How do I calculate labor burden accurately for my crew?

Labor burden is everything an employee costs you beyond the wage on the paycheck: payroll taxes, workers' compensation, liability insurance, benefits and paid time off. To calculate it, add up those costs for a year, add the wages, and divide by the hours the person actually works on jobs. The result is the real cost of one productive hour, and it is the number your estimates should use.

Why the base wage is the wrong number

A journeyman paid $32 an hour does not cost $32 an hour. For most trade contractors the true figure lands 30 to 45 percent higher, and more in trades with high workers' compensation rates such as roofing. An estimate priced at the base wage is short by that amount on every labor hour in the bid, and no markup rule fixes a cost that was never counted.

What goes into labor burden

• Employer payroll taxes. Social Security and Medicare are 7.65 percent of wages. Federal unemployment (FUTA) is 6 percent of the first $7,000 of wages, usually 0.6 percent after the state credit. State unemployment (SUTA) depends on your state and your claims history.
• Workers' compensation. Charged per $100 of payroll, by class code. It is often the largest single item.
• General liability. Many policies are priced on payroll, so it belongs here too.
• Benefits. Health insurance, retirement match, union fringes where they apply.
• Paid time off. Holidays, vacation and sick days are hours you pay for and cannot bill.
• Other costs tied to the person. Training, safety gear, a phone, a vehicle allowance.

A worked example

Take one employee at $32 an hour, paid for 2,080 hours a year.

• Wages: $66,560
• Social Security and Medicare at 7.65 percent: $5,092
• Federal unemployment: $42
• State unemployment (yours will differ): $400
• Workers' compensation at $9 per $100 of payroll: $5,990
• General liability: $1,300
• Health insurance: $6,000
• Retirement match at 3 percent: $1,997

Burden costs come to $20,821, so the year costs $87,381.

Now the hours. Fifteen paid days off (holidays, vacation, sick) take 120 hours out of the 2,080, leaving 1,960 hours on jobs. Divide $87,381 by 1,960 and one productive hour costs $44.58. That is a burden of about 39 percent on the $32 wage.

Two ways to get it wrong

Dividing by paid hours instead of worked hours. Paid time off is a cost and it also removes hours. Divide by 2,080 and you understate every hour you bid.

Using one rate for everyone forever. An apprentice and a foreman carry different wages and often different benefits. Workers' compensation rates change every policy year, and so does health insurance. Recalculate at least once a year, and again whenever a rate or a wage changes.

Burden is not overhead

Labor burden follows the person: more hours, more burden. Overhead (rent, office staff, software, your own salary) does not change when you add a job. Keep them apart. Burden belongs inside the labor cost of each estimate line. Overhead is recovered through markup. Mixing the two is how a company ends up counting some costs twice and others not at all.

How to use the number

1. Work out a burdened hourly cost for each role or each person.
2. Price every labor hour in an estimate at the burdened cost, never the wage.
3. Add your markup for overhead and profit on top of that.
4. Compare estimated hours with actual hours when the job closes, so next year's number is better than this year's.

Where ConstructStream fits

In ConstructStream each employee's pay record holds the hourly rate or salary and a burden percent, and the app works out what an hour of that person costs. Estimates price labor from those costs, so each line shows its labor, its materials and its margin before the estimate goes out. When a rate changes, open bids pick up the new cost; a bid you already won keeps the rates from the day it was won.