Labor Burden in Construction – Proper Rate Formula


Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!

Labor burden in construction is a value added on to the respective hourly labor base wage to to determine the total cost per hour for a particular trade or employee. Labor burden rates are used extensively with estimating and recording actual results. The key to labor burden is that the rate is NOT universal. The value is different per company and in some cases per trade/employee. The rate is highly dependent on the various employee benefits provided and the structure of the organization.

Labor burden is one of the soft costs in construction. It is comprised of five distinct cost groups including taxes; mandatory and voluntary benefits; compliance requirements and human resources management. Each of these five distinct groups of costs are explained along with the associated impact on the formula is covered in the first section below. With knowledge of the respective cost groups, the labor rate formula can then be designed and developed. With the core formula set, management can then calculate the cost per hour and in some cases per trade or employee. Finally, the concept of labor burden and the proper rate is not pure and therefore some nuances are important to take into consideration when applying the labor burden rate.

It all starts with understanding the five distinct cost groups composing labor burden.

Labor Burden Cost Groups

One of the first lessons any new business owner learns is that payroll is not purely an hourly rate. The first lesson learned about labor cost ties directly to payroll taxes. Another additional cost for an employer are benefits, some of them mandated by law, others are provided by the employer to recruit and/or retain good employees. If that isn’t enough of a financial obligation, there are compliance costs that add to the overall cost to have employees. Finally, for larger organizations, a human resources department is incorporated into the company’s organizational structure adding more costs to the overall labor burden and the final rate.

The following subsections explain each group in more detail and their respective impact on the labor burden rate.

Payroll Taxes

There are four mandated taxes for each dollar of payroll wages paid to employees. Two are matching payroll taxes, i.e. the employer matches what the employee pays and the remaining two are tied directly to unemployment. Here is the short list and the corresponding percentage amounts:

  1. Social Security Match – 6.2% of every dollar an employee earns must be paid as a separate tax to the Internal Revenue Service.
  2. Medicare Match – 1.45% of every dollar an employee earns must be paid as a separate tax to the Internal Revenue Service.
  3. FUTA – Federal Unemployment Tax is also a percentage of employee’s earnings. It is not paid on every dollar of earnings, it is mandated on the first $7,000 of wages earned per employee and the tax rate is 6%. If the employer participates in their state’s unemployment program, the IRS provides a credit up to 5.4% effectively reducing the FUTA to .6%.
  4. SUTA – State Unemployment Tax is similar to FUTA, however the rate varies per state and is customarily a function of the company’s cumulative experience and compliance with FUTA. The average is is from .6% to as high as 5.4% for most states.

SUTA is the most interesting and complex element of the payroll tax calculation. If the employer participates, pays in full and on time, the employer is entitled to a 5.4% tax credit for FUTA. Thus, FUTA’s net tax rate drops to .6% on the first $7,000. Most states run their program similar to the federal system. The tax is only paid on the first few thousand dollars of wages, customarily the first $5,000 to $10,000 of wages paid per employee per year. Thus, it varies depending on the state of business and of course participation in FUTA and the company’s experience rate.

In general, FUTA/SUTA approximates 2.8% to 3.4% depending on your company’s experience. If you are a newer company, expect your average combined rate to be around 3.4% per dollar on the first $7,000 of wages per employee.

Thus, the average payroll tax labor burden rate per employee is:

Social Security               .0620
Medicare                        .0145
FUTA                             .0060
SUTA                             .0220
Total                               .1045

Expect to average 10.45% per dollar of wages paid to employees. The more employees the company has and the longer the life of the company, this rate will drop to as low as 8.2% overall. For most contractors, the higher value in the range is the value to use in calculating this portion of the labor burden rate.

Mandatory Benefits

For those employers with more than 50 full time employees, there are two mandated benefits the employer must provide.

  • Family and Medical Leave under the Family and Medical Leave Act – for most construction companies, this is not applicable and has no corresponding contribution towards the final labor burden rate.
  • Under the Patient Protection and Affordable Care Act (ACA), employers must provide affordable health insurance coverage to at least 95% of their employees. Affordable means that the cost of coverage can not exceed 9.78% of the employee’s annual wages. Most employers provide an across the board contribution per employee to assist in paying for coverage. The primary purpose is to really have a decent health care plan for the owners and upper management team. By having a higher participation rate in health coverage, the overall plan’s cost per participant decreases. Therefore, many employers, especially those in the construction industry, pay a portion of each employee’s premium contingent on the respective employee participating.

The mandatory benefit calculation is difficult to determine as a function of wages due to the complexity and constant changing values associated with health care. To assist the reader in understanding how complex this is, an illustration is appropriate.

Nail It Construction, Inc.
Nail It Construction (NIC) has 72 employees and has a health insurance plan whereby 38 of the employees participate. NIC pays 75% of all premiums on this plan for any employee participating. The total annual wages paid to all employees in 2019 were $5,109,000. Total health insurance premiums for all 38 employees equaled $767,448. NIC paid $575,586 as its share of the total premiums. Of the $5,109,000 of wages paid to all employees, $3,876,000 were paid to field personnel, actual workers on the job sites and the project management team members that visited the sites. The health insurance labor burden rate is calculated as follows:

Total Field Wages                                               $3,876,000
Total Company Paid Premiums                               575,586
Average Cost as a % Health Care Premium             14.85%

There is a lot more to this than the illustration conveys. Health insurance in general is the most expensive benefit an employer is mandated to pay. The formula assumes that the labor burden rate is tied to field production which is the best denominator to use. However, some contractors separate out the administration costs including health care coverage for the upper management team and office personnel and only use field personnel health insurance premiums paid against total field wages to determine labor burden for field operations. This is explained further in the nuances section below. There is no correct answer, e.g. whether to use field wages or use total payroll; the key is be consistent with its application over time.

Voluntary Benefits

Unlike mandatory benefits, voluntary benefits are programs or employee driven advantages for working for the company. They include:

  • Holidays
  • Vacation
  • Personal Time Off (including sick leave)
  • Retirement Plan Contributions
  • Group Life Insurance
  • Dental/Vision/Cancer Insurance
  • Section 125 Plans
  • Education Supplements
  • Child Care
  • Health Savings Accounts
  • Cell Phone Stipend

Voluntary benefits are employer provided benefits and greatly increase the cost of labor for each additional benefit included. Here are some simple formulas related to the top five common benefits employers provide.

Holidays
Many employers provide upwards of 12 holidays per year. These are the traditional federal and religious holidays. Many employers simply state that the employee is entitled to all 10 federal holidays and two religious holidays per year. Thus, many employees choose Christmas and Good Friday as their 2 religious holiday (only because the majority of the population is Christian in the United States). Some employers may add one or two state holidays to the formula.

There are 2,080 work hours in a calendar year (52 weeks times 40 hours per week). Thus, 12 traditional holidays equals 96 total hours. Thus, an employee without any other benefits will physically work 1,984 hours in a year. Therefore, traditional holidays costs the average company 4.84% (96 Hours/1,984 Hours) of total payroll. Thus, for NIC above, total wages paid in 2019 were $5,109,000 and approximately $247,210 of this was for traditional holiday compensation.

Vacation
Most employers offer vacation time to employees. Many employers use a tier vacation time off depending on seniority with the company. In general, most employers offer 80 hours per year. Similar to the holidays formula above, about 4% of the total payroll is due to vacation time. In NIC’s case, this equates to $204,360 per year.

PTO (Personal Time Off)
Similar to vacation time many employers offer personal time off, more commonly referred to as sick leave. The common average is five days per year, or 40 hours of sick leave. 

Retirement Plan Contributions
Smaller contractors utilize the SIMPLE program [Section 408(p)]. Larger employers, those with at least 100 employees sign onto the 401(k) plans for retirement. The most common matching amount is up to 3%. Thus, the cost of this is a direct reflection of the participation rate among the employees.

Cell Phone Stipend
Many contractors avoid purchasing radios and instead take advantage of the existing technology with smart phones. In addition, many workers have to turn in photos on a daily basis to update the project management software, thus employers provide a simple monthly stipend, i.e. payment to augment the employee’s monthly phone plan cost. The most common amount is $50 per month per field employee.

The key to the formula is the final number of actual field production hours per employee. Traditional, vacation and PTO reduce the actual physical availability of labor to around 1,864 hours per year. Combined, the normal non-working paid time is 216 hours. Thus, the percentage of traditional, vacation and PTO against actual field production as a cost is 11.59%. Thus, in NIC’s case from above, time off equates to a cost of $592,030 for all personnel in the company. Just like mandatory benefits, the question is: Which value to use as the denominator, field production payroll or total payroll. This is covered in the labor burden rate section of this article.

If the employer considers the other additional voluntary benefits, voluntary benefits can exceed 15% of the total payroll depending on the selections and associated costs. Take note, most contractors do not provide this level of benefits to their employees due to several underlying reasons:

  1. The construction industry has a significant employee turnover rate; in effect, due to the nature of the job and maturity levels of the personnel, it is quite common to have 20% employee turnover rates per year. Thus, many contractors require a minimum time with the company before allowing access to benefits. Most use a 90 day minimum employment period before an employee is vested with access to voluntary benefits.
  2. The cost of voluntary benefits is high. Mature contractors add incremental benefits as the company matures and becomes highly stable.
  3. Since this industry is prone to overtime, many employers consider this a benefit to their employees in lieu of voluntary benefits; thus employers allow employees access to significant overtime, e.g. 200 plus hours per year.

Therefore, voluntary benefits range from 7% to as high as 17% depending on the maturity of the construction company and the state the company operates. Those states with union laws and requirements tend to have voluntary benefits towards the upper range, right to work states rarely see voluntary benefits exceeding 12% of the payroll.

Compliance Requirements

OSHAcampus- Occupational Safety courses onlineCompliance costs are legally mandated direct or indirect employee requirements. The most common example is workers compensation insurance. Here is a list of compliance requirements for most states and then an auxiliary list of mandates many states have in addition to the standard set.

Standard Compliance Requirements
1) Workers Compensation Insurance
2) Occupational Safety and Health Administration Training
3) Safety Equipment (Hard Hats, Vests, Steel Toe Boots, Eye Protection, Sound Protection, etc.)
4) Site Safety Gear (Fall Protection, Eye Wash Stations, PPP, First Aid Kits)
5) Training
Auxiliary Compliance
6) Restrictive Definition of Overtime
7) Double Time
8) Travel Time
9) Union Compliance
10) Drug Awareness and Rehabilitation Regulations

The most expensive of the above is workers compensation insurance. The percentage is different per trade. The higher the risk associated with the trade, the greater the percentage rate of the wages paid to employees. Here is a short list of common construction trades and the corresponding rate ranges with workers compensation insurance:

  • Electrician                                         3 – 6%
  • Roofer                                               9 – 17%
  • Carpenter                                          4 – 7%
  • Heavy Equipment Operator              3-9%
  • Estimators                                         2-7%
  • Office Administrators                      <2%

The rates are subject to each respective state’s accident rates and participation. In general, for construction, workers compensation insurance is more expensive than most other industries.

Similar to mandatory and voluntary benefits, the result of the formula is tied to which pool of wages are used to determine the outcome. In general, expect a range of 4 to 11% for compliance per dollar of wages. The labor burden is significantly higher in states that protect unions.

Human Resources Department

The human resources department is customarily an auxiliary responsibility of one of the members of the management team. But as the company matures and prospers, the number of employees starts to reach 50. At this threshold, most companies create a dedicated position for human resources. This individual then runs a department solely for the purpose of recruiting, retaining and managing all employee benefit programs. There is a cost associated with this. Typically, a human resources department costs from $85,000 to $220,000 depending on the size of the organization. But in general, human resources management will cost around $900 to $1,200 per employee depending on the diversity of skills of the employees and the state’s compliance requirements. 

The top three underlying elements of human resources that drives the cost per employee are:

  1. Human Resources Manager Salary
  2. Technology
  3. Training Courses (CPR, Sexual Harassment, Communications, Professional, CPE’s, Project Management)

For most organizations, human resources management costs around 1.5 to 3% per dollar of wages paid. 

Labor Burden Rate Formula

The labor burden rate in construction is calculated by adding up all five distinct cost groups. The derived value in dollars is then divided by the total payroll of all field personnel. This is an important element of the formula. Field personnel compensation is used as the denominator and not total payroll. Why? It is the field personnel that perform the primary services of the company. Therefore, to recoup or recover the labor burden, management must use the payroll associated with production. In construction, it is field production labor that is used to create estimates that ultimately end up as proposals to clients.

Accumulate Total Labor Burden

The first step in the formula is to total up all labor burden costs over a set period of time. Most controllers or owners use the prior year amount adjusted by any current year projected changes; e.g. additional benefits added to the overall portfolio of benefits. Using the information from above, and continuing the example with Nail It Construction, Inc. The following is an illustration of accumulating the total labor burden.

Payroll Taxes: 
Sourced from Form 941, 940 and State’s SUTA Reports

Matching Payroll Taxes in 2019                   $373,299
Form 940 2019                                                    2,845
State Unemployment Taxes 2019                     67,697
Sub-Total Employer Payroll Taxes 2019                               $443,841

Mandatory Benefits:
Sourced from Health Insurance Bills/Payments/Compliance Reports

Health Insurance Premiums Paid                       $575,586
Disallowed as Owner Compensation                    (31,408)
Net Mandatory Benefits Paid by NIC                                   $544,178

Voluntary Benefits:
Sourced from Payroll Reports, Retirement Plan Payments, Cell Phone Bills and Employee Reports

Holidays                                                               $247,210
Vacation Paid                                                         204,360
Vacation – Anticipated 2020 Increases                    17,482
PTO – Actual Paid 2019                                          83,609
PTO – Accrual 2019                                                23,110
Retirement Matching                                             124,149
Cell Phone Stipend                                                  41,005
Group Life Premiums Paid                                      32,008
Other Insurance (Dental/Eye)                                  48,299
Sub-Total Voluntary Benefit Payments                                   $821,232

Compliance:
Sourced from Bills, Reports, State Audit, Insurance Audit and Other Documents

Workers Compensation Insurance Premiums     $241,123
Workers Compensation Audit Premium                 18,581
OSHA Certification/Training                                  19,852
Safety Gear (Personal & Site)                                 22,127
Union Compliance Programs                                    9,343
Drug Awareness/Testing                                           1,985
State Audit                                                                 4,347
Sub-Total Compliance                                                              $317,358

Human Resources Management:

Manager Salary                                                      $53,700
Technology                                                                 5,385
Training                                                                      8,665
Other                                                                              841
Sub-Total Human Resources Management                               $68,591

In summary format:

Payroll Taxes                                                        $443,841
Mandatory Benefits                                                544,178
Voluntary Benefits                                                  821,232
Compliance                                                             317,358
Human Resources Management                               68,591
Total Labor Burden for Nail It Construction                        $1,455,200

To determine the actual labor burden rate, the denominator value must be determined next.

Labor Burden Rate Denominator

The second step is to calculate the denominator, i.e. the wage basis to calculate the final percentage per dollar of wages. There is no correct answer; but, there is a best answer overall. The key is consistency with application.

Most construction organizations are divided into three distinct groups of employees. The primary group are the actual production crew, the workers out in the field building the respective projects. These are the trades, laborers and equipment operators. The second group perform both office functions and field operations. Examples of this group include project managers, supervisors, estimators, engineers and inspectors. Notice that the workers in this group perform dual roles and are generally considered members of the management team. The final group of employees and customarily the smallest numerically are the front and back office personnel. This includes reception, office operations, accounting team, human resources, legal and owners. Often, owners perform multiple roles; but in general they are considered office staff.

The question remains, who to include in the formula for the denominator?

If the entire payroll is included as the denominator, the labor burden rate equals 28.48% of every dollar. In effect, this is the company’s average labor burden rate. However, the key is to earn the $1,455,200 from field operations. Since there is no other revenue source than construction, it is the field payroll that must recoup the necessary dollars to fund the entire corporate labor burden.

With Nail It Construction, field personnel, i.e. the field workers only exclusive of the management team members (project managers, estimators, engineers etc.), payroll equals $3,876,000. Thus the best labor rate formula is:

Total Labor Burden for NIC     = $1,455,200      = 37.54%
Field Production Wages                $3,876,000

If the management team is included in the formula, the denominator increases thus lowering the overall average labor burden rate. The rate will average between the 28.48% for the entire payroll and the 37.54% when the denominator is restricted to just field production wages.

Notice that the labor burden rate formula has two different outcomes and can have a third outcome if the management team is included with field production wages. Thus, the real question is why is it best to use just field production wages and not include management or for that matter, the entire payroll for the company?

There are three key reasons that the field production wages are the exclusive and best value for the denominator in determining the labor burden rate.

  1. With construction, the field production employees are the only source of revenue; the balance of the payroll are either soft costs (management team’s payroll is considered soft costs) or overhead (front office personnel and owners).
  2. With estimating, only hard costs are used, i.e. the field production wages to construct the project. Thus, the entire organizational labor burden must be recovered from this limited pool of workers. This is similar to how manufacturing does cost accounting.
  3. Many contracts are tied to a time and materials concept. With the time rate per hour of work, the greater the recovery rate, i.e. the higher the labor burden rate, the greater the overall margin from the labor charges to the customer. The key for the contractor is to recover all labor burden via a fair and reasonable rate per dollar of wages paid. 

Labor Burden Rates for Contractors

From the information above, labor burden rates for contractors vary depending on the voluntary benefits provided (highly dependent on the voluntary benefits). The greatest impact costs are:

  1. Payroll Taxes
  2. Insurance Rates (Workers Compensation Percentage Per $100 of Wages Paid)
  3. Voluntary Benefits Provided
  4. Compliance

In general, labor burden rates can be as low as 18% and rarely exceed 40% of field production wages paid. The proper method to determine the labor burden rate is to accumulate all labor benefit cost groups as an aggregate value and amortize this cost over all field production hours to determine the rate per hour of work. It is somewhat sophisticated; but accuracy is not as critical as you may think. If your formula is 1% off, e.g. you estimated 31% and the actual cost is 32% on $3,000,000 ($3 Million) of field wages, the lost dollar value will equal $30,000 for the entire year. Assuming a reasonable 40% mark-up on labor; this would mean the contractor will generate about $500,000 in net profits after taxes. Thus, the $30,000 error isn’t going to break the company. The key is to learn from the historical labor burden and continuously improve accuracy over time. Within five years, a well managed construction company should be able to get the labor burden rate within plus or minus .1% of the actual labor burden rate.

Nuances of the Labor Burden Rate

There are several issues requiring attention when calculating and applying the labor burden rate, especially with the construction industry. These include:

  • The labor burden rate is a part of the overall formula to mark-up hard costs of construction to cover soft and overhead costs; and generate a desired net profit.
  • Utilize the same formula denominator each year, i.e. be consistent in its application.
  • Consider adjusting the rate based on the respective trades, especially with time and materials contract.
  • Use pooling of costs to aggregate labor burden and the amortize via job costing based on dollars of wages paid.

The following subsections go into more detail for each of the above nuances; however, other articles on this website cover the respective nuance in great detail along with illustrations, suggestions and various formulas.

Labor Burden Rate as a Function of Overall Mark-Up

The primary purpose of the labor burden rate is to determine true hard costs of labor with construction. It is customarily the only adjusted hard cost made in an estimate. Once the hourly wage is adjusted for the labor burden, the adjusted value then becomes the labor hard cost for that particular project. This adjusted hard cost is then marked up by the mark up rate to determine the total bid price for the respective project. In effect, it is a two step mark-up when creating a proposal for the client’s project.

Consistent Application

Some contractors use the entire payroll as the denominator in the labor burden rate formula. This is acceptable, however, the final mark-up percentage is customarily higher than the method advocated above (using only field wages). The  mark-up percentage must be higher to cover the labor burden tied to the non-field production wages or hours of work. The advantage of using field production wages as the denominator is generating a much more accurate labor rate for those projects whereby time and materials is the basis of the amounts for the proposal. The key is to maintain consistency from one accounting cycle to another. If the contractor decides to change the denominator in the labor burden rate formula, the construction management team should use a conversion factor when comparing an historical project against an upcoming estimate and final proposal.

Adjust Rate for Different Trades

No two workers are the same. They have different skills and different wages. But their perceived value from the client in a proposal is often skewed. An illustration is appropriate. Suppose the company’s standard mark-up on hard costs including labor adjusted by the labor burden rate is 45%. What is the value charged per hour between a highly skilled trade and a laborer assuming the company’s labor burden rate is 28.3%?

                                                 Laborer             Skilled Trade
Hourly Compensation                   $18                    $43
Labor Burden Rate (Factor)         28.3%                 28.3%
Adjusted Labor Rate                     $23.09/Hr       $55.17/Hr
Hard Costs Mark-Up %                  45%                     45%
Proposal Rate to Client                 $33.48/Hr       $80.00
                                          Exhibit A

Notice how the skilled trade rate per hour begins to mimic what professionals charge for the services? Whereas the laborer is well within reasonable rates per hour of service? This is due to the compiling of mark-up on the base wages. The initial $25 difference in wages per hour equals $46.52 difference in the proposed rate per hour. This is why more sophisticated contractors use a different multiplier for the labor burden rate and can compete and often win more technical engagements. Sophisticated contractors will increase the labor burden rate by a factor of 30% for laborers and reduce the labor burden rate for skilled workers by 10%. Review this schedule:

                                                  Laborer             Skilled Trade
Hourly Compensation                   $18                    $43
Labor Burden Rate (Factor)         58.3%                 18.3%
Adjusted Labor Rate                     $28.49/Hr       $50.87/Hr
Hard Costs Mark-Up %                  45%                     45%
Proposal Rate to Client                 $41.31/Hr       $73.76/Hr
                                         Exhibit B

Now, the differential between the two ends of labor skills is a mere $32.45. This allows the contractor to be much more competitive with contracts that have extensive skills required. In effect, the contractor is making up the difference with those projects that are labor intensive. Imagine a project whereby two contractors are bidding against each other. All conditions are the same except one uses tiers of burden rates (Exhibit B)and the other an across the board rate (Exhibit A). With this project, it is very intensive with skilled labor by a factor of 3:1. No materials, equipment or other costs are required to keep the comparison simple and straight forward.

                                                         Sophisticated Approach                                      Standard Approach
                                                    Laborer           Skilled Trade                               Laborer             Skilled Trade

Hourly Compensation                   $18                    $43                                              $18                     $43
Labor Burden Rate (Factor)         58.3%                 18.3%                                         28.3%               28.3%
Adjusted Labor Rate                     $28.49/Hr       $50.87/Hr                                      $23.09              $55.17
Hard Costs Mark-Up %                  45%                     45%                                         45%                    45%
Proposal Rate to Client                 $41.31/Hr       $73.76/Hr                                      $33.48              $80.00
# of Hours Required                    700                       2,100                                         700                    2,100
Proposed Value/Skill                    $28,917              $154,896                                     $23,436         $168,000
Total Bid Price                                          $183,813                                                               $191,436
                                                                                                                Exhibit C

There is a $7,623 difference between the two bids. The actual contribution towards labor burden is $23,870 under the sophisticated approach and $29,120 under the standard approach. The sophisticated approach is charging $5,250 less towards the labor burden than the standard approach. With a 45% mark-up, this equates to the total difference of $7,623. However, the sophisticated contractor will win the bid. Again, all factors are equal between the two approaches except using tiers of labor burden rates.

Now let’s reverse the conditions and only change the ratio of laborers to skilled workers. In this scenario, laborers are 3:1 over skilled labor. 

                                                           Sophisticated Approach                                 Standard Approach
                                                 Laborer           Skilled Trade                                  Laborer             Skilled Trade
Hourly Compensation                   $18                    $43                                              $18                     $43
Labor Burden Rate (Factor)         58.3%                 18.3%                                         28.3%               28.3%
Adjusted Labor Rate                     $28.49/Hr       $50.87/Hr                                       $23.09              $55.17
Hard Costs Mark-Up %                  45%                     45%                                          45%                    45%
Proposal Rate to Client                 $41.31/Hr       $73.76/Hr                                       $33.48              $80.00
# of Hours Required                       2,100                   700                                            2,100                    700
Proposed Value/Skill                    $86,751              $51,632                                     $70,308             $56,000
Total Bid Price                                           $138,383                                                               $126,308
                                                                                                                Exhibit D

The standard approach is superior by $12,075. However, the difference between their contribution towards labor burden is $8,330 (the sophisticated approach contributes $8,330 more than the standard approach). Every reader will ask the same question, how is the sophisticated approach superior then? The answer is the total contribution margin during the year. Suppose both contractors win their bids as they should. How much money is earned as gross profit?

The sophisticated method contractor wins the bid in Exhibit C and therefore the job produces $57,043 of adjusted gross profit less the additional marginal cost of labor burden at $5,250 netting the company $51,793 in net gross profit. The standard approach contractor wins the bid in Exhibit D and that company’s gross profit is $39,438. The sophisticated method improves the bottom line by $12,355 with each covering their respective labor burden equally.  

The key to the sophisticated method is to use an accounting technique called pooling of costs and amortizing the pool of labor burden costs based on units of work per skill set and not as a percentage of wages.

Amortize Pooling of Costs with Labor Burden

Another nuance tied to labor burden is the responsibility of the accountant to pool the costs of labor burden. This is done via generating special reports that only pull the accounting information from those accounts used exclusively for labor burden. The information is often dumped to a spreadsheet and various groups of workers are set forth (Office, Field, Management, Owners, etc.). The accountant uses payroll data to determine actual hours of work from each employee and determines the total productivity of field laborers given the labor availability. 

With this information, the labor burden rate is updated quarterly to reflect any changes in personnel, changes in voluntary benefits or compliance costs. The rates are then disseminated to estimators to update estimating programs. For job costing purposes, whether the sophisticated or standard method is used, the pool of value is constantly monitored to ensure all labor burden is covered by field productivity contribution per unit of measurement (hours or dollars). It is a protracted explanation and not suitable for this particular article. Please search the site for the article tied to pooling of labor burden.

Summary – Labor Burden Rate In Construction

The labor burden rate is a value derived by dividing all costs associated with having employees against a consistent denominator (field production wages is the preferred value). The goal is to generate a hard cost per dollar or hour of work for labor. This value is used in accurately creating estimates and ultimately proposals to clients. There are five groups of costs composing total labor burden:

  1. Employer Payroll Taxes
  2. Mandatory Benefits
  3. Voluntary Benefits
  4. Payroll Compliance
  5. Human Resources Management

With all costs accumulated, the costs are divided by a denominator, preferably the field production wages paid over the prior year. The result is a cost per dollar of wages for field production. This value is then added to the wages to determine the total cost per hour for field labor. This is known as fully loaded labor burden for estimating purposes.

There are several nuances involved with the labor burden rate. First, labor burden is one step in the mark-up formula for generating proposals. Secondly, maintain consistency from year to year with the denominator used to determine the rate. Third, consider using a sophisticated approach and change the labor burden rates among the trades. The more skilled and higher price labor is, the greater the reduction with the labor burden rate. The lower the skills, the greater the percentage increase in the labor burden rate. This allows the contractor to be more competitive in the market with bidding. Finally, utilize the pooling of costs to formulate the final labor burden rate. Act on Knowledge.

Please follow and like us:
Follow by Email
LinkedIn
Share