How to Calculate Labor Burden for Construction Employees

Paying an employee $25 per hour does not mean that employee costs your construction business $25 per hour.

The real cost of an employee can be significantly higher once you account for employer payroll taxes, workers’ compensation insurance, paid time off, benefits, overtime, and other employee-related expenses.

That difference is commonly called labor burden.

Understanding labor burden is important for any contractor who estimates jobs, sets labor rates, or manages crews. If you build your estimates using wages alone, you may be underestimating one of the largest costs in your business.

Here’s how to calculate your true employee cost and turn it into a useful hourly number for estimating jobs.

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What Is Labor Burden?

Labor burden is the additional cost a business incurs to employ someone above that employee’s base wages.

For example, suppose an employee earns:

$25 per hour

At 40 hours per week for 52 weeks, the employee’s base annual wages would be:

$25 × 40 × 52 = $52,000

But $52,000 is not the employer’s total cost.

The employer may also pay expenses such as:

• Social Security and Medicare taxes
• Workers’ compensation insurance
• Unemployment taxes
• Paid holidays
• Paid vacation or PTO
• Health insurance or other benefits
• Bonuses or allowances
• Other employee-related expenses

Once those expenses are included, the employee’s actual cost to the company is higher than the wage shown on the paycheck.

That second calculation is especially useful for contractors.

Your estimates need to recover what an employee actually costs you for the hours available to produce work, not simply their hourly wage.

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What Should Contractors Include in Labor Burden?

Every company is different, but there are several common costs contractors should consider.

Employer Payroll Taxes

Employers generally have payroll costs in addition to the taxes withheld from an employee’s paycheck.

For example, employers pay their share of Social Security and Medicare taxes. There may also be federal and state unemployment taxes and other payroll-related costs.

Use the actual rates that apply to your company whenever possible.

Workers’ Compensation Insurance

Workers’ compensation can be a meaningful labor expense for construction and home-service businesses.

The cost varies considerably based on the type of work performed, employee classification, location, claims history, and insurance carrier.

A landscaping employee, carpenter, electrician, roofer, and office employee may have very different workers’ compensation costs.

Use your company’s actual workers’ compensation rate rather than relying on a generic industry percentage.

Paid Time Off

Paid time off is easy to overlook when estimating labor.

Suppose an employee receives five paid vacation days and six paid holidays.

You are paying the employee for those 11 days, but those hours are not available for producing billable work.

That means the cost of the employee’s productive hours is higher.

Employee Benefits

Depending on your company, benefits might include:

• Health insurance
• Dental or vision insurance
• Retirement contributions
• Life insurance
• Employer-paid phone plans
• Vehicle allowances
• Other recurring benefits

If the company pays the expense because it employs that person, it should at least be considered when determining the employee’s true cost.

Other Employee Costs

There may also be employee expenses specific to your company.

Examples could include uniforms, training, certifications, safety equipment, bonuses, or other recurring employment costs.

The goal isn’t to make the calculation unnecessarily complicated. The goal is to capture the meaningful costs that wages alone leave out.

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Why Productive Hours Matter

This is where labor-cost calculations become much more useful for estimating.

Simply dividing $60,578 by 2,080 hours would produce:

$60,578 ÷ 2,080 = $29.12 per hour

But 2,080 assumes the employee produces work for 40 hours every week of the year.

Suppose the employee receives:

• 5 paid vacation days
• 6 paid holidays

That’s 11 paid days—or 88 hours—when the employee is being paid but isn’t producing work.

Productive regular hours would therefore be approximately:

2,080 − 88 = 1,992 hours

Now calculate the employee cost again:

$60,578 ÷ 1,992 = $30.41 per productive hour

The employee’s wage is still $25 per hour.

But in this simplified example, the company’s actual labor cost is approximately $30.41 for each productive hour.

That is the number that becomes much more useful when estimating labor on a job.

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Using the example above:

Labor burden costs:

$60,578 − $52,000 = $8,578

Labor burden percentage:

$8,578 ÷ $52,000 × 100 = 16.5%

That’s useful information, but contractors should also know their true labor cost per productive hour.

Why?

Because estimates are often built around hours.

If you estimate that a project will require 120 labor hours, you need a realistic cost for those 120 hours.

Using wage rate alone can cause the estimate to understate your actual labor expense.

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Overhead may include:

• Office salaries
• Office rent
• General liability insurance
• Software
• Accounting
• Advertising
• Phones
• Administrative expenses
• General business expenses

There can be some gray area in how individual companies classify expenses.

What matters most is consistency.

Don’t leave a legitimate business expense out of your pricing simply because you’re unsure which bucket to put it in—and don’t accidentally count the same expense twice.

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Why Labor Burden Matters When Pricing Construction Jobs

Consider a project estimated to require 200 labor hours.

If your employees average $25 per hour, estimating labor using wages alone gives you:

200 × $25 = $5,000

But using the $30.41 productive-hour cost from our simplified example gives you:

200 × $30.41 = $6,082

That’s a difference of:

$1,082 on one job.

If your company completes dozens of projects during the year, consistently underestimating labor can quietly consume a significant portion of your expected profit.

You can sell plenty of work and still struggle with profitability if the costs inside your estimates aren’t accurate.

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Don’t Confuse Labor Cost With Your Customer Billing Rate

Your true labor cost is not necessarily what you should charge the customer per hour.

If an employee truly costs your company $30.41 per productive hour, charging the customer $30.41 would only recover that employee cost.

It would contribute nothing toward:

• Company overhead
• Equipment and vehicles
• Other operating expenses
• Profit

Your labor cost is an input into your pricing, not automatically your selling price.

For companies that price work by crew production, the next step is determining what the entire crew costs and how much revenue that crew needs to generate.

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Calculate Your Actual Labor Burden

Instead of working through all of these calculations manually, use our free Contractor Labor Burden Calculator.

Enter your employee’s:

• Hourly wage
• Regular and overtime hours
• Paid days off
• Payroll tax rate
• Workers’ compensation rate
• Benefits
• Other employee costs

The calculator estimates total annual employee cost and the employee’s true labor cost per productive hour.

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Frequently Asked Questions

What is a typical labor burden percentage for contractors?

There isn’t one percentage that is accurate for every contractor. Labor burden depends on payroll taxes, workers’ compensation rates, benefits, paid time off, employee classifications, location, and other company-specific expenses. Using your actual costs produces a much more useful number than relying on an industry rule of thumb.

Are payroll taxes included in labor burden?

Employer-paid payroll taxes are commonly included when calculating labor burden. Remember that the employer’s payroll costs are different from amounts withheld from the employee’s paycheck.

Is workers’ compensation part of labor burden?

Yes, workers’ compensation insurance is commonly treated as a labor burden expense because the cost is directly related to employing workers. Rates can vary significantly by trade and employee classification.

Should paid holidays and vacation be included?

Yes. Paid non-working time affects your true cost per productive hour. You’re paying the employee for those hours even though those hours aren’t available to produce work.

Is overtime part of labor burden?

Overtime should be considered when calculating your actual annual labor costs if employees regularly work overtime. Contractors with significant overtime can materially underestimate labor expenses if they calculate costs using only a 40-hour regular workweek.

Is labor burden the same as overhead?

No. Labor burden generally represents expenses associated with employing workers, while overhead represents broader expenses required to operate the company. Companies may classify some expenses differently, but the important thing is to account for legitimate costs without omitting or double-counting them.

Should I use burdened labor cost when estimating jobs?

Generally, yes. Using only employees’ base wages understates the company’s actual labor expense. A burdened labor rate based on productive hours provides a more realistic labor-cost input for job estimates.

Know Your Labor Cost. Then Price Your Crew.

Once you know what each employee truly costs per hour, you can calculate what an entire crew costs to put into the field each day.

Use the Contractor Crew Day-Rate Calculator to determine your crew’s daily break-even cost and the revenue it needs to produce at your desired margin.

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