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.