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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