How to Determine Your Fully Burdened Labor Rate in Construction

Running a profitable construction business means keeping a close watch on exactly what running that business costs. One part of that cost is the loss of labor — but to know the true cost of an employee, it's important to factor in more than just salary to be accurate. That is where the fully burdened labor rate comes in. This rate includes their basic wage or salary but also any additional costs associated with employing that worker.

Keeping on top of these costs helps contractors estimate accurately and bid competitively — while fairly compensating their workers and meeting all employer-related tax requirements. In this article, we'll briefly cover more about what a fully burdened labor rate is and what costs would be included, how to calculate fully burdened labor rate, and how it affects estimating.

What is a fully burdened labor rate in construction?

The fully burdened labor rate in construction (or in any industry) is the total hourly cost to employ a worker — taking into account not only their basic wage or salary, but also any additional costs associated with employing that worker, which has mandatory and voluntary inclusions.

Mandatory costs are inclusions that the employer is legally or contractually obligated to pay, such as payroll taxes. They cannot be opted out of without violating laws, regulations, or contracts. Voluntary costs are inclusions that an employer chooses to incur, typically to attract and retain employees and maintain a competitive position in the labor market, such as health benefits beyond the legal minimum, or retirement contributions.

Mandatory Costs Included in the Fully Burdened Labor Rate

Burdens that are mandatory include payroll taxes (Social Security, Medicare), federal and state unemployment insurance, and, if the state requires it, workers' compensation insurance, liability insurance, and state disability insurance.

The state or local government may also require a local payroll tax and job-training tax.

Voluntary Costs Included in the Fully Burdened Labor Rate

There are more inclusions that may be important to include when calculating a fully burdened labor rate as they can affect budgeting and estimating, including health insurance, life, disability, and accident insurance, as well as other costs and benefits such as vacation pay, sick pay, retirement benefits, etc. While these are voluntary, knowing your burden rate can help you determine if and how you can afford these benefits as an investment to attract and retain the talent you want to employ.

There can also be additional costs incurred due to the expenses of having employees that factor into your fully burdened labor rate. These include things like company vehicle use, business travel, training, cell phone use, and uniforms.

While recognizing that all of the costs associated with employment will increase the total cost, it’s important to also notice that labor-burdened rates do not include any markups or profits related to the labor or expenses not associated with employee compensation (more about markups later).

Calculating the Burdened Labor Rate

Calculating fully burdened labor costs can help contractors make better decisions about their budget and workforce. The burdened labor rate is a way to find the indirect costs of your labor force and compare indirect costs to direct costs.

Indirect costs are necessary to run a construction business and will certainly impact a company’s profit margins, — but identifying and budgeting those indirect costs isn’t always straightforward because the costs aren’t always apparent. Besides the indirect labor costs such as vacation time and insurance, there are other indirect costs that must be accounted for, including tools and equipment, repairs and maintenance, depreciation, rent and supplies. Additionally, some of these costs are fixed and others will fluctuate. It’d be wise to review calculations every six months and adapt to changes as needed.

To determine a labor burden rate or fully burdened cost per production hour, it’s common among contractors to estimate the indirect cost pool and divide it by labor hours. That calculation is:

Employee’s Fully Burdened Labor Rate or total employee cost = (Labor Burden Costs PLUS gross payroll labor cost) DIVIDED BY the number of hours (production).

Note: Construction companies that are equipment-intensive — such as excavation or site work — likely have indirect cost pools that include a large amount of fuel, repairs, maintenance, depreciation, etc. Using an equipment burden rate in addition to a labor burden rate may be wise. To determine that figure, identify the indirect cost pool, and then divide that by equipment hours, and then allocate those costs into jobs using an hourly equipment burden rate.

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Mistakes to Avoid in Estimating Using Fully Burdened Labor Rates

With an eye on estimating for profitability, it’s important to know all the numbers and be as consistent with calculations as possible when using a fully burdened labor rate. This will help in avoiding common mistakes, specifically underestimating employee total cost.

For example, will all labor-related costs be included in overhead? Then when calculating markup and do estimating using a fully burdened labor rate, overhead would be added to the sales price twice — in the labor rate and in the markup — resulting in a price much higher than it should be.

This example can go the other way, too, if someone deducts labor-related expenses from their overhead when calculating markup, but estimates using the employees’ hourly pay rate. This will mean losing money because they're pricing too low.

What’s important to remember is to use the rate depending on what's included in overhead when the markup is calculated — and of course, the markup is based on your company’s specific situation. When estimating your job costs, consider the assumptions you made when calculating markup. The key point here is to account for your payroll taxes and benefits just once when you quote a job.

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