How to Calculate Your Labor Burden Rate (So You Stop Underpricing)

Labor burden is the extra cost of an employee beyond their hourly wage: payroll taxes, workers' compensation, insurance, benefits and paid time off. Typical burden rates are commonly cited in the 20 to 40 percent range or higher, and if you price jobs using raw wages you are almost certainly underpricing.

What is included in the labor burden?

• Employer payroll taxes such as Social Security, Medicare and unemployment.
• Workers' compensation insurance.
• General liability and related insurance allocated to labor.
• Health and other benefits.
• Paid time off, holidays and sick days.
• Training, uniforms, tools and phones.

Add up the annual cost of these items for each employee.

How do you calculate it?

Divide the total annual burden cost by the employee's annual hours to get the extra cost per hour, or divide it by annual wages to get a percentage. Example: an employee earns $25 per hour for 2,000 hours ($50,000). If taxes, insurance, benefits and time off add another $12,500, the burden is 25 percent, and the true cost is $31.25 per hour.

Then remember that not every paid hour is billable. If your employee bills 1,600 of 2,000 paid hours, the cost per billable hour is higher again.

How do you use it in your estimates?

Use the burdened rate as the cost side of your labor line, then add overhead and profit. If you use flat prices, check them against the burdened cost of the hours the work takes. Use the same approach for your own labor: pay yourself a wage and include the costs you would pay for an employee.

What mistakes are common?

Forgetting workers' compensation, ignoring non-billable time such as travel and shop time, using last year's rates, and treating owner labor as free. Recalculate at least once a year, or whenever insurance costs change.

Frequently asked questions

What is a typical labor burden percentage?

It varies by trade, state and benefits. Many contractors see 20 to 40 percent or more. Calculate yours from your actual costs.

Is labor burden the same as overhead?

No. Burden is the extra cost of employing a person. Overhead covers business costs like rent, software and admin.

Do subcontractors have a burden?

Their rates already include their costs, but check that they carry their own insurance.

Price it faster and more consistently

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