How do I calculate true labor costs including burden?
True labor cost includes everything you pay to have an employee on your crew, not just their hourly wage. Most contractors underestimate this by 25% to 40%, which means they’re underbidding jobs and wondering why profit margins disappear.
Start with the base hourly wage. Then add each burden component.
Payroll taxes come first. You pay 7.65% for Social Security and Medicare on every dollar of wages. An employee earning $25/hour costs you an additional $1.91/hour just in FICA taxes.
Unemployment taxes add more. Federal unemployment runs about 0.6% on the first $7,000 of wages per employee. Utah state unemployment varies based on your experience rating, typically starting around 2% for new employers. The rate changes over time based on your claims history.
Workers’ compensation insurance is where construction gets expensive. Rates vary dramatically by trade. A carpenter might cost $8 to $15 per $100 of payroll. An electrician might be $4 to $8. Roofers can hit $20 or more. Your actual rate depends on your classification code and experience modifier.
Benefits add to the total if you offer them. Health insurance might run $400 to $800 per month per employee. A 3% 401(k) match on a $52,000 annual salary adds $1,560. Two weeks of PTO means you’re paying for 80 hours where no productive work happens.
To calculate your burden rate, add up all annual burden costs and divide by total wages. If an employee earns $52,000 annually and you pay $18,000 in burden costs including taxes, workers comp, and benefits, your burden rate is about 35%. That means your true labor cost is 135% of the base wage.
For hourly calculations, multiply the base rate by 1.35. A $25/hour worker actually costs you $33.75/hour when you account for everything. That’s the number that should go into your job estimates and job costing reports.
Getting this wrong affects every bid you submit. A job requiring 100 labor hours at $25/hour base wage isn’t a $2,500 labor cost. With a 35% burden rate, it’s $3,375. Miss that and you’ve given away $875 before materials and overhead even enter the picture.
The burden rate varies by employee type. Office staff typically have lower workers’ comp rates than field crews. If you’re mixing labor types in your estimates, calculate separate burden rates for each classification.
Contractors working with a real estate bookkeeper in American Fork often discover their actual burden is higher than they assumed. That’s not bad news. It means you can finally price jobs to make real profit instead of wondering why the margins never match your estimates.
Track your burden rate annually. Workers’ comp rates change based on your experience mod. Unemployment rates adjust based on claims history. Benefits costs increase. Last year’s burden rate might understate this year’s true cost by several percentage points.
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More Questions
How do I track inventory for a construction business?
Most construction materials are job costs, not inventory. True inventory tracking is only needed for materials kept in stock before being assigned to specific projects. Focus on job costing for project-specific purchases.
Read answerWhat 1099 forms do I need to file?
The main form is 1099-NEC for any subcontractor or service provider you paid $600 or more during the year. You may also need 1099-MISC for rent payments. The deadline is January 31 for both recipients and the IRS.
Read answerAre there any bookkeepers in the Wasatch Front that specialize in construction?
Yes. The Wasatch Front has bookkeepers who focus specifically on construction companies and contractors. Construction accounting requires specialized knowledge of job costing, progress billing, and work-in-progress that general bookkeepers typically don't have.
Read answerShould I do my own bookkeeping or hire someone?
It depends on your transaction volume, industry complexity, and what your time is worth. DIY works for simple businesses with minimal transactions. Hiring makes sense when bookkeeping eats into revenue-generating time or when mistakes start costing you money.
Read answerWho does bookkeeping for contractors in Salt Lake City?
Several bookkeeping firms in the Salt Lake City area work with contractors, but not all understand construction accounting. Look for someone with job costing experience who knows how to track costs by project and phase.
Read answerHow do I track materials and supplies by job?
Tag every material purchase to a specific job at the time of purchase. Write the job name on receipts, set up job references with suppliers, and enter expenses in your accounting software with job assignments. This gives you accurate job costs instead of guesswork.
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