labor distribution is simply determined by the number of hours applied to each of these categories multiplied by their hourly rate.
For salaried employees who are not compensated for overtime, their effective cost rate will vary based on the number of hours worked. For example, a salaried employee with an hourly rate of $50 an hour will earn $50 * 40 or $2,000 a week, based on a standard 40 hour work week. If that same employee works 80 hours in a given week (double the time), they will still be paid $2,000. Because of this, their effective hourly rate is reduced by half based on the following calculation: Effective rate = (hours in week/hours worked) * standard rate. In this example, (40/80) * $50 = $25/hour.
The resulting effective hourly rate is called the diluted rate. The process of automatically calculating diluted rates is called Dilution. When turned on, an employee's effective rate will automatically be calculated and will drive the results of all cost related Unanet reports.
As mentioned, for dilution to create a meaningful calculation of effective cost, you must track all time of employees including leave, internal, and direct/billable. The concept of Total Time Accounting (TTA) or Total Time Reporting (TTR) refers to the equitable distribution of labor costs across all projects worked. It assumes that an employee enters all compensated and uncompensated time, including compensated leave (vacation, holiday, etc.) as well as time on both indirect and direct projects.
Unanet has three settings for cost dilution methods, under Admin > Properties > Time > General > Dilution Settings.
- The first option, Off (No Dilution), can be selected if you do not want to calculate effective, or diluted, cost rates for your labor hours. This is rarely selected, but may be chosen if instead of using dilution (effective hourly rate), you follow some other method such as a method called payroll variance. This option is very rarely selected.
- The second option, Style 1, can be selected if you want to dilute cost rates for labor hours worked in excess of the standard work week hours, as well as for labor hours worked under the standard work week hours.
- The third option, Style 2, can be selected if you want to dilute cost rates for labor hours worked in excess of the standard work week hours, but do not want to dilute cost rates for labor hours worked under the standard work week hours. In this case, if a salaried person worked less than the expected number of hours (let's say 35 hours instead of 40), the cost rate applied to the hours would be the Person Profile Rates tab cost rate.
So that Labor cost is diluted correctly, it is critical that your Time Period in Admin > Setup > Time Periods is aligned with your pay period. For example, if you pay semi-monthly or monthly, then you can have either semi-monthly or monthly time periods. If you pay weekly or bi-weekly, you can have either weekly or bi-weekly time periods. Refer to the Time Period page for more information.