How to calculate labor burden and loaded hourly cost

Wage is not cost

If a technician is paid $30 per hour, the business does not spend $30 for an hour of work. It also pays the employer's share of payroll taxes, workers' compensation insurance, unemployment insurance and any benefits. It pays for holidays, vacation and sick time. It pays for training, meetings, shop time and administration that no customer is billed for.

Labor burden is the difference between the wage and the true employer cost of productive time. Pricing from the wage alone understates every labor hour in every estimate.

Build the annual loaded cost

Productive hours are the hours left for billable work after subtracting vacation, holidays, sick time, training, meetings, travel between jobs that cannot be billed, and routine administration. A common planning range is 1,500 to 1,700 productive hours from a 2,080-hour paid year, but the right figure is the one your time records support.

• Base wages: hourly rate × paid hours, or annual salary.
• Employer payroll taxes: Social Security, Medicare, federal and state unemployment, and any local taxes that apply.
• Workers' compensation and other required insurance: the employer premium attributable to the employee.
• Benefits: health contributions, retirement match, allowances, uniforms, phone, vehicle or other taxable and non-taxable benefits.
• Paid time off and holidays: already inside paid hours, which is why the denominator has to be productive hours.

Worked example

The percentage rates and benefit amount are invented for the example. Replace them with your payroll provider's figures and your insurance policy, and update them when those change.

The burden multiplier shortcut

Some contractors use a multiplier: loaded cost equals wage times 1.25 or 1.35. A multiplier can be a quick check, but it hides two different effects. One is the employer cost added on top of wages. The other is the loss of paid hours that cannot be billed. The multiplier in the example is $80,472 ÷ $62,400, or about 1.29, but applying 1.29 to the wage gives $38.70, not the $51.58 loaded cost of a productive hour. The difference is the productive-hour denominator.

If you use a multiplier, derive it from your own annual loaded cost and productive hours, and revisit it when wages, insurance or utilization change.

Labor burden rate vs labor burden percentage

Contractors use "labor burden rate" and "labor burden percentage" for related but different numbers. The burden rate is a dollar amount per productive hour. The burden percentage expresses employer costs as a percentage of base wages: total burden ÷ annual base wages. The calculator reports both the effective burden percentage on base pay and the loaded cost per productive hour, because one number cannot answer both questions.

There is no standard labor burden percentage. Workers' compensation is classified by trade and state, payroll taxes have federal and state components, benefit packages differ, and the number of paid hours that cannot be billed varies by business. A percentage copied from another contractor can be too low for your policy or too high for your actual staffing mix.

A useful percentage comes from your own payroll, insurance policy and paid-time-off records. It is a check on the loaded rate, not a replacement for it: a percentage applied to the base wage still ignores the productive-hour denominator. Use the loaded hourly cost in estimates, and use the percentage to compare roles, verify a benefit change or spot an input that has gone stale.

Common labor-burden mistakes

• Dividing annual cost by 2,080 instead of productive hours, which makes every hour look cheaper than it is.
• Omitting workers' compensation because it is paid annually rather than per paycheck.
• Forgetting that paid time off is already in paid hours and must be removed from the denominator, not added to the numerator again.
• Using one company-wide rate for very different roles, classifications or benefit levels.
• Setting the rate once and never updating it after a raise, a premium change or a new benefit.

Where the loaded rate goes next

Use the loaded hourly cost for every crew line in a job estimate. Then allocate overhead separately. Overhead is a business cost, not part of the employee's compensation, and bundling it into labor burden makes it impossible to see whether labor or indirect spending is the problem.

The labor burden calculator performs this arithmetic with your own inputs and saves the result in the Business Cost Profile in this browser.