The construction industry works off estimates. Figure the cost of a project too high, and your bids won’t be chosen. If you estimate too low, profits will suffer.
Calculating labor costs is a huge part of a project estimate. To do this correctly, companies must figure their labor burden. Labor costs account for the largest percentage of your operating expenses. When calculating your burden rate, you also need to take into account all the indirect costs you pay for labor, including payroll taxes, workers’ compensation, PTO and healthcare benefits.
Definition of Labor Burden Rate
Labor burden rate is the total indirect labor costs, calculated as a percentage of your total direct labor. It is the amount your workers cost above their hourly pay. For every dollar your employees earn, there are added costs to keep them employed. These costs include payroll taxes, benefits like medical, dental and life insurance, vacation days, retirement plan assistance, bonuses, and equipment and supplies.
The labor burden rate lets companies know how much it really costs for their workers to complete a project above and beyond their actual wage. Calculating the labor burden rate allows construction companies to accurately bid on projects. Employers can pay 30, 40 and even 50% of an employee’s hourly wage in indirect costs. It is interesting to note that for a union contractor, the labor burden rate for employee costs ranges from 60 to 70%.
How to Calculate Labor Burden for Construction
Calculating your labor burden rate first requires figuring your indirect costs. There are two costs associated with your labor, direct and indirect. According to Construction Business Owner, direct costs are the expenditures directly associated with a project, i.e., whatever you need to get the job done. Examples of direct costs include subcontractors, direct labor, materials and supplies, equipment rentals, bonds and permits.
Indirect costs are not as obvious. These costs include everything else indirectly associated with completing a project. Some examples are:
- Workers’ compensation
- Payroll taxes (Social Security – 6.2%, Medicare – 1.45%, Federal Unemployment Tax Act– 6.0%, State Unemployment Tax – This figure varies by state)
- Vacation pay
- Healthcare benefit costs
- Retirement matching
- Profit sharing
- Supplemental pay
- Liability insurance
- Automotive insurance
- Equipment repairs
- Vehicle maintenance
- Vehicle and equipment depreciation
- Mobile phone plans
- Protective gear
Once you determine how much you pay in indirect costs, you can determine how much your employees are actually costing you per hour, or your labor burden.
To determine the labor burden rate or fully burdened cost per production hour, take your labor burden costs (sum of indirect costs) and gross payroll labor costs (hourly wages) and divide by the number of production hours.
Here’s an example (your indirect costs could be higher and include more factors):
| Hourly Wage | $20 per hour | ||
| Indirect Costs | |||
| Social Security | 6.2% | +$1.24 | |
| Medicare | 1.45% | +$.29 | |
| Federal Unemployment Tax Act | 6% | +$1.2 | |
| State Unemployment Tax | 3% | +$.6 | |
| Retirement Contribution | 3% | +$.6 | |
| Liability Insurance | $4/$1000 | +$.08 | |
| Workers’ Compensation | $15/100 | +$3 | |
| Mobile Phone Plan | $25 per month | +$.16 | |
| Vehicle Fuel/Maintenance | $25 per month | +$.16 | |
| Total Indirect Costs | $7.33 per hour | ||
| Fully Burden Cost | $27.33 per hour |
It is important to re-evaluate your labor burden at least every six months to maintain accuracy.
How to Improve Job Costing
Adding your labor burden rate to your project estimates can help correctly identify how much a project will actually cost. Imagine you are estimating a project for 20 workers and don’t account for indirect costs. The above example shows the employer pays just one employee more than 35% of his or her direct wage in indirect costs. Multiple $7.33 by 20 employees, and every hour the employer is racking up $146 in indirect costs. Figuring the labor burden is imperative for creating an estimate that will actually provide your construction company with real profits.
So where can you save? Direct labor costs are out. If you start cutting your employees’ pay, you’ll quickly have more to worry about than finding savings; your workers will likely find another job. What’s left is indirect costs. Obviously, payroll taxes are fixed—but savings may be found in other indirect costs.
For example, if you notice machine maintenance costs rise with every new estimate, it may save you in the long run to buy a replacement. Or a good buyer may find savings with mobile phone plans, tools, insurance and vehicle repairs.
Tracking when your employees are actually working is the best way to reduce labor costs.
Benefits of Time Tracking
A time tracking app like ExakTime’s can eliminate paying employees for time they didn’t work while also simplifying your entire payroll process.
Track Your Workers
Time tracking leaves a digital footprint of where your employees are working and how much time they’re putting in at each site. Start and stop times are automatically reported to you daily, no paperwork required. The software also allows you to see a breakdown of who is doing what and how long it takes. Reports can be generated per location or employee. This gives you the opportunity to accurately see how time is being spent so you can keep productivity high—and potentially provide a paper trail to a client looking for a detailed breakdown.
These reports are also essential to tracking overtime. Unforeseen overtime costs can quickly inflate your budget. With a time tracking app, you coordinate when overtime needs to be paid and when it and other costs need to be curbed, helping to keep you on budget.
Track Equipment Costs
With equipment maintenance being an important indirect cost, those costs need to be monitored as well. Equipment tracking lets you see every time a bulldozer, jackhammer, concrete cutter or scaffolding was used on a project. By tracking their use, you can see which equipment may need more maintenance.
Accurate Time Cards
It has been found that 10 minutes is stolen per day, per employee via paper time cards. Your employees may not be out to get you. Instead, these stolen hours are likely due to hasty hour-rounding or mistakes. A mobile app reduces human error like misrepresented times and ineligible writing. Paper time cards filled out seven days or more after a job is completed are only 36% accurate.
Digital time cards reduce costly mistakes by always tracking the exact times your employees work. They also require employees to sign off on their time, eliminating disputes over paychecks.
Reduce Payroll Processing Times
Time tracking apps also simplify the payroll process. ExakTime’s app automatically syncs to payroll. In essence, your workers are the ones handling data entry for payroll, eliminating the need for an extra person to enter it manually.
ExakTime’s payroll syncing features a live (direct database) integration with QuickBooks and QuickBooks Online, Sage 100 Contractor & Master Builder, Sage BusinessVision and other valued partners. The automatic system ensures paychecks are accurate and on time.
Accurately estimating the true cost of a project, including your complete labor burden, means more of your profits will end up in your pocket, instead of being directed to unaccounted-for expenses. Let ExakTime’s time tracking app help control your labor costs and make estimating more efficient. You’ll only pay your employees for time worked and your payroll will always be correct.
