Labor burden is everything an employee costs you on top of their hourly wage: employer payroll taxes, workers' comp and liability insurance, benefits, and the paid hours they can't bill to a job. To get the burdened rate, add up the year's total cost of the employee and divide by their productive hours, not their paid hours. In our worked example below, a $28 an hour field employee really costs about $40.79 per productive hour, roughly 46% above the wage.
Most estimators know labor costs more than the wage. Far fewer have rebuilt the number since their insurance, benefits and crew size changed. That gap goes straight into every bid.
Why the wage is the wrong number
When you price labor at the hourly wage plus a rough percentage, you're betting that the percentage is still right. For a growing company it usually isn't. Your workers' comp mix has changed, you added health coverage to keep good people, and your crews lose more hours to travel, weather and training than they did when you had two trucks.
Labor is often the biggest cost a contractor actually controls, and it's the one most likely to be priced on an old assumption. A few dollars an hour sounds small. Spread across every field hour you work in a year, it's the difference between the margin you bid and the margin you keep.
What goes into labor burden
Think of it in four groups.
Employer payroll taxes. These are set by law. According to the IRS, the employer pays 6.2% for Social Security and 1.45% for Medicare on each employee's wages. Social Security stops at an annual wage base, so it applies to most field wages in full. Federal unemployment tax (FUTA) is 6.0% on the first $7,000 of each employee's wages, which drops to 0.6% for most employers once the state unemployment credit applies. Georgia unemployment tax comes on top, at a rate the state assigns to your company.
Insurance that follows payroll. Workers' comp is priced per $100 of payroll, and the rate depends on the type of work each employee does. A roofer and an office manager carry very different rates. General liability is often rated on payroll too.
Benefits. Your share of health insurance, retirement contributions, and any other benefits you provide.
Paid time that isn't billable. Holidays, paid time off, rain days you pay for, safety training, shop time. You pay for those hours, but no job pays you for them. This is the piece estimators most often leave out, and it's why the right divisor is productive hours, not paid hours.
A worked example
Here's one field employee at $28 an hour, paid for 2,080 hours a year. The tax rates are the federal ones above. The insurance, benefit and state unemployment figures are typical of how the math works, so put your own numbers from your carrier and your payroll in their place.
| Cost | How it's figured | Annual cost |
|---|---|---|
| Base wages | $28 × 2,080 paid hours | $58,240 |
| Social Security and Medicare | 7.65% of wages | $4,455 |
| Federal unemployment (FUTA) | 0.6% of the first $7,000 | $42 |
| Georgia unemployment | Your assigned rate on the state wage base | $300 |
| Workers' comp | $6.00 per $100 of payroll for this class | $3,494 |
| General liability | $1.50 per $100 of payroll | $874 |
| Health insurance | Employer share, $500 a month | $6,000 |
| Retirement match | 3% of wages | $1,747 |
| PPE, small tools, training | Per employee | $1,200 |
| Total cost of the employee | $76,353 |
Burden here is about $18,100, or 31% of wages. But that's not the rate to put in a bid, because you didn't get 2,080 billable hours.
Take out 128 hours of holidays and paid time off and another 80 for weather, training and downtime, and you're left with 1,872 productive hours. Divide the total cost by those hours and the real cost of this employee is $40.79 per productive hour. That's about 46% above the $28 wage.
What the gap does to your bids
Say your estimates carry labor at the wage plus payroll taxes, about $30.14 an hour in this example. Every productive hour is under-priced by about $10.65. For ten field employees working 1,872 productive hours each, that's roughly $199,000 a year of cost your bids never covered.
It doesn't show up as a single bad job. It shows up as every job finishing a little under its estimate, which is exactly the pattern a surety reads as gross profit fade. And because overhead and profit are usually marked up on top of cost, an understated labor rate shrinks those too.
Overtime changes the math
Under federal law, non-exempt employees get time and a half for hours over 40 in a workweek. The extra half is pure cost with no extra production behind it, and employer payroll taxes apply to the overtime pay too. If a crew is regularly working 50-hour weeks, the burdened rate on those last ten hours is far higher than your standard rate. Jobs that depend on overtime to make a schedule should carry it in the estimate, not absorb it later.
One rate or several
A single company-wide burden percentage is a start, but it hides the biggest variable. Workers' comp rates differ widely by type of work, so a framer, an electrician and a finish carpenter can carry very different burdens at the same wage. Most growing contractors do better with a burdened rate for each labor classification, rebuilt at least once a year when insurance renews.
Those rates then belong in your job costing. If payroll posts to jobs at the bare wage and burden lands in overhead, every job looks more profitable than it is, and your estimators never see the real number. Posting burden to jobs through your cost codes closes the loop.
Burden is a reason to check your classifications
Seeing a 46% burden, some contractors are tempted to move crews onto 1099s to make it disappear. It doesn't disappear. If those workers are really employees, the taxes and the workers' comp exposure come back with interest. We covered how the IRS decides in subcontractor or employee.
What to do before your next bid
One: pull last year's payroll, payroll tax, insurance and benefit costs by employee or by classification. Two: count real productive hours, not paid hours, using your timecards. Three: build a burdened rate for each labor classification and compare it to what your estimates are using. Four: post burden to jobs so your job cost reports show the true cost of labor.
Building burdened labor rates and job cost reports that match them is part of our construction accounting services for growing contractors in Atlanta.
Labor burden is one piece of overhead. To see how it rolls into your overall markup and margin, read contractor profit margin and overhead percentage, explained.