From a business context, calculating the labor burden can either make or break a business.
Construction companies spend many hours in the estimating process in construction and job pricing. It is only prudent if these labor-intensive steps are profitable when the company lands the job. Without calculating the labor burden rate in construction, the chances of making profits subside.
In cost estimation, the constructor needs to consider the whole scope of costs besides the employee's salary. An employee's earnings alone do not account for the total costs of keeping that employee. Traditionally companies worked with a 30% labor burden rate, but the current increases in health insurance alone can throw a company off-budget.
There is tight competition that subsequently leads to tighter profit margins, which means there is no room for costly mistakes.
Table of Contents
What is labor burden in construction?
In construction, the labor burden is the benefit versus the respective hourly employee wage to determine the total hourly cost for sustaining an employee in the construction company.
In simple terms, the labor burden is the sum of all the company’s direct labor costs for an employee as a percentage of the company's direct labor.
The labor burden costs are one of the hidden fees in construction. Failure to consider them can put your construction business behind with each project you take up.
The labor burden lets the employer know employee costs beyond the actual wage. An employer can pay an average of 40% of the standard hourly wage. For some contractors, this cost can shoot up to 70%.
Business is not just about breaking even, and in construction, a key way to ensure profit is by understanding your labor burden. A better understanding of labor burden positively influences your construction profit margin.
When do I use the labor burden rate?
You need to check your labor burden rate when you make prospects engage in a new project. You don't want to miss out on closing a good deal, but you also don't need to lose money in the process by making an uninformed commitment.
Most companies find the project's pricing by calculating the cost of materials, labor, equipment, and subcontractors.
However, the figure calculated under labor is not only the employee's salary compensation. The labor burden is also inclusive, and you need to cover the costs to understand your business margin to make a profit. This is the importance of estimation in construction.
The findings of a burden rate analysis are why companies opt to open manufacturing plants outside their home country. The burden for labor and machinery rate might be too high to allow the companies to make profits in their resident countries.
Calculating the labor burden
The labor burden is the total indirect costs expressed as a percentage of the direct costs. For example:
Labor Burden = Indirect Costs/Direct Costs*100
To avoid the complexities of calculating labor burden costs, companies allocate an affixed percentage, say 30% of the employees' wages. Other companies use excel estimating software.
However, it is possible to eliminate these time-consuming processes and complete the details needed in job costing using construction estimation software. You need to develop good estimator skills for computing labor costs.
Labor costs are classified into distinct groups: direct and indirect costs. Direct costs refer to the wages paid to an employee, but the indirect costs encompass but are not limited to:
- Payroll taxes
- Mandatory Benefits such as Health and Retirement
- Optional Benefits such as vacations
- Communication costs
- Car Insurances
Start with Salary Costs
The first step is calculating the salary costs, as you have to pay a certain percentage of indirect costs to cover that person for every dollar you spend.
Assess related employee costs
Calculating the indirect costs is the most taxing bit when calculating the labor burden, but necessary. You can calculate these costs using financial tools or by contacting a tax professional. Having identified all the indirect employee-related costs, you can go ahead to calculate an employee's labor burden.
Calculate the full costs
The next step is calculating the full costs for which an employee is paid but does not work, such as Labor Day, New Year, Christmas, etc.
Other periods include vacation days, paid time off, sick leave, and personal days. There are also training days for seminars for professional development.
From here, you can fully account for the actual working hours by subtracting the paid leave hours.
There is also general administrative time spent on production work, such as company meetings, reporting, and time in the field.
Now we have the total working hours and the total production hours. We can calculate the labor burden rate as a percentage of the total working hours against the total production hours.
However, we cannot stop here. We need to factor in the indirect costs we mentioned above, such as Payroll Taxes, Benefits, Tools, etc. We now need to compute the total costs by summing up the indirect costs with the direct costs. After this, we need to calculate the labor burden as a percentage of the additional costs to the total costs.
Next, check your construction estimate
After crunching all the numbers, the next step is to check the construction estimate to ensure profitability. Having a fast and efficient way of checking your project's price will save you money in the end. However, remember that this is not the actual pricing stage, but it is a construction estimate. You are merely verifying your company's budget.
Before making any job estimates, you need a set of accurate plans. Without plans, you can only give a rough approximation for the job.
After reviewing the drawings, you can then proceed to unit cost estimation. This is done by compiling all line items for a job, checking their costs in the construction unit cost database, attaching unit costs to them, and computing total numbers.
Various contractor estimating software can get you off the ground. The estimated costs mostly include things like the costs of goods. The next cost to consider is the labor cost, where the labor burden is inclusive. There are then some office overheads such as advertising, office expenses, job superintendent, and more.
Frequently Asked Questions
Does a fully burdened labor rate include a fee?
An unburdened labor rate accounts for the employee's gross pay, but a fully burdened labor rate includes all the other hidden costs.
What is the benefit of knowing your burden rate?
Apart from good budgeting, knowing your burden rate helps you prioritize employee time. You will be able to make the right productivity decisions for employees. You can sum up a whole meeting with an email, and you will also know which employees to delegate specific projects to.
What is the percentage of labor cost in construction?
Depending on the labor costs of your employees, the percentage of your labor costs will vary.
When counting only labor costs in pricing, it might only account for 20% of the project cost, but if you include the labor burden costs, it will account for anywhere between 30% to 40% of the total cost.
The materials, in turn, take the rest of the cost.
However, when it comes to interior design projects, the labor is highly skilled and intensive, and it might shoot up to 50% of the project cost. Apart from the indirect costs, it also includes a chunk of other overhead expenses and the profit.
What about the overhead burden rate?
Some business owners conflate the overhead burden rate with the labor burden rate, but you need to bear some important distinctions in mind. The overhead burden rate refers to manufacturing overhead costs, which are supporting costs incurred by a company.
These costs include management, accounting, sales, and so on and are distributed in the project cost as a percentage of the direct labor cost. They are not directly linked to production and therefore cover all those costs outside production.
What are the lead causes of changes in burden rate?
Burden rates change because of health insurance increases, pension fund contributions, and fluctuations in other union agreements' contributions.
How often should I review labor burden calculations?
It is essential to review the labor burden calculations every six months to reveal any hidden costs. For instance, a company's insurance rates may change, and there may be anticipated employee raises in advance to bidding projects.
There are primarily two reasons for keeping track of the numbers in your business.
One reason for filling out the paperwork is finding out your tax obligations to the government. The other reason is finding out your company's performance and ways to improve it. Unless you organize your company's information, it will be a burden rather than a benefit.
Instead of embarking on a project and hoping for the best, you can identify your project spending trends, optimizing your operations.