Labor Burden: What an Hour of Your Crew's Time Actually Costs
An electrician pays a journeyman $32 an hour. A four-hour service call, he figures, costs him $128 in labor. He bills $600, subtracts the $128 and $90 in parts, and books it as a good ticket.
The labor on that call cost him closer to $213.
That gap is labor burden, and it is the single most common way a contractor loses money without ever seeing it happen. Nothing about it is exotic. It is arithmetic you can run against your own payroll register this afternoon. Most contractors have simply never run it, because the wage rate is the number printed on everything and the real number is not printed anywhere.
What labor burden actually includes
Labor burden is everything you pay because a person works for you, over and above the wage itself. Some of it is legally required, some of it is competitive necessity, and some of it is a choice about how you allocate costs. All of it is real money leaving your account.
Employer payroll taxes. Your half of FICA is 7.65% of wages. Federal and state unemployment sit on top of that, and the state piece moves with your experience rating, so a contractor with turnover pays more than one without.
Workers compensation. In construction this is the big one, and it varies more than any other component. Rates are set per class code and per state, and the spread between a low-risk trade and roofing or structural work is enormous. A contractor who uses a single blended burden rate across genuinely different class codes is averaging away the thing that matters most.
General liability. Frequently rated on payroll, which makes it a labor cost even though it does not feel like one.
Health insurance and retirement. Whatever you contribute, per employee, whether or not that employee was productive this week.
Paid time off and holidays. You pay for these hours. You cannot bill them. More on this below, because this is where the calculation usually goes wrong.
Training, licensing, and certification. Continuing education, license renewals, safety training, and the hours spent in them.
Truck, fuel, phone, and small tools. These are a judgment call. Some contractors treat them as overhead, some allocate them to the technician. Neither is wrong, but you have to pick one and be consistent, because a burden rate that excludes the truck is not comparable to one that includes it.
The denominator is where it goes wrong
Here is the mistake almost everyone makes. They add up the burden components, divide by 2,080 hours, and get a comfortable-looking number.
But 2,080 is what you pay for. It is not what you can bill. Between those two numbers sit paid time off, holidays, training, drive time between calls, shop time, warranty callbacks, cleanup, and every hour the weather or a supplier decided the day was over.
Divide the annual cost by paid hours and you get a burden rate that is confidently too low. Divide by productive hours and you get the truth. The difference is not small, and it compounds across every bid and every flat-rate price you have set.
A worked example
Take the $32 journeyman. Every figure here is illustrative, chosen to show the mechanics rather than to describe your business.
| Component | Per paid hour |
|---|---|
| Base wage | $32.00 |
| Employer FICA at 7.65% | $2.45 |
| Federal and state unemployment | $0.80 |
| Workers compensation | $1.92 |
| General liability, payroll-rated | $0.48 |
| Health insurance | $3.75 |
| Retirement match | $0.96 |
| Loaded cost per paid hour | $42.36 |
At this point a lot of contractors stop. They write down $42.36, call it the burdened rate, and price off it. But this is cost per hour paid, and you do not get to bill all of the hours you pay for.
| Hours per year | |
|---|---|
| Paid hours | 2,080 |
| Less paid time off and holidays | (128) |
| Less training and safety | (40) |
| Less drive, shop, warranty, and cleanup | (260) |
| Productive hours | 1,652 |
The annual loaded cost is $42.36 multiplied by 2,080 paid hours, or $88,109. Spread that across 1,652 productive hours:
$88,109 divided by 1,652 = $53.33 per productive hour.
The wage was $32.00. The real cost of an hour you can actually bill is $53.33, or roughly 1.67 times the wage. On that four-hour service call, the labor cost $213, not $128. The difference of $85 was invisible, and it was invisible on every call that technician ran all year.
And that is before overhead and before profit. It is cost.
Add the truck and it moves again. If you allocate a service vehicle at, say, $1,200 a month for payment, insurance, fuel, and maintenance, that is $14,400 a year across the same 1,652 productive hours, or roughly another $8.72 per hour. The burdened cost goes past $62. Whether the truck belongs in burden or in overhead is your call. What is not optional is knowing which one you chose.
Where the damage shows up
A wrong burden rate does not announce itself. It shows up as symptoms that get blamed on other things.
Jobs that should have been profitable come in flat, and everyone assumes the crew was slow. A busy season produces revenue but no cash. Per-technician margins look acceptable while company profit does not, which is the classic signature of a burden rate applied at the job level that is too low to be true. Flat-rate pricing set three years ago still gets used, even though comp rates and health premiums have moved since. Overtime gets treated as though only the premium costs extra, when in fact payroll taxes and workers comp apply to the overtime wages too.
The most expensive version is the contractor who wins more work because the bids are competitive, and the bids are competitive because the labor cost inside them is wrong. Growth makes that worse, not better.
Getting it right
A few practical rules.
Run separate rates where the class codes genuinely differ. One blended rate across a service department and a structural crew hides the exact variance you need to see.
Recalculate at least annually, and immediately after a workers comp rate change, a benefits renewal, or a meaningful shift in your unemployment experience rating.
Be honest about productive hours. Pull the actual numbers from payroll and your field system rather than estimating. Most contractors are surprised by how much unbillable time is real, and that number is itself a management report worth reading. Our piece on productivity erosion covers what those hours are telling you.
Use the burdened rate everywhere labor touches a number. Bids, flat-rate books, job costing entries, and the estimated cost at completion behind your WIP schedule. A WIP schedule built on unburdened labor is precise and wrong, which is worse than obviously rough, because you will trust it.
The short version
The wage is the smallest part of what an employee costs, and the hours you pay for are not the hours you can bill. Get both halves of that right and your job costing starts describing reality. Get either one wrong and every downstream number, every bid, every margin report, and every WIP schedule inherits the error.
If you want a second set of eyes on your burden calculation, or you suspect your flat-rate pricing was built on numbers that have since moved, book a discovery call and we will run it against your actual payroll and comp rates.