Labor Burden
What does it actually cost my Electrical Company to work an employee?
This is a great question! If you are going to run a profitable electrical contracting business, then you need to know exactly what running that business costs. That knowledge will allow you to estimate electrical projects accurately and also keep you in business.
What you pay your employee is not what it cost you to work that employee.
Often employees don’t appreciate or consider what compensation they are being paid that does not show up on their paycheck. Most only look at what they bring home each week.
If you are providing a phone, truck, 401K, vacation, holidays, and insurance, for example, they are receiving more compensation than what shows on their paycheck.
Employing a worker costs more than just their hourly wage.
This is why we add a “Labor Burden” to their rate of pay? There is a “burden” of additional costs you’ll incur and this must be included.
The Labor Rate is the basic compensation paid to employees. Yet, the real cost of an employee can only be seen when the Labor Burden is added. This cost has mandatory and voluntary inclusions.
Those burdens that you must include are:
- Payroll taxes (Social Security, Medicare).
- Federal and state unemployment insurance.
- Workers’ compensation insurance.
- Liability insurance.
- State disability insurance.
- Your state may also require a local payroll tax and job-training tax.
Other labor burdens may be deemed voluntary.
- Sick leave.
- Health insurance.
- Retirement benefits, etc.
- Life insurance.
- Vacation pay.
- Disability insurance.
- company vehicle
- Accident insurance.
- Travel
- Training
- Cell Phone
- Clothing
While these are voluntary, knowing your Labor Burden is important.
You need to recognize that all of these costs associated with employment will increase your total cost.
It’s easy to appreciate how the “Labor Burden” will impact your cost and overall profitability once you understand the concept.
Calculating Your Burdened Labor Rate
Here is how to determine a “Labor Burden” rate per production hour.
Total employee cost = (Labor Burden Costs plus gross payroll labor cost) Divided by the number of hours actually worked.
Labor burden costs are those beyond gross compensation.
Typically, Labor Burden for Electrical Shops ranges between 28-65 percent which is added to their hourly wage. You’ll quickly appreciate how knowing your true labor costs can make a dramatic impact on labor-intensive projects.
An employee’s pay rate and what you actually pay for that employee are not the same.
I can’t stress that statement enough.
It seems simple, but it’s also easy to overlook. Many electrical companies lose money because they don’t correctly calculate the real cost of maintaining an employee. Calculating your labor burden can be tricky.
The key is to locate the hidden costs that many companies overlook.
Labor costs can be divided into two categories — direct and indirect. Accurately calculating total labor costs involves adding the indirect costs to the direct costs.
The direct cost for an employee is the wage paid to that employee.
Indirect costs depend on many variables, which will be unique for each electrical shop.
They include, but are not limited to:
- General liability.
- Vehicle insurance.
- Worker’s compensation.
- Communication expenses.
- Health Insurance.
- Profit-sharing.
- Company apparel.
- Sick Leave.
- Payroll taxes.
Your labor burden is the total of all the indirect labor costs expressed as a percentage of the direct labor costs:
Indirect costs / Direct costs x 100% = Labor Burden
For every dollar you pay an employee you will also have to pay a certain amount to employ that person.
Calculating the labor burden
Locating and calculating all the indirect costs in your electrical company is the most difficult part of determining your labor burden.
If you have trouble finding all of these costs you might contact your CPA or tax professional for help.
Let’s find the Labor Burden for an employee named David.
This is a lesson on how you may start to find your company’s”Labor Burden”. The numbers below are only for this lesson.
Let’s start with an employee named David.
David is paid $20 per hour.
Start with how many hours worked per week.
David works 40 hours per week:
David’s compensation is: 40 hours a week x 52 weeks a year = 2080 hours worked.
$20.00 per hour x 2080 hours= $41,600.00 per year
- Determine the time for which David is paid but does not work:
- 6 holidays 6 x 8 hr/day = 48 hrs
- 5 vacation days 5 days x 8 hr/day = 40 hrs
- 2 training days 2 training days x 8 hr/day = 16 hrs
48 + 40 + 16 = 104 hours paid for but not worked.
- Calculate David’s available working hours:
Total working hours – paid leave = Total available working hours
2080 –104 =1976 total available working hours
- Calculate the general or administrative time David spends on non-billable/production work. This time could be related to company meetings etc.
Let’s assume that David spends 2 hours per week in meetings.
- Divide the total available working hours by 40 hr/wk to determine the number of effective weeks David is available to work.
1976 hours / 40 hr/wk = 49 WK (rounded down)
General/Admin Time = 2 hours a week x 49 weeks = 98 hours per year.
- Determine the total production hours David can work by subtracting the total general/admin time from the total available working hours:
1976 – 98 = 1878 total hours actually worked, producing revenue.
If we were to stop here, then we could determine a “Labor Burden” based on the total production hours versus the total working hours.
David is going to receive pay for 2080 hours which totals $41,600
But David is only producing work for 1878 hours in a year.
If we divide David’s total working hours by his total production hours we get the labor burden factor we need to apply to his pay rate to determine the actual labor costs (including this labor burden).
Total working hours / total production hours = labor burden percent
2080 / 1878 = 1.11
David’s labor cost rate per hour is approximately 11% more than his wage:
Wage/hr x “Labor Burden” factor = $20 /hr x 1.11 = $22.20 / hr
But we can’t stop here. There are more costs to employing David that we must include.
Include indirect costs
Listed below are some of the indirect costs that should be included in any labor burden calculation. Keep in mind that this is by no means a comprehensive list. You also might include retirement benefits, use of a company vehicle, mobile devices, etc.
- Payroll Taxes $3744 (Based on the effective overall rate of 9% – varies by state)
- Worker’s Compensation $4160 (assumes 10% rate or $10 per $100 payroll)
- Clothes (shirts, hats, etc.) $200
- Tool allowance $600 (based on $50/month)
- Company events $240 (based on $20/month – picnics, parties, other events)
- Bonus, raises, etc. $1248 (based on 3% of wages)
- Professional development $175 (fees for training, seminars, education)
- Health insurance reimbursement $1500 (based on $125 per month reimbursement)
The total for the indirect costs listed above is $11,867.
David’s total compensation is $41,600 based on a $20 per hour wage, then we need to add the $11,867 of indirect costs to this number to determine the total cost to employ David.
Total cost to employ David: $41,600 + $11,867 = $53,467
Now we can determine the effective cost rate of David per hour including the total production hours:
Total cost to employ / total production hours = $53,467 / 1878 = $28.47 per hour.
The labor burden factor is: $28.47 / $20 = 1.42. or 42%
For every dollar you pay David, it will cost you $0.42 in additional indirect costs.
This 42% in additional costs does not include the markup on David’s labor. This is only a true cost.
This should give you a general idea of how to calculate your “Labor Burden”.
You will then need to create your composite rate of pay that we have addressed earlier.
Labor rate with burden included of all employees divided by the number of employees will give you your Composite rate of pay.
This should get you started on understanding your Labor Burden.
You can now enter your composite rate of pay into your electrical estimating software such as the Best Bid Hybrid Pro.
HTTPS://www.bestbidelectricalestimating.com or HTTPS://electriccalestimatingsoftware.com
