Exploring Construction Payroll Labor Burden

by Alex Gray
July 5, 2024
Read Time: Less than 8 Mins
Last Modified: July 11, 2024

Construction payroll burden means calculating the true total costs of an employee’s labor. This goes beyond hourly wage and includes all direct and indirect costs associated with employing a worker.

Knowing how to properly calculate and understand payroll burden allows you to know the true cost of your projects. Failing to factor in payroll burden can lead to inaccurate estimates and potential losses.

According to Knowify, construction labor costs can take up 30% to 50% of the total project expense but can be different for every company.

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:

  • Payroll 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 payroll 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 payroll burden with automatic calculations and other features.

What Should a Contractor Know About Construction Payroll Burden?

Payroll burden goes by many names. It may be referred to as labor burden, the true cost of an employee, the true cost of labor, or the fully costed rate.

These phrases all refer to the same calculation, which is the employee’s wage plus all of the direct and indirect costs involved in paying construction workers incurs on the business.

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

  1. Finding burdened labor costs (direct costs)
  2. Determining additional costs (indirect costs)
  3. Calculating burdened labor rate

Burdened Labor Costs

These costs include the “all-in” costs of employing a worker beyond their wage. Calculating this category of costs will mainly consist of adding up all mandatory costs included as well as common benefits for construction workers employees offer. 

Common components of payroll burden include:

  • Payroll 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

These costs will include extra expenses that are not mandatory or directly linked to labor. Determining all indirect costs includes adding up:

  • Company cell phones (or other communication expenses)
  • Tools and equipment
    • Insurance
    • Repairs and maintenance
    • Depreciation
    • Rent and supplies
  • Training and employee development
  • Company apparel

Always be sure to keep tabs on these costs and factor them into your labor cost estimates. 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

Knowing the fully burdened labor cost helps with budgeting and workforce decisions. It 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.

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

By understanding your 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, employee-related 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?

Calculating payroll burden reveals the full picture of labor costs. 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

Payroll burden is a hidden cost that can easily be overlooked. 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 expenses and ensure your projects are profitable.

#2. Financial Transparency

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

You can also allocate funds to cover payroll burden costs and avoid situations where you might run short due to underestimating these 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 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 payroll burden helps with budgeting 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 costs effectively across various departments.

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

#5. Compliance with Regulations

Payroll burden can also be included within some benefits as well as construction payroll taxes, which are mandatory by law. Calculating the 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 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?

Managing payroll for construction companies requires keeping the payroll burden under control and accounted for.

While there are many ways you can calculate the burden on your own or with generic services or software, these solutions 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 can be an extreme help in maintaining accuracy. The service will calculate the payroll burden for you while simplifying the process in several key ways:

  1. Automated Calculations: Payroll services automate the calculation of payroll burden, including taxes, insurance, and benefits. This eliminates manual calculations and reduces the risk of errors.
  2. 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.
  3. 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.
  4. Cost Transparency: Payroll services provide detailed reports like EEO/minority compliance, certified payroll and more that break down all the components of payroll burden for each employee and project.
    • This transparency allows you to easily see where your labor costs are going.
  5. 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.
  6. 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.
  7. Expert Support: These services provide access to dedicated support teams who can answer your questions and help you navigate any complexities related to payroll burden.
  8. 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 payroll 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 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 payroll burden greatly for construction companies. A service like Payroll4Construction offers automatic 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 payroll labor burden.

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