Understanding and Calculating Labor Burden: Why It Matters for Your Water Restoration Business
What Is Labor Burden?
An employee’s pay rate and their true cost to your business are not the same thing. Calculating labor burden involves adding all additional overheads involved in employing someone to their pay rate to work out their true cost. Many businesses lose money because they don’t correctly calculate their real labor cost for employing each of their workers. Understanding your labor cost is critically important if you are running a water restoration business because a large percentage of your project costs come from labor. If you don't do this correctly, you risk inaccurately bidding on jobs that could go way over budget, ultimately losing you money.
The Importance of Accurate Labor Cost Calculation
To ensure your water restoration company is profitable, you’ll need to apply strict controls over labor costs. But reconciling labor costs can be complicated. Factors like health care, benefits, training, and increased administrative overhead have made labor more expensive—and you’ll need to account for these additional expenses in your labor cost calculations.
Utilize Our Labor Burden Calculator
To identify your true labor costs, we've provided a free labor burden calculator that helps you calculate your labor burden for each employee. This tool simplifies the complex process of accounting for all the hidden costs of employment, ensuring your bids are accurate and your business remains profitable.
What Employee Costs Should Be Included in a Fully Burdened Labor Rate?
Labor burden needs to include the indirect costs of your labor—in other words, the cost of having that labor. Indirect labor cost typically includes:
Payroll taxes including FICA, FUTA & SUTA
Workers' compensation insurance
Health insurance and other benefits
Retirement benefits
Paid leave
Additional training or classes
Safety gear, employee equipment, or employee supplies
Annual overhead costs like time spent in meetings or commuting
It’s a common mistake to bid a job based solely on direct labor costs (the hourly wage). While the direct labor costs could be $20 an hour, the indirect labor costs could be closer to $30 or even $40 an hour. On average, an employee’s labor burden is 24%—or $0.24 on the dollar.
What Are Payroll Taxes?
As an employer, you’re required to pay taxes for the Federal Insurance Contributions Act (FICA), which covers Social Security and Medicare, and the Federal Unemployment Tax Act (FUTA), which funds labor-related agencies. In addition, you are required to pay state-level unemployment taxes (SUTA). Navigating these payroll taxes can feel very complicated, and if you get it wrong, you can easily end up in trouble with the IRS. Luckily, most modern payroll systems today automatically calculate payroll taxes for you and also take care of filing and paying these taxes to the government. When in doubt, it’s always a best practice to check with your accountant to ensure your taxes are being calculated and remitted correctly.
Typical Labor Burden Rates in Water Restoration
There is no typical labor burden rate for water restoration; it really depends on the type of projects and trades you are hiring, although rates tend to be higher due to workers' compensation insurance rates being higher than in other industries. The biggest factors tend to be your workers' compensation insurance rates and whether you are a union contractor versus working on private projects. Employers can pay 30, 40, and even 50% of an employee’s hourly wage in indirect costs. For union contractors, the labor burden rate for employee costs ranges from 60 to 70%. There are typical contractor overhead and profit margins you should be aware of that you can use as a benchmark for your specific business.
Improve Your Estimating by Calculating Labor Burden Accurately
Using your labor burden rate when estimating projects will help correctly identify exactly how much a project will actually cost. Imagine you are estimating a project for 10 workers and don’t account for indirect costs—that will sum up to a significant amount of money. Figuring the labor burden is crucial to achieving the margins you are aiming for in your estimates.
Once you are confident that your estimates reflect your true costs, the next step is to make sure you accurately track your actuals. Tracking and comparing your actuals to your estimates is the best way to ensure you hit your goals and also learn from your mistakes to improve future bids.
By understanding and calculating your labor burden accurately, you can ensure more profitable projects, better financial management, and a more sustainable business. Start using our labor burden calculator today to get a clear picture of your labor costs and improve your project bidding and profitability.