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Understanding Fully Burdened Labor Rates

Disclaimer: This blog is for informational purposes only and does not provide accounting or financial advice. Always consult with a licensed professional before making financial decisions related to labor costing.

When estimating project costs or reviewing business performance, it's important for contractors to understand the concept of fully burdened labor rates. Many assume the hourly wage they pay an employee reflects the total labor cost, but in reality, it's only part of the picture. Indirect expenses like payroll taxes, benefits, and administrative overhead also factor into the overall cost of employing someone.

What Is a Fully Burdened Labor Rate?

A fully burdened labor rate reflects the total cost of employing a worker, beyond just their base wage. It combines both direct pay and indirect costs tied to employment, offering a clearer picture of what labor truly costs a business.

For example, an employee earning $25 per hour likely costs more when you consider employer-paid taxes, health insurance, and other benefits. In many cases, this can push the effective cost of labor 40% to 50% higher than wages alone. That same $25/hour employee might actually represent a $35-$38/hour expense when all indirect costs are considered.

These added expenses often include:

  • Payroll taxes (Social Security, Medicare, unemployment insurance)
  • Health insurance premiums
  • Retirement plan contributions
  • Paid time off
  • Administrative and operational overhead

Again, this is not financial advice, but understanding the scope of what fully burdened rates include can help businesses better assess labor costs.

Why Fully Burdened Labor Rates Matter

While calculating the fully burdened labor rate is typically left to accountants or financial professionals, understanding what these rates represent is useful for operational planning, especially in industries like construction or government contracting.

Here's why this matters:

Project Cost Visibility

When preparing estimates or pricing out work, using just the hourly wage underrepresents the real cost of labor. Fully burdened labor rates give business owners and project managers a more realistic picture of what it costs to complete a job.

Improved Job Costing

If only base pay is used, it can appear that a project is more profitable than it actually is. A fully burdened rate ensures all labor-related expenses are factored in.

Strategic Budgeting

Fully burdened rates help with broader budgeting efforts, providing clarity on where labor costs are going and how they relate to total overhead.

Staff Productivity Analysis

It's also a useful metric when comparing employee output to total investment. For example, if a team member's output doesn't align with their fully burdened cost, it may indicate inefficiencies that need to be addressed.

General Overview of What's Included

Though eMars does not advise clients on how to calculate a fully burdened rate, here's a general outline of what typically contributes to one:

  • Direct Wages: The employee's hourly pay or salary.
  • Employer-Paid Taxes: This often includes the employer portion of Social Security, Medicare, federal/state unemployment taxes, and more.
  • Benefits: Health insurance, retirement plans, disability insurance, and other optional or mandated benefits.
  • Paid Time Off: Vacation, holidays, and sick leave are all paid but non-productive hours.
  • Overhead Allocation: The cost of facilities, management, software tools, HR/payroll teams, training, and other resources.

When all these categories are added up, the result is a far more complete view of labor costs, which is what the fully burdened labor rate helps illustrate.

Applying the Concept in Your Business

While you should always consult a qualified financial or accounting professional before acting on this type of information, understanding fully burdened labor rates can help you ask better questions, benchmark costs more effectively, and make more informed business decisions overall.

For example:

  • When evaluating bids or project pricing, knowing your true labor costs can help ensure profit margins are sustainable.
  • When forecasting future expenses, factoring in indirect labor costs can make projections more accurate.
  • When analyzing operational efficiency, comparing the fully burdened cost to the revenue generated by a team or department can be eye-opening.

Final Thoughts

Fully burdened labor rates give business leaders a broader perspective on where money is going and how labor fits into the larger financial picture. Although calculating these rates requires specialized knowledge, being aware of what they represent can strengthen decision-making across all areas of the business, especially for contractors working on prevailing wage projects or navigating the complexities of certified payroll reporting.

Understanding total labor costs becomes even more critical when working on government-funded jobs, where accurate reporting and compliance are essential. While eMars does not provide accounting services or labor rate calculations, we do help contractors streamline certified payroll compliance, reduce administrative workload, and avoid costly reporting errors.

Want to Simplify Certified Payroll Reporting?

If you're a public works contractor required to submit certified payroll reports under prevailing wage laws, eMars can help. Our platform makes it easy to stay compliant with Davis-Bacon and state-level requirements by generating accurate, audit-ready reports. Learn more about how eMars supports contractors here.

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