When it comes to profits, labor is a crucial component. In construction, labor costs vary between 30% to 50% of total project revenue. And the smaller your company, the closer your labor costs will be to 50%.
To make sure your business is profitable, you’ll need to apply strict controls over labor costs. But reconciling labor costs can be complicated. Factors like health care, benefits, training, and increased administrative overhead have made labor more expensive—and you’ll need to account for these additional costs in your calculations.
To identify your true labor costs, you’ve got to know how to calculate labor burden. Today, we’re going to show you how to calculate labor burden and how to apply the numbers to your project estimates.
What Is Labor Burden?
Labor burden is related to the indirect cost of your labor—in other words, the cost of having that labor. Indirect labor costs include:
- Payroll taxes.
- Workers compensation insurance.
- Health insurance and other benefits.
- Additional training or classes.
- Safety gear, employee equipment, or employee supplies.
- Administrative overhead, time spent in meetings, or time commuting.
It’s a common mistake to bid a job based solely on direct labor costs. While the direct labor costs could be $20 an hour, the indirect labor costs could be closer to $30 or even $40 an hour.
On average, an employee’s labor burden is 24%—or $0.24 on the dollar.
|Check out our handy online Labor Burden Calculator to calculate your labor burden.|
How To Calculate Labor Burden
Labor burden is simple, but you need to begin with accurate numbers. Take a look at the following example:
- An employee works for 40 hours at $20 per hour on a project. Their direct cost of labor is $20 x 40 = $800.
- If the employee’s indirect labor costs are $200 (explained further below), that employee’s total labor cost is $800 + $200 = $1,000. So, the true cost is $1,000 per 40 hours of work.
- This breaks down to a labor cost of $25 per hour ($1,000 / 40).
In the above example, the labor burden is 25%, or $5 per hour. You’ll need accurate numbers, though, to ensure valuable calculations.
To take the pain out of tracking hours and ensure accuracy use a gps time clock app that tracks your employees when they’re on-site—booking their hours down to the minute.
Once you have the right numbers in hand, you can start calculating your labor burden.
1. Begin with the total hours worked.
Any time your employee is “on the clock” and getting paid will factor into labor burden—even if these aren’t part of the employee’s on-site hours.
2. Calculate your direct labor costs.
To calculate your labor burden, start with your direct labor costs by multiplying the total hours paid by the employee’s hourly wage.
3. Add your indirect costs.
These are all the costs that are associated with supporting your labor. They will vary depending on the type of benefits you provide.
4. Total your actual labor costs.
Now, you should have your total Labor Costs: Direct Costs + Indirect Costs.
$10,040.00 + $3,410.00 = $13,450.00
Divide your total Labor Costs by your On-Site Hours (not your Total Hours) to calculate the amount each on-site hour actually costs you.
$13,450.00 / 480 = $28.02
Next, deduct your Hourly Wages from your total Hourly Labor to get your total Indirect Costs.
$28.02 – $20.00 = $8.02
Your Labor Burden is your Indirect Costs divided by your Direct Costs, expressed as a percentage:
$8.02 / $20.00 x 100 = 40.11%
Our spreadsheet template will perform the calculations for you:
How Often You Need Calculate Your Labor Burden
With a solid understanding of your labor burden, you can more accurately estimate future projects. Check your labor burden at least once a year to make sure that you stay on target.
And don’t forget—to calculate the true cost of your labor, you also need to have an accurate accounting of your hours. Use construction time tracking software to:
- Ensure the accuracy of employee hours captured
- Understand how many hours are being on projects vs non-billable work
- Track and improve construction crew productivity.
- Make the process of calculating your labor burden a whole lot easier. You’re more likely to do it if its easy!