Why Most Contractors Underestimate Labor Burden

The Hidden Costs of Labor: Building a Better Labor Burden

Most construction contractors underestimate labor burden because they don’t fully understand the concepts and ramifications. Let’s face it: Focusing on easily quantifiable direct costs like wages is easier. Seeing the less obvious indirect costs of employing workers is more difficult. 

If you need a definition, here it is. Labor burden refers to the total cost of employing a worker. 

Direct and indirect labor costs must be added to the base salary or hourly wage. When construction contractors apply labor burden correctly, they can:

• Accurately estimate project costs.

• Set competitive prices.

• Make informed workforce decisions.

Miscalculating Labor Burden Affects Profitability

Miscalculating labor burden negatively affects profitability in many ways. Here are some of them:

• Underpricing projects or services

• Reduced profit margins

• Budget overruns

• Financial instability

The “Hidden” Costs of Engaging Employees

Some costs included in labor burden are well known and not that hidden; they are the mandatory costs:

• Payroll Taxes such as Social Security, Medicare, and federal and state unemployment insurance taxes.

• Workers' Compensation Insurance that covers employees injured on the job.

• Some states require State Disability Insurance to cover employees who cannot work due to injury or illness. 

Other costs that must be considered when compiling labor burden include direct employee benefits and other expenses; they may include, but are not limited to:

• Health Insurance

• Retirement Contributions

• Paid Time Off

• Employee Training Costs

• Recruiting Costs

• Company Apparel or Uniforms

• Insurance for any Equipment used by an Employee

• Facilities and Equipment

• Communication Devices 

• Travel Expenses

• Liability Insurance

• Life Insurance

• Employee Stipends

The Black and White of Labor Burden

Let’s take a simplified example of what you can expect to see when the labor burden is applied to the wages of one employee. In this case, we’ll see how much Ted, your new employee, will cost when a minimal labor burden has been applied.

Ted makes $20 per hour and works 40 hours a week. His workers’ comp rate is 15% ($15 per $100 he makes), and his health insurance costs $500 a month.

Wage FICA State Unemployment Insurance Workers’ Comp Health Insurance Total

$20.00 1.53 .27 3.00 2.92 $28.00

It’s easy to see (in the black and white example above) that a $20 per hour employee costs about 40% more than his hourly wage. Do the math. $8 = 40% of $20. 

When fully burdened, an employee's cost is often much more than many construction contractors believe it to be.  

That leads to a significant problem. When construction contractors fail to account for labor burden, their labor costs will be acutely inaccurate. That inaccuracy means they have no idea how efficient or profitable their crew is.

Understanding Labor Burden

By understanding labor burden, construction contractors can:

• Make more accurate estimates.

• Set competitive prices. 

• Make informed decisions about their workforce. 

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735