Calculating the Approximate Cost of Downtime

Downtime costs are not something you can calculate exactly. However, along the lines of “what gets measured, gets managed”, it’s useful to have some idea of where you’re headed even if it’s just an approximation. What’s often missing in any formula for this are either one-off charges that you didn’t think of at the time (for example, penalties for late delivery) or intangibles such as the business you don’t get from customers who decide to award extra jobs to another supplier instead of you. At the risk of taking a simplistic approach, here’s some arithmetic.

You can do sums on the approximate labour cost of an outage, and on the revenue lost. The labour cost looks like this: N x P x C x H, where N is the number of people affected, P is the average percentage by which they are affected, C is the average employee cost per hour (wages, social security charges, etc.) and H is the number of hours of downtime. Simple enough, although you might want to set it up in a simple Excel spread-sheet, especially if you want to tackle different values for different groups of personnel.


Lost revenue can be approximated as: (GR/YH) x I x H, where GR is gross yearly revenue, YH is the total number of business hours per year, I is the percentage impact and H is the number of hours of downtime. I, the percentage impact is more difficult to estimate in this case. It may be easier, where possible, to take one representative case and to list the expenses incurred in terms of penalties imposed by customers, order revenue lost, overtime paid to make up for lost productivity, public relations efforts and anything else that your company had to pay for. You can then work backwards from the result and calculate I (= (result/H) x (YH/GR)), so as to have a rule of thumb to apply for the other cases and their hours of downtime.