Why Those Extra Hours Cost More Than You Think
Overtime is the quicks solution when you need more capacity and more output. But here’s what most manufacturing business owners don’t realise is overtime is expensive.
Much more expensive than it appears on the surface. And when it becomes a regular feature rather than an occasional necessity, it can seriously damage your profitability.
Let me show you exactly what overtime really costs and why relying on it is a red flag for your business.
Product Costing Accountant – Skynet Accounting – Accountants For Manufacturing & Engineering
Understanding UK Overtime Pay Regulations
First, let’s be clear about what you’re legally required to pay for overtime in the UK.
There’s actually no statutory requirement to pay enhanced rates for overtime. Your obligation is simply to ensure that total pay (including overtime) doesn’t drop someone’s average hourly rate below the National Minimum Wage or National Living Wage.
However, employment contracts and workplace custom often create obligations to pay overtime premiums.
Most manufacturing businesses pay time-and-a-half (1.5x normal rate) for weekday overtime and double time (2x normal rate) for weekends and bank holidays.
Even if you’re not contractually obliged to pay enhanced rates, you’ll struggle to get people working extra hours without some premium. In a tight labour market, workers know they can get overtime premiums elsewhere.
So for practical purposes, assume you’re paying at least time-and-a-half for overtime, and often double time for weekends.
7 Quick Wins to Protect Profit & Cash in Manufacturing
The Direct Cost: More Than Just Wages
Let’s start with the obvious cost. The actual wages you’re paying.
Say you’ve got a machine operator on £15 per hour for a 40-hour week. That’s £600 per week in basic pay.
If they work 5 hours overtime at time-and-a-half, that’s 5 × £22.50 = £112.50. Add that to their basic £600 and you’re paying £712.50 for 45 hours of work.
But that’s not your actual cost. You’ve also got employer’s National Insurance contributions on those wages. At 15%, you’re paying an extra £16.88 in NI on that overtime.
If you’re offering pension contributions (and you’re required to under auto-enrolment), there’s another cost. At the minimum 3% employer contribution, that’s £3.38 more.
So your £112.50 of overtime wages actually costs you £132.76. And that’s just the direct employment costs.
The Hidden Costs Nobody Talks About
The direct wage cost is just the beginning. There are several hidden costs that make overtime even more expensive than it appears.
Reduced productivity. Tired workers make more mistakes, work more slowly, and are less efficient. Study after study shows that productivity drops significantly after 8 hours, and plummets after 50-55 hours per week. That tenth hour of the day might cost you time-and-a-half in wages but deliver only 70% of normal productivity.
Increased defect rates. Fatigue leads to errors. More scrap, more rework, more warranty claims. I’ve seen manufacturers where weekend overtime consistently produces double the defect rate of normal production. You’re paying premium wages to make products you’ll have to fix or scrap.
Equipment wear and tear. Running machines for extended hours increases maintenance needs and brings forward the replacement cycle.
For example, your CNC machine rated for 8 hours a day, 5 days a week? Running it 12 hours a day, 6 days a week will halve its lifespan and increase breakdown frequency.
How to Double Revenue in CNC & Laser Cutting Industry
Higher energy costs. Many manufacturers are on time-of-use electricity tariffs. Evening and weekend rates can be significantly higher than standard daytime rates. Your overtime might be running during peak pricing periods.
Health and safety risks. Tired workers have more accidents. The HSE is clear that long working hours increase injury risk. One serious accident will cost you far more than you saved by avoiding a permanent hire.
Staff burnout and turnover. Sustained overtime leads to exhaustion, resentment, and people leaving. Recruitment and training costs for replacements are significant. Plus, you lose the productivity and knowledge of experienced staff.
Supervisory and support costs. Overtime production often needs supervisors, quality inspectors, and maintenance staff also working overtime. You’re not just paying premium rates for direct labour, you’re paying them for support staff too.
The £1m to £10m Manufacturer’s Breakthrough Plan
A Real Example: What Overtime Actually Costs
Let’s work through a realistic scenario with actual numbers.
You run a metal fabrication shop with 10 production staff, each on £15/hour for 40 hours per week. Business picks up and you start running 10 hours of overtime per person per week at time-and-a-half.
Weekly overtime wages: 10 staff × 10 hours × £22.50 = £2,250
Employer’s NI: £337.50
Pension contributions: £67.50
Direct weekly cost: £2,655
That’s £138,060 per year just in direct costs. But now add the hidden costs:
Reduced productivity (assume 20% drop in overtime hours): 100 hours of overtime delivering 80 hours of effective work. You’re wasting 20 hours per week at premium rates = £450/week or £23,400/year.
Increased defects (assume 2% increase in scrap rate on £500k annual material spend): £10,000/year.
Accelerated equipment depreciation (assume 20% faster wear on £200k equipment): £8,000/year additional depreciation.
Higher energy costs (assume 15% premium on overtime energy use, £30k annual bill, 20% from overtime): £900/year.
Staff turnover (assume one extra leaver per year due to burnout, £8k recruitment and training cost): £8,000/year.
Electronics Manufacturing Bottleneck Operations
Total annual overtime cost: £188,360
But what would hiring two additional staff have cost?
Two new employees at £15/hour, 40 hours/week:
- Annual wages: £62,400
- Employer’s NI: £9,360
- Pension: £1,872
- Recruitment and training: £4,000 one-off
- Total first year: £77,632
- Ongoing annual cost: £73,632
You’d save over £114,000 per year by hiring permanent staff instead of relying on overtime. And you’d have a more sustainable, safer operation with better quality output.
When Overtime Makes Sense (And When It Doesn’t)
I’m not saying overtime is always wrong. There are legitimate situations where it’s the right choice.
Short-term demand spikes are perfect for overtime. A rush order, covering for holiday absence, or a seasonal peak. These are exactly when overtime works well. It’s temporary, there’s a clear end date, and the cost is justified by keeping a good customer happy.
Emergency situations like equipment breakdown, urgent quality issues, or unexpected absences need covering with overtime. These are one-offs where you don’t have an alternative.
Testing new work before committing to permanent hires makes sense. If you’ve won a new contract but aren’t sure it’ll last, using overtime initially while you assess demand is sensible risk management.
But overtime becomes a problem when it’s structural rather than exceptional. If you’re regularly working 10+ hours of overtime per person per week, that’s not a temporary spike, that’s understaffing.
If overtime has become necessary to hit normal production targets, you’re using an expensive temporary solution for a permanent problem. If your business model only works with sustained overtime, your business model is broken.
The Warning Signs You’re Relying Too Much on Overtime
Watch for these red flags that overtime has become structural:
- Overtime is budgeted as a regular line item rather than a contingency
- The same people work overtime every week
- Production targets assume overtime availability
- You can’t fulfil normal orders without overtime
- Staff are working over 48 hours per week regularly
- Overtime costs are increasing as a percentage of total labour costs
- Quality issues correlate with high overtime periods
- Staff turnover has increased alongside overtime hours
If several of these apply to your business, overtime has shifted from an occasional tool to a crutch that’s costing you money and creating risks.
Calculating Your True Overtime Cost
Here’s how to work out what overtime is really costing your business.
Step 1: Calculate direct costs. Add up overtime wages, employer’s NI, and pension contributions for a typical month.
Step 2: Assess productivity impact. Compare output per hour during normal time versus overtime hours. The difference is your productivity cost.
Step 3: Review quality data. Do defect rates increase during overtime periods? What’s the cost of that additional scrap and rework?
Step 4: Check maintenance records. Has equipment downtime increased since overtime became regular? What’s the additional maintenance cost?
Step 5: Review staff turnover. Have you lost people who cited excessive hours as a reason? What did recruitment and training replacements cost?
Step 6: Add it up. The total is almost certainly much higher than the wage line on your payslips.
Alternatives to Structural Overtime
If overtime has become a permanent feature, what are your alternatives?
Hire additional permanent staff. Yes, there’s commitment involved, but as we’ve seen, the numbers often stack up favourably compared to sustained overtime.
Use agency or temporary staff. For genuinely variable demand, temporary workers can flex your capacity without the overhead costs of permanent employment.
Improve efficiency. Before adding capacity, squeeze more from existing resources. Reduce changeover times, eliminate bottlenecks, cut waste, and improve workflow.
Invest in automation. Sometimes the answer is equipment rather than people. A machine doesn’t get tired, doesn’t need overtime premiums, and delivers consistent quality.
Subcontract overflow. For capacity peaks, subcontracting specific operations might be cheaper than internal overtime, especially if you can maintain quality control.
Redesign your production scheduling. Better planning might even out workload, reducing peaks that require overtime to manage.
Shift patterns. Two shifts of 8 hours might be more cost-effective than one shift of 12 hours with 4 hours at time-and-a-half.
The National Living Wage Impact
With National Living Wage increases, the overtime cost equation gets even worse.
As NLW continues to rise. It’s increased significantly in recent years and overtime premiums rise with it. The gap between permanent hire costs and overtime costs widens further.
This makes the economic case for permanent staff over structural overtime even stronger than it was five years ago.
Making the Business Case for Change
If you’ve recognised that overtime is costing you more than it should, here’s how to make the case for change.
Document the true cost. Use the calculation method above to show the full picture, not just the wage line.
Model the alternative. Show what permanent hires, agency staff, or automation would cost in comparison.
Highlight the risks. Staff burnout, quality issues, safety incidents, and knowledge loss all have real costs that need factoring in.
Present a transition plan. Show how you’d phase out overtime and what the timeline looks like. Include any one-off costs like recruitment or equipment purchase.
Forecast the improvement. Better quality, more consistent output, improved staff morale, and reduced risk all have value even if they’re harder to quantify.
Take Control of Your Labour Costs
Overtime is a tool, shouldn’t be used as a strategy. Used occasionally for genuine short-term needs, it’s valuable and cost-effective. Used as a permanent solution to structural understaffing, it’s expensive, risky, and unsustainable.
If overtime has crept up in your business, it’s worth taking a hard look at whether you’re actually saving money or just avoiding a difficult decision about permanent capacity.
The numbers usually tell a clear story and more often than not, that story is that you’d be better off hiring permanent staff or finding another way to manage capacity rather than grinding through on endless overtime.
Getting your labour costs properly understood and controlled is fundamental to manufacturing profitability.
Not sure whether your overtime costs are helping or damaging your business profitability? Want to understand the true cost of your current approach to managing capacity?
Let’s have a conversation about your labour costs and how accurate product costing can show you where your money is really going.
Get in touch for practical advice on controlling manufacturing costs.
Apply For a Call – Skynet Accounting – Accountants For Manufacturing & Engineering
Follow me on LinkedIn: www.linkedin.com/in/skynet-yesim-tilley
About the Author
Written by Yesim Tilley Founder of Skynet Accounting is a chartered accountant with over 20 years of experience supporting manufacturing and engineering businesses across the UK. Specialising in cost analysis, product costing, and financial strategy, she helps industrial businesses understand their numbers and make more profitable decisions. Skynet Accounting provides tailored finance, compliance, and taxation support designed specifically for the manufacturing and engineering sector.