Calculating the Labor Burden for Your Construction Business
The true cost of having an employee goes far beyond the hourly wage
Look up the definition of “burden” and you’ll find something like this:
Bur·den – noun: A load, especially a heavy one.
In a business context, a labor burden is the indirect cost of hiring an employee. These costs are often hidden, but failing to account for them can put your construction business further behind with each project you take on. If you’re going to stay in business, or at least do better than just break even, you must understand what your labor burden is and how to calculate it. It’s all part of a strategy for accurately estimating construction costs.
Labor costs can be divided into two categories — direct and indirect. Accurately calculating total labor costs involves adding the indirect costs to the direct costs.
The direct cost for an employee is the wage paid to that employee.
Indirect costs depend on many variables, which will be unique for each construction business. They include, but are not limited to:
- Worker’s compensation
- General liability
- Vehicle insurance
- Communication expenses
- Employee benefits (health, retirement, profit sharing programs)
- Vacation and/or holiday and sick pay
- Payroll taxes
- Training and employee development
- Company apparel
The labor burden is the total of all the indirect labor costs expressed as a percentage of the direct labor costs:
Indirect costs / Direct costs x 100% = Labor Burden
In other words, for every dollar you pay an employee you will also have to pay a certain amount to employ that person.
Making these calculations is just one part of running a successful construction company. You’ll need other financial tools as well in order to accurately price jobs and keep your company in the black. For more, see the list at the bottom of this page.
Calculating the labor burden
Locating and calculating all the indirect costs in your construction business is the most difficult part of determining your labor burden, but it’s a necessary chore if you want to hit the profit margins required to keep your business going.
If you have trouble running all of these costs down, you might contact your CPA or tax professional for help. But let’s assume that you have identified the indirect costs for your company, and are going to develop the labor burden for an employee named Tim.
Tim is paid $20/hr.
Start with time
Tim is a full-time employee who works 40 hours per week for the entire year:
40 hrs/wk x 52 = 2080 hrs/yr
Tim’s compensation is:
$20/hr x 2080 = $41,600/yr
1. Determine the time for which Tim is paid but does not work:
- 6 holidays (New Year’s Day, Memorial Day, July 4, Labor Day, Thanksgiving, Christmas).
6 holidays x 8 hr/day = 48 hrs
- 5 vacation, sick, or personal days / paid time off (PTO)
5 days x 8 hr/day = 40 hrs
- 2 training days for seminars or professional development
2 training days x 8 hr/day = 16 hrs
2. Calculate Tim’s available working hours:
Total working hours – paid leave = Total available working hours
2080 – 48 (holidays) – 40 (PTO) – 16 (training) =
1976 total available working hours
3. Calculate the general or administrative time Tim spends on non-billable/production work. This time could be related to company meetings, company maintenance (shop/field), time reporting, etc.
Let’s assume that of the total available working hours calculated above, Tim spends 2 hours per week on these tasks.
4. Divide the total available working hours by 40 hr/wk to determine the number of effective weeks Tim is available to work.
1976 hr / 40 hr/wk = 49 WK (rounded down)
General/Admin Time = 2 hr/wk x 49 wk/yr = 98 hr/yr
5. Determine the total production hours Tim can work by subtracting the total general/admin time from the total available working hours:
1976 – 98 = 1878 total production hours
If we were to stop here, then we could determine a labor burden based on the total production hours versus the total working hours.
Tim is going to receive pay for 2080 hours which totals $41,600 (assuming he receives all the PTO offered and other time listed above).
But Tim is only producing work for 1878 hours in a given year.
If we divide Tim’s total working hours by his total production hours we get the labor burden factor we need to apply to his pay rate to determine the actual labor costs (including this labor burden).
Total working hours / total production hours = labor burden factor
2080 / 1878 = 1.11
Tim’s labor cost rate per hour is approximately 11% more than his wage:
Wage/hr x labor burden factor = $20 /hr x 1.11 = $22.20 / hr
But we can’t stop here. There are more costs to employing Tim that we must include.
Include indirect costs
Listed below are some of the indirect costs that should be included in any labor burden calculation. Keep in mind that this is by no means a comprehensive list. You also might include retirement benefits, use of a company vehicle, mobile devices, etc.
- Payroll Taxes $3744 (Based on effective overall rate of 9% – varies by state)
- Worker’s Compensation $4160 (assumes 10% rate or $10 per $100 payroll)
- Uniforms (shirts, hats, etc.) $200
- Tool allowance/maintenance $600 (based on $50/month)
- Company events $240 (based on $20/month – picnics, parties, other events)
- Bonus, cost of living, raises $1248 (based on 3% of wages)
- Professional development $175 (fees for training, seminars, education)
- Health insurance reimbursement $1500 (based on $125 per month reimbursement)
The total for the indirect costs listed above is $11,867.
If Tim’s total compensation is $41,600 based on a $20/HR wage, then we need to add the $11,867 of indirect costs to this number to determine the total cost to employ Tim.
Total cost to employ Tim:
$41,600 + $11,867 = $53,467
Now we can determine the effective cost rate of Tim per hour including the total production hours:
Total cost to employ / total production hours = $53,467 / 1878 = $28.47/hr
Therefore the labor burden factor is:
$28.47 / $20 = 1.42.
In other words, for every dollar you pay Tim, it will cost you $0.42 in additional indirect costs.
This 42% in additional costs does not include the markup on Tim’s labor. This in only the breakeven number.
In order to determine the price at which you should sell Tim’s labor you need to understand the markup your business needs to make the margin that is required.
The final price
Let’s assume you determine your markup to be 50%. Then you would calculate the price for an hour of Tim’s labor with the following equation:
Labor wage x labor burden factor x markup = Labor price
$20/hr x 1.42 x 1.5 = $42.60/hr
Understanding how to calculate your labor burden will cause you to experience the opposite of the word burden — relief.
Re·lief – noun – a feeling of reassurance and relaxation following release from anxiety or distress.
Now doesn’t that sound nice?
More on calculating business costs:
Markup: The One Number That Rules Them All — One markup controls the revenue for your construction business and rules all other markups you might have developed.
Fast, Accurate Techniques for Estimating Construction Costs — In order to produce accurate construction estimates quickly, you need to develop a unit-cost method. Here’s how to do it.
Checking Your Construction Estimate — Having a fast, accurate way of checking your prospect’s budget will save you time and money in the long run.
3 Ways to Price Construction Projects — Construction is a cost-based business. Use these three methods to determine the correct price for your construction projects.