How to Calculate Labor Burden and Its Impact on Construction Payroll

Labor burden significantly impacts construction payroll, with employment costs adding 24-70% on top of base wages. Calculating labor burden gives contractors visibility into the full cost of their workforce.

Failing to factor in labor burden can lead to inaccurate estimates and potential losses.

Effectively managing construction labor burden can be the difference between a company’s ultimate success and failure. Getting the right number of hours from every employee ensures that everyone is being paid the correct wage and that you’ve properly tracked all the benefits employees are entitled to.

Luckily, we’re here to help you understand the construction payroll burden and how it affects your company.

Key Takeaways for Contractors:

Labor burden is the employee’s wage plus all of the direct labor costs and indirect labor costs that the employee incurs on the business.
Burdened labor rate represents the total cost per employee hour, including both direct wages and indirect costs, as the percentage of additional costs you pay on top of the base salary.
Calculating construction Labor burden can allow contractors to make informed financial decisions and help create accurate project estimates and bids.
Outsourcing payroll to a construction payroll service can simplify calculating labor burden with automatic calculations and other features.

What Should a Contractor Know About Construction Labor Burden?

Labor burden encompasses all costs associated with employing construction workers beyond their base wages, including both direct and indirect expenses.

To help simplify all of the costs to consider, we have broken them down into three main steps:

Finding burdened labor costs (direct costs)
Determining additional costs (indirect costs)
Calculating burdened labor rate

Burdened Labor Costs

Burdened labor costs include the mandatory expenses you’ll pay for each employee beyond their hourly wage. Calculating this category of costs will mainly consist of adding up all mandatory costs included, as well as common benefits for construction workers that employees offer.

Common components of payroll burden include:

Payroll burden taxes
- Federal Insurance Contributions Act (FICA)
- Medicare
- Social security
Unemployment insurance
- Federal
- State
Workers’ compensation insurance
Health insurance
Paid time off
- Vacation
- Sick leave
- Parental leave
Pension contributions

It’s worth noting that benefits are included in burdened labor costs because they will remain relatively consistent throughout the year compared to additional costs.

Additional Costs

Additional costs (also known as indirect costs) include extra expenses that aren’t mandatory but are necessary for running your construction business.

These indirect expenses form a critical component of your overall labor burden calculation.

Determining all indirect costs includes adding up:

Company cell phones (or other communication expenses)
Tools and equipment
- Insurance
- Repairs and maintenance
- Depreciation
- Rent and office supplies
- Administrative overhead
Training costs and employee development
Company apparel

Always be sure to keep tabs on these costs and factor them into your labor cost estimates. Accurate accounting for labor burden is about capturing the full story of your business expenses.

Therefore, every piece of financial data must be considered in your final count.

Calculating Burdened Labor Rate

The fully burdened labor rate represents the total cost per employee hour, including both direct wages and indirect costs. The burdened labor rate reflects the true hourly cost of employing a worker, including wages, payroll taxes, insurance and overhead.

Understanding the complete labor burden cost is essential for contractors to visualize the full financial impact of their workforce on project profitability.

This helps you determine the true hourly cost of employing someone and price your projects competitively.

By understanding your labor burden rate, you can:

Accurately price your bids
Manage your budget effectively
Identify areas for cost savings in employee benefits

According to Construction Business Owner, employment costs will typically account for 24% to 33% for a non-union contractor, and for a union contractor, the labor burden rate for employee-related costs will range from 60% to 70%.

Why is Calculating Construction Payroll Burden an Important Part of The Payroll Process?

Understanding labor burden provides contractors with comprehensive visibility into workforce costs, enabling strategic financial planning and informed decision-making throughout the payroll process.

While determining the construction payroll burden isn’t a direct part of processing payroll itself, it can allow contractors to make informed financial decisions throughout the payroll process and is a crucial step in pre-processing for several reasons:

#1. Accurate Project Estimates

Labor burden represents a hidden cost that contractors often overlook when creating project estimates. By factoring it in, contractors can create more realistic project estimates which prevents underbidding and ensures projects are profitable.

Using past estimates from previous, similar projects, contractors can calculate accurate labor burden costs and repeat successful counts for future projects.

By factoring in the full cost of labor, including burden, you can set prices that cover all your job costs and accurate expenses and ensure your projects are profitable.

#2. Financial Transparency

Knowing the real cost of labor allows contractors to track their overall financial stability. Being aware of the actual cost totals of labor upfront, you can manage your cash flow more effectively.

You can also allocate funds to cover labor burden costs and avoid situations where you might run short due to underestimating these essential expenses.

This transparency helps you make informed decisions about staffing, pricing and resource allocation.

#3. Competitive Bidding

With an accurate understanding of labor costs, contractors can set competitive bids for government projects or commercial construction jobs that reflect the true value of their services.

By factoring in the labor burden rate, you can optimize your bid proposal as it demonstrates to potential clients that your pricing is not just competitive but also reflects the true value of your workforce.

This increases your chances of winning projects without sacrificing profit margins.

#4. Budgeting and Cost Control

The labor burden helps with accurate budgets for projects and the entire company. Knowing the actual cost of labor can allow you to find cost-saving opportunities within your project while allocating and tracking business costs effectively across various departments.

By knowing the extra costs associated with each employee, you can better control labor expenses and avoid budget overruns.

#5. Compliance with Regulations

Labor burden can also be included within some cost of benefits as well as construction payroll taxes, which are mandatory by law. Calculating the labor burden ensures you withhold the correct amount and avoid non-compliance issues.

Any non-compliance with payroll regulations can lead to hefty penalties and fines. By accurately calculating the labor burden, you avoid the risk of under-withholding or late filings, protecting your business from financial repercussions.

How Can a Construction Payroll Service Help Simplify Managing Payroll Burden?

While calculating labor burden is essential for construction companies, the complexity of these calculations can be overwhelming. Generic payroll services or software may not meet your needs when it comes to calculating construction-specific payroll burden accurately, which is a huge expense for construction companies.

Outsourcing payroll to a construction-specific payroll service eliminates these challenges while providing specialized expertise tailored to the construction industry. The service will calculate the payroll burden for you while simplifying the process in several key ways:

Automated Calculations: Payroll services automate the calculation of payroll burden, including taxes, insurance and benefits. This eliminates inaccurate calculations and reduces the risk of costly errors.
Industry Expertise: These services understand the intricacies of construction payroll, including prevailing wages, union benefits and multi-state compliance. This expertise ensures your burden calculations are accurate and compliant with regulations in the construction industry.
Integrated Systems: Many payroll services integrate with time tracking software. This eliminates the need for manual data entry of hours worked, further streamlining the burden calculation process.
Cost Transparency: Payroll services provide detailed reports like job costing, certified payroll and more that break down all the components of labor burden for each employee and project.
- This transparency allows you to easily see where your labor costs are going.
Reduced Administrative Burden: Payroll services handle the administrative tasks associated with payroll burden, such as filing tax reports and making benefit contributions.
- This frees up your time and resources to focus on running your construction business.
Compliance Management: Construction payroll services can help ensure you comply with all relevant labor laws and regulations.
- This includes staying updated on changes to tax codes and benefit requirements.
Expert Support: These services provide access to dedicated support teams who can answer your questions and help you navigate any complexities related to labor burden.
Advanced Reporting: Construction payroll services offer advanced reporting options like job costing that gives contractors a clearer picture of how labor burden is affecting the budget.

What Can Payroll4Construction Offer Your Construction Business?

Understanding labor burden can help you maintain accuracy and financial transparency when calculating your labor costs.

Knowing what direct and indirect costs factor into the true cost of labor and how to calculate the labor burden rate can ensure you build a profitable company. And recognizing your payroll burden in advance allows you to make informed financial decisions for projects and maintain a healthy cash flow throughout the payroll process.

Using a construction-specific payroll service can simplify the process of calculating labor burden greatly for construction companies. A service like Payroll4Construction offers automatic, accurate calculations, helps you maintain compliance, integrates with other software and services, and so much more!

Talk to a specialist today to learn more about simplifying your labor burden.